economics

Dan Dorfman: Housing Could Sink Recovery, Squash Obama

February 21, 2011

Hey, it’s now common talk that we’re on a solid road to recovery. Likewise, that President Obama, now gaining in the polls, is likely to win a second term. Maybe so, but if one perceptive and skeptical economic mind knows what she’s talking about, both are about as credible as an anti-aging process that really works. The chief reason: The housing mess — a subject that has become a bore and no one really wants to hear about anymore — could short-circuit both possibilities. Here’s the story! At the turn of the year, a senior loan officer at a significant New York State bank told me its inventory of foreclosed homes had risen 28% in the past few months. I rechecked the other day and he told me the figure had now more than doubled to 61%. “I was sure the number would have declined, given an improving economy.” he says, “but I was wrong. More and more would-be home buyers seem to be afraid of losing money and are holding back on their purchases, many preferring to rent instead.” He went on to note that he hears “the same ugly story” from many peers around the country. It reminded me of a remark a number of months ago from Chicago real estate developer Robert Sheridan, who told me that anyone who buys a house these days and pays the asking price is overpaying. He was right then and a chat with economist Madeline Schnapp made me think that’s still the case. Interestingly, she reminded me that housing peaked 56 months ago, June of 2005, to be precise. Why, I wondered, should anyone give a hoot about that now? Because, she explains, housing is still stuck in quicksand, it’ll take another four to five years (2015 to 2016) to get back where it once was and that strongly suggests to her it behooves everybody to take with a grain of salt all those rosy upgraded economic forecasts we’re getting from Wall Street and the White House as a result of a peppier economy. Why question such forecasts in view of growing signs the economy is in a turnaround mode? Because, Schnapp explains, one out of every 10 jobs in this country is associated with the housing sector. And she figures this struggling industry will require numerous years and a lot of Viagra to re-establish its potency on the economic scene, given its current sad state. Between 2002 and 2007, housing accounted for 40% of job growth and represented 20% of GDP, figures that are both considerably lower at this juncture, and Schnapp thinks it will take many moons to restore such numbers. A number of real estate optimists have been insisting for well more than a year that we’re on the verge of a housing rebound and some are still saying it. Sounds hopeful, but Schnapp, the economics chief at West Coast liquidity tracker TrimTabs Research, partially owned by Goldman Sachs, warns that playing catchup anytime soon is totally unrealistic, given such significant sales-stifling housing problems as: – A bulging inventory of 5.8 million new and existing vacant homes, about two million of which is a shadow inventory (foreclosed houses owned by banks). That’s about a 15 months’ supply. – The number of houses under water (meaning the mortgages are greater than the value of the homes) continue to swell. They now stand at 14 million or 27% of the 53 million U.S. homes, up from 25% a few months ago. – Foreclosures continue at a sizzling pace — 255,000 a quarter or more than one million a year. – Mortgage delinquencies, which often herald future foreclosures, now stand at a hefty seven million — which is only million below the January 2010 peak despite all the stimulus packages. – Rising mortgage rates. In November, the 30-year mortgage rate was 4.2%. It’s now above 5%. In effect, Schnapp is telling us the housing horror show — which seems to be competing in longevity with such long-running hit Broadway plays as Cats , Phantom of the Opera and Chicago — is far from over, could well sabotage economic growth and wreak havoc on the stock market. She also expects homeowners to suffer another 10% drop in housing prices this year President Obama obviously disagrees with such a negative assessment since his budget calls for GDP growth of 4% in 2012, 4.5% in 2013 and 4.2% in 2014. “No way, that’s nuts, not the way housing is. Obama is living in fantasyland,” says Schnapp, who thinks an average growth range of 2.5% to 3% in the three-year period is far more realistic. Her rationale: Aside from a depressed housing market, she points to such economic deterrents as financially strapped state and local governments (which means job cuts or higher taxes), higher energy prices, the June ending of QE2, high unemployment, widespread consumer deleveraging and massive deficits. Meanwhile, some other observers also see serious consequences from the ongoing housing woes. One is Florida investment adviser Martin Weiss, author of a New York Times economic best seller, who referred to housing in a recent promotional commentary on a new book he’s written. In brief: “With home values still sinking, unemployment still high and states across the country announcing major cutbacks, we’re facing bubbles and busts unlike anything we’ve seen in our history.” All of this would seem to have political implications for Obama, now a tad above 50% in the polls. In 2012, the nation will expect a considerably better economy, especially on the employment and housing fronts. Schnapp’s glum housing outlook with its negative economic consequences suggests it may not happen. Since voters vote with their pocketbooks, the worsening housing mess Schnapp is talking about could just possibly derail Obama’s bid for a second term. There is an old saying from sports losers: Wait till next year! “Where housing is concerned,” quips Schnapp, “change that to wait until five years.” What do you think? E-mail me at Dandordan@aol.com.

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Ian Fletcher: The Biggest Bubble of All Has Yet to Pop

February 18, 2011

Americans presumably realize by now that living in a bubble economy, while exhilarating as long as the champagne lasts, is not a good move. Therefore it is worth understanding why the biggest bubble of all may be yet to pop. I refer to America’s trade imbalance with the rest of the world. As I explained in a previous post , our trade deficit with the rest of the world means that we must a) borrow money and b) sell existing assets in order to cover the yawning gap between our imports and our exports. And while a rich nation can indeed borrow a huge amount of money and has a lot of assets to sell off, this doesn’t mean Santa has installed an ATM on every street corner. Which is what a lot of people seem to think. Now it used to be that American liberals were the ones traditionally accused of “money-grows-on-trees” thinking. But I’ve noticed something: when it’s convenient to them (i.e., not a matter of cutting social programs they don’t like), American conservatives are now even worse. Let’s take as a case-in-point this recent assertion by Don Boudreaux of the libertarian Cato Institute: Second and most importantly, Mr. Fletcher doesn’t understand what a trade deficit is. An increase in the U.S. trade deficit does not necessarily mean that Americans are borrowing more or are selling off assets. The volume of productive capital assets is not fixed. Foreigners who invest dollars in creating and expanding businesses in America increase America’s capital stock without either putting Americans further in debt or decreasing Americans’ ownership of assets. Given that America is the world’s leading destination for foreign direct investment, it hardly seems plausible that the U.S. trade deficit is evidence of American impoverishment or of inadequate production. Now the key phrase here is, “The volume of productive capital assets is not fixed.” The idea appears to be that because we can always make more assets, there’s nothing wrong with selling them off to foreigners. Sounds logical enough. The problem, though, is that even if you can bake more cookies, selling off the cookies you already have results in your ending up with fewer than you would otherwise have. Maybe you don’t end up with nothing, but your still have fewer cookies than if you hadn’t sold any. The meaning of this analogy is that even if America can increase its stock of capital assets over time (as we obviously can), selling off some of those assets to foreigners still means we own fewer assets. Our net worth is still lower. We are poorer, by basic accounting. We own less. Debt works the same way. Even if America’s capacity to service debt goes up over time (as it does with a growing GDP), assuming debts to foreigners still means that we owe more than we otherwise would. Again, our net worth is lower. Our debit column went up. Now let’s look at the next tenet of bubblethink expressed above, the idea that “foreigners who invest dollars in creating and expanding businesses in America increase America’s capital stock without either putting Americans further in debt or decreasing Americans’ ownership of assets.” There are two problems with this idea. First is that most foreign investment into the United States simply doesn’t fall into this category. For example, of the $260.4 billion invested in 2008, 93 percent went to buying up existing companies, according to the Bureau of Economic Analysis. (Thomas Anderson, “Foreign Direct Investment in the United States,” BEA, June 2009, p. 55.) Worse, a huge chunk of foreign investment in the U.S. just goes for Treasury securities, which get recycled, by way of deficit spending, into consumption , not even investment in existing assets. Second, it’s a baseline trick. It is indeed true that if we take our low savings rate as a given and ask whether we would be better off with foreign-financed investment or no investment at all, then foreign-financed investment is better. But our savings rate isn’t a given, it’s a choice , which means that the real choice is between foreign- and domestically-financed investment. Once one frames the problem this way, domestically-financed investment is obviously better because then Americans, rather than foreigners, will own the investments and receive the returns they generate. Developing nations face this problem all the time (and more honestly than we do right now): While it’s certainly nice to have foreigners come and invest in your country, because this creates jobs et cetera, what’s even better is if you have the capacity to invest for yourself. Being able to develop your own country with your own investments, rather than depending upon others, is part of what distinguishes the serious players from the also-rans. The last time America was importing huge amounts of capital was in the 19th century, when we were still a developing nation dependent upon European bankers to pay for building our railroads and the like; as we matured into a major industrial power in our own right, the tide reversed and we exported capital back to Europe to rebuild it, for example, after two world wars. In the 19th century, we borrowed to invest in projects that made us more productive, improved our capital stock, thus we could (and did) pay back the borrowing. Borrowing to consume is quite the opposite. Today, we are selling off our capital stock and damaging our future productivity. The free trade crowd also assumes that the economics of trade takes place in a vacuum. This is where the golden rule applies: He who has the gold makes the rules and controls the key decisions. There are important economic and political consequences. If Washington is under the influence of Wall Street and so-called “American” multinationals, what will our policies look like, what freedom of action will we have as a nation? How does one possess national security when the economic sinews thereof belong to someone else? At some point, all this will come out in the wash. Don’t say I didn’t warn you.

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Japan Falls Behind China As World’s Number 2 Economy

February 14, 2011

TOKYO (By Tetsushi Kajimoto and Leika Kihara) – Japan’s economy shrank slightly in the final quarter of 2010 but analysts expect a recovery this year as stronger exports to China and other parts of fast-growing Asia offset persistently weak domestic demand. The data confirmed Japan lost its place to China last year as the world’s second-largest economy and highlighted Tokyo’s increasing reliance on its giant neighbor, which buys nearly a fifth of Japan’s exports. Gross domestic product (GDP) shrank 0.3 percent in the October-December period from the previous quarter, slightly less than a 0.5 percent fall expected by markets but still the first contraction in five quarters. That translated into an annualized contraction of 1.1 percent, with analysts largely blaming the weakness on a temporary hit to consumption after the September expiry of government incentives to buy low-emission cars. The data showed Japan’s economy was the weakest among major rich nations, compared with annualized growth of 3.2 percent in the United States in the same quarter. European data due out on Tuesday is expected to show slight growth in the 17-nation euro zone. “The data confirms that the economy entered a lull on a downturn in private consumption, but recent monthly economic indicators such as output and exports show it is unlikely that the lull will be prolonged,” said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute. “The economy will continue to depend on external demand for growth, as domestic demand is likely to be capped by subdued income growth and the anticipated negative impact from the expiry of subsidies for energy-efficient electrical appliances.” CHINA THE NEW NO.2 The latest GDP figures confirmed analysts’ estimates that China pulled ahead of Japan in 2010 as the world’s second-biggest economy behind the United States on a seasonally unadjusted, nominal dollar basis, at $5.8786 trillion against $5.4742 trillion. Economics Minister Kaoru Yosano said Japan needed to make the most of China’s growth to boost its own fortunes, as it increasingly relies on demand from its Asian neighbor. “The fact that China’s economy is booming is welcome news for Japan as a neighboring country,” Yosano told reporters after the release of the data. “We want to deepen the amicable economic relationship between Japan and China.” Japan’s shipments to mainland China accounted for 19.4 percent of its overall exports last year, making it the No.1 destination for Japanese goods, followed by the United States at about 15.4 percent. The signs of an export-led recovery prompted the government to upgrade its economic assessment last month and dampened expectations of any imminent monetary easing by the Bank of Japan. BOJ policymakers meeting this Monday and Tuesday may see no immediate need to ease policy further through an increase of asset purchases and may instead focus on assessing the strength of the recovery. While recent data showed exports and industrial output rose more than expected in December, a pick-up in the corporate sector is seen unlikely to spill over to personal consumption, which makes up about 60 percent of GDP. Capital expenditure rose 0.9 percent from the previous quarter, slower than the 1.5 percent pace of gains in July-September. Analysts said the increase in capital spending may not lead to stronger consumer spending as companies remain reluctant to boost wages due to fierce global competition, and as workers put a higher priority on job security than wage hikes. The roll-back of government incentives for purchases of energy-efficient household electronics in December will also weigh on private consumption, which fell 0.7 percent from the previous quarter after a 0.9 percent increase in July-September. External demand, or net exports, shaved 0.1 percentage point off GDP, with the yen’s spike to a 15-year high against the dollar during the period hurting exports. BOJ STANDS PAT As the economy remains mired in stubborn deflation, the BOJ is in no position to roll back its comprehensive easing anytime soon. That is in stark contrast with policymakers in other parts of Asia, Europe and elsewhere where the focus is shifting from supporting sustainable recoveries to controlling inflation. China raised interest rates last week for the second time in just over six weeks and further policy tightening is expected from Beijing in the coming months, raising the prospect of a slowdown in Chinese demand for everything from imported electronics to construction equipment and cars. Nissan Motor Co, Japan’s No.2 automaker, raised its annual profit and sales forecasts last week as its big drive into emerging markets such as China pays off. But with Japan’s domestic demand expected to remain weak, a heavy reliance on exports to fuel recovery is expected to pose a risk if external demand stumbles. “Risks from overseas economies and currency moves need to be closely watched,” Economics Minister Yosano said, noting that financial markets were also monitoring the government’s ability to enact legislation in a divided parliament. Highlighting concerns about prolonged political paralysis, a Kyodo news agency survey showed support for Prime Minister Naoto Kan’s government had fallen below 20 percent, a level where some premiers have been nudged out of power in the past. (Editing by Edmund Klamann and Kim Coghill.) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Bernanke Responds To GOP Grilling On Inflation

February 9, 2011

WASHINGTON — Members of Congress sharply questioned Federal Reserve Chairman Ben Bernanke Wednesday over whether the Fed’s policies are raising the risk of higher inflation in the months ahead. House Budget Committee Chairman Paul Ryan, R-Wis., said he is concerned that the Fed won’t be able to detect inflation until “the cow is out of the barn” and inflation is already spreading dangerously through the economy. Bernanke acknowledged that inflation is surging in emerging economies. But he downplayed the risks to the U.S. economy, even as lawmakers expressed concerns about rising gasoline and food prices. Inflation in the United States remains “quite low,” Bernanke said. He blamed higher prices on strong demand from fast-growing countries such as China_ not the Fed’s policies to stimulate the economy, including buying $600 billion worth of Treasury debt. Bernanke’s remarks suggest the Fed will stick with the bond-buying plan through June, as scheduled. The program is aimed at invigorating the economy by lowering rates on loans and boosting prices on stocks. It was Bernanke’s first appearance before the House since Republicans took control last month. He faced tough questions from them, despite being a member of the party. Ryan worries that the Fed’s stimulus policies, including the debt purchases, could trigger inflation or fuel speculative buying of stocks or other assets. “Many of us fear monetary policy is on a difficult track,” Ryan said. Rep. Todd Rokita, R-Ind., seemed skeptical of the Fed’s ability to fend off inflation before it gets out of hand. In the Fed’s history, when did the Fed “get it right?” Rokita asked. Bernanke said former Fed Chairman Paul Volcker brought down double-digit inflation during the 1980s by pushing up interest rates to levels not seen since the Civil War. The Fed chief said he was confident the Fed has the political will to boost interest rates and snuff out inflationary forces before they take hold. Bernanke did acknowledge that rising gas prices are a threat to the economy. Prices have been around $3 a gallon nationally. If they were to go above $4 a gallon, that would “take a significant amount of disposable income away from people,” he said. Still, Bernanke defended the bond-purchase program. He said it is needed to ease high unemployment and credited all the Fed’s stimulus policies with creating or saving 3 million jobs over the past several years. The unemployment rate was 9 percent in January after the fastest two-month decline in 53 years. Bernanke said the drop is encouraging but cautioned that it will take four or five years for hiring to return to normal – around 5 percent or 6 percent. He said the economic recovery won’t be assured until companies step up hiring on a consistent basis. Ryan and Bernanke agreed that Congress and the White House must have a plan to reduce the government’s $1 trillion-plus deficits. Ryan favors budget cuts to get the deficits under control. Bernanke didn’t endorse any specific policies on deficit-cutting. He said lawmakers should hold off on spending cuts or tax increases until the economy is in better shape. Bernanke again warned Republicans that they shouldn’t play political games with the Treasury Department’s request to raise the government borrowing authority. Treasury has asked to raise the $14.3 trillion debt ceiling. House Republicans have vowed to make deep spending cuts a precondition. “We do not want to default on our debts. It would be very destructive,” Bernanke said. At the same time Bernanke was testifying, Rep. Ron Paul, R-Texas, held a hearing on whether the Fed’s bond-buying program and record-low interest rates can really help create jobs. Paul, an outspoken critic of the central bank, favors abolishing the Fed. Lawmakers at that hearing also expressed concerns that the Fed’s policies will spur inflation. “If the Fed didn’t see this mess coming, will they see the recovery starting in time to turn off the printing presses to stop inflation,” asked Rep. Frank Lucas, R-Okla. “I am not sure their vision in the future will be any better than in the past.” ___ AP Economics Writer Martin Crutsinger contributed to this report.

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Bernanke: Not Raising Debt Limit Would Be ‘Catastrophic’

February 4, 2011

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke on Thursday issued a stern warning to Republican lawmakers that delays in raising the United States’ $14.3 trillion debt limit could have “catastrophic” consequences. “Beyond a certain point … the United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic,” he told the National Press Club. Bernanke coupled his warning with a call for the Obama administration and Congress to put in place a credible plan to curb future budget deficits. He also offered a moderately more optimistic assessment of the economy’s prospects than in other recent remarks, although he made clear the recovery still needs support from the Fed. Some Republican leaders intend to use the need to raise the statutory debt ceiling as leverage for spending cuts. The Obama administration has said the nation would likely hit the limit between early April and late May. If Congress does not raise the limit in a timely way, the government could be forced to scale back operations. A failure to lift the limit could raise the specter of a first-ever U.S. debt default and push interest rates up sharply. Financial markets have not yet shown any nervousness over the debt limit, which has typically been raised after political grumbling, and Bernanke said the chances of a default were “very remote.” Still, his comments echoed dire warnings issued by Treasury Secretary Timothy Geithner and other Obama administration officials, who have also said failure to raise the debt ceiling could be “catastrophic.” The Fed chairman called on lawmakers not to hold the issue hostage to the contentious debate over how best to rein in record budget gaps. “I would very much urge Congress not to focus on the debt limit as being the bargaining chip in this discussion, but rather to address directly the spending and tax issues that we have to deal with in order to make progress on this fiscal situation,” Bernanke said. FED MISSING BOTH MANDATE TARGETS In discussing the recovery, Bernanke provided a modestly more rosy outlook than he has in other recent appearances, citing gains in household spending, improved consumer and business confidence and stepped-up bank lending as signs 2011 may bring stronger growth than 2010. But he made clear Fed officials were not yet satisfied. “Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate,” he said. Bernanke’s comments on the economy suggest the Fed believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep inflation in check. “We continue to see the Fed as making good on its intent to purchase $600 billion in long-term Treasury securities by the end of the second quarter,” Barclays Capital economist Michael Gapen wrote in a note to clients. “We also believe that the chairman has the votes needed to pursue further asset purchases should he think conditions warrant.” The hard-hit job market shows some grounds for optimism, but modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, Bernanke said. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” he said. KOCHERLAKOTA’S VIEW Minneapolis Fed President Narayana Kocherlakota, who despite his reputation as an inflation hawk has publicly voiced support for the Fed’s bond-buying program, said on Thursday the jobless rate will remain “troublingly” high through 2012. “I do not believe that either unemployment or employment will improve rapidly in 2011,” he told an audience at the University of Minnesota, where he headed the economics department before taking the top job at the Fed’s smallest regional bank in 2009. And while he said he is “optimistic” inflation will rise this year, he said he expects it to stay below the central bank’s informal 2 percent target. Asked about the potential that Fed policy is fueling bubbles, he said, “Nothing in the current policy environment makes me worried about that.” Some analysts worry the Fed is underplaying gains in the recovery and is turning a blind eye to inflation pressures that may be building, as evidenced by rising commodity prices around the world. Economic data on Thursday pointed to stronger growth momentum, as the U.S. services sector grew in January at its fastest pace in more than five years, factory orders picked up and claims for jobless benefits fell off sharply. “It seems to me that the chairman seems to be glass half-empty,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. “There are all these inflation concerns that are hitting the long-end of the bond market. Bernanke played down worries that recent commodity price rises pose an inflation threat in the United States. “Overall inflation remains quite low,” he said, adding that downward pressure on wages and prices was not surprising, given the “substantial slack” in the economy. He also countered accusations the Fed’s easy monetary policy was behind surging prices for food and other raw materials around the globe, saying the increases primarily reflected strong demand in emerging economies. (With additional reporting by Glenn Somerville, Rachelle Younglai and Richard Leong in New York, and Ann Saphir in St. Paul, Minn. Editing by Chizu Nomiyama, Dan Grebler, Gary Hill) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Dan Dorfman: Lady Dracula Sees Gobs Of New Jobs

February 2, 2011

For the moment, at least, America’s biggest economic worry — the lofty unemployment rate — may finally be taking a decided turn for the better. In December, 103,000 new jobs were created in non-farm payroll employment. The January number, to be reported Friday by the Bureau of Labor Statistics, could double that with a gain of between 175,000 and 215,000 jobs, according to Madeline Schnapp, the economics chief of West Coast liquidity tracker TrimTabs Research. “We expect the job growth reported by the BLS to surprise on the upside,” she says. Interestingly, Schnapp, who got the moniker “Lady Dracula” in economic circles for being exceptionally bearish on the economy in recent years, has had a change of heart. No longer, like last October, is she warning of a gory jobs story. The reason for her positive shift, she tells me: the trillions of dollars in freshly printed and borrowed money pouring into the system, which she thinks could be a boon for new job creations.. Given her altered economic stance, maybe she should undergo a name change, say to Glinda, who was the good witch of the north in the Wizard of Oz . Why the creation of gobs of new jobs in January? Schnapp offers a slew of reasons, namely: – The TrimTabs online jobs posting index rose 4.5% in January, the biggest monthly gain since October of 2010. – Initial unemployment claims have been trending lower since August of 2010. – Commercial and industrial loan growth accelerated to 1% in the past month. Such strong growth often accompanies a pickup in job growth. – The Federal Reserve’s senior loan officer opinion survey reported the demand for business loans picked up in the fourth quarter of 2010, while demand for commercial and industrial loans was the strongest sine 2006. – Fed manufacturing surveys for New York, Philadelphia, Richmond and Kansas City all reported rising employment. – The Institute of Supply Management business conditions indices for Chicago and New York have both showed job improvements, – The Fed’s “beige book” (a Fed commentary of current economic conditions) reported that labor markets rose in most districts. Temporary staffing firms in six of 12 districts gave positive reports, while eight of 12 said their business contacts planned to hold hiring steady or increase hiring in 2011. – Personal consumption expenditures rose 4.4% in last year’s fourth quarter, the largest hike since the first quarter of 2006. Meanwhile final sales jumped 7.1%, the strongest growth since 1984. – The ISM manufacturing index component surprised on the upside, pointing to strong employment growth. – TrimTabs withholding tax data was strong the last two weeks of January. Because a lot more discouraged workers are coming back into the labor force, Schnapp figures we may not see a sizable improvement in the unemployment rate (presently 9.4%) despite her projected jump in new jobs. In fact, she says, we may even see the unemployment rateactually increase. While bullish now on the economy, Lady Dracula hastens to point out it’s too soon to uncork a fresh bottle of champagne, given her two biggest long-term concerns: the question of whether the economy will be able to grow without extraordinary government support and the additional uncertainty of whether there are sufficient buyers of U.S. treasuries at low yields. What do you think? E-mail me at Dandordan@aol.com

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Ian Fletcher: Stop the Korea Free Trade Agreement!

January 23, 2011

You would think America had learned its lesson from NAFTA, which the Labor Department has estimated cost us 525,000 jobs. But no. President Obama and the Republican leadership are united in pressing for ratification of the Korea-U.S. Free Trade Agreement (KORUS-FTA). This is an agreement which the Economic Policy Institute estimates will cost us 159,000 more jobs over the next five years. Yes, you read that correctly. At a time when even the president admits that his number one economic priority is job creation, and has created an entire new commission for that purpose, they’re going ahead with it anyway. It gives the phrase “contradictions of capitalism” a whole new meaning. Make no mistake: we’re in big trouble. The US economy has entirely lost the ability to create jobs in tradable sectors, and the recent downward blip in unemployment was merely the result of more people giving up looking, which causes them to drop out of the statistics. Even the official U.S. International Trade Commission has admitted that KORUS-FTA will cause significant job losses. And not just in low-end industries. The ITC foresees the electronic equipment manufacturing industry, with average wages of $30.38 in 2008, as a major victim. The supposed logic of America swapping junk jobs for high-end jobs simply isn’t the way the economics really works out. Pace free-market mythology, there are actually well-understood reasons for this, if you dig a little into what economists already know. Was this the Obama America voted for in 2008? No. That Obama is at an undisclosed location somewhere. He campaigned against KORUS-FTA during the 2008 campaign. (It was originally negotiated, but not ratified by Congress, by Bush in 2007.) Among other things, that Obama said: I strongly support the inclusion of meaningful, enforceable labor and environmental standards in all trade agreements. As president, I will work to ensure that the U.S. again leads the world in ensuring that consumer products produced across the world are done in a manner that supports workers, not undermines them. Nice words, but none of them are reflected in KORUS-FTA, which contains no serious new provisions on these issues. This agreement is essentially a NAFTA clone. It is, in fact, the biggest trade agreement since NAFTA, and the first since Canada with an industrialized country. This agreement, like NAFTA and the dozen or so other free trade agreements America has signed since NAFTA, is fundamentally an offshoring agreement. It is about making it easier for U.S. companies to move work overseas. The provisions to protect workers and consumers are unenforceable window dressing. Don’t be fooled by the fact that some unions, like the United Auto Workers (UAW), have endorsed the agreement. This is part of a cynical ploy by the White House to split the trade union movement in order to keep the AFL-CIO neutral. The UAW’s out-of-touch leadership is so punch-drunk from the 2008 collapse of the U.S. auto industry that it has lost touch not only with what is good for the American economy as a whole, but with what is good for rank-and-file auto workers. Don’t take my word for it: in the words of Al Benchich, retired president of UAW Local 909: The UAW Administration Caucus is the one-party state that controls the UAW at the International level. Every International officer is a member of the Caucus, and they surround themselves with appointed international reps that unquestioningly do their bidding. No wonder other, more democratic and more intelligent, unions, like Leo Gerard’s United Steelworkers, are criticizing the UAW for its decision to support KORUS-FTA. Interestingly, the UAW’s past record of criticizing KORUS-FTA is more honest than anything they’re doing in a desperate bid to help keep Obama in the White House. For example, here’s what they originally said about this agreement: KORUS-FTA has inadequate protections and enforcement mechanisms to enforce either the spirit or the letter of the law. Precisely . And changes made since then are, as noted, minimal. As an example of how one-sided the treaty is, consider that it now allows — to great rejoicing — America to export 75,000 cars a year to Korea. This translates to a measly 800 jobs. Korea’s exports of cars to the U.S. in 2009, on the other hand? Try 476,833. Furthermore, even if the U.S. does get to sell more cars in Korea, American companies will mostly not be making the steel, tires, and other components that go into them, because the agreement allows cars with 65 percent foreign content to count as “American.” This is just one example of how KORUS-FTA isn’t even as good as the deal the EU just signed with Korea. (The EU got a 55 percent standard on this item.) And remember that the EU and most of its member states, of course, don’t really practice free trade anyway: they practice a covertly managed trade that has kept the EU’s trade balance within pocket change of zero over the last two decades, while America has been running deficits around the $500 billion mark. “Free trade agreement,” in American English, means “free trade agreement.” In other languages, it means “politely codified agreement for managed trade at a low tariff.” The Europeans invented this game — called mercantilism — back when international trade was conducted with sailing ships. South Korea learned it from the Japanese. Uncle Sam (and maybe John Bull and a few others) are the only naïfs who still don’t get it. Despite what the White House and the U.S. Chamber of Commerce are saying, this agreement makes no sense as a strategy to reduce our horrendous trade deficit. America’s trade deficits have a long record of going up , not down, when we sign trade agreements with other nations. Paradoxically, trade agreements even seem to sabotage our own trade with foreign nations: according to an analysis by the group Public Citizen, in recent years our exports to nations we have free-trade agreements with have actually grown at less than half the pace of our exports to nations we don’t have these agreements with. So these agreements don’t hold water as trade-expanding measures. Even leaving aside trade-balance issues, this agreement is a disaster, thanks to something called “investor-state arbitration.” Like NAFTA, it compromises American sovereignty and subjects American democracy to having its own laws overruled by foreign judges as interfering with trade. Under NAFTA to date, over $326 million in damages has been paid out by governments as a result of challenges to natural resource policies, environmental protection, and health and safety measures. There about 80 Korean corporations, with about 270 facilities around the U.S., that would acquire the right to challenge our laws under KORUS-FTA. What kind of problems could this cause? The U.S. was forced in 1996 to weaken Clean Air Act rules on gasoline contaminants in response to a challenge by Venezuela and Brazil. In 1998, we were forced to weaken Endangered Species Act protections for sea turtles thanks to a challenge by India, Malaysia, Pakistan and Thailand concerning the shrimp industry. The EU today endures trade sanctions by the U.S. for not relaxing its ban on hormone-treated beef. In 1996, the WTO ruled against the EU’s Lome Convention, a preferential trading scheme for 71 former European colonies in the Third World. In 2003, the Bush administration sued the EU over its moratorium on genetically modified foods. It gets worse. KORUS-FTA also signs away our right (and Korea’s, too, not that this makes it any better) to a wide range of financial regulations of the kind that might have helped avoid the crisis of 2008. For example, it forfeits our right to limit the size of financial institutions. It forfeits our right to place firewalls between different kinds of financial activities in order to prevent volatility in one market from collapsing another. It prevents us from limiting what financial services financial institutions may offer — Enron Savings & Mortgage, here we come… It bans regulation of derivatives. It ban limits on capital flows designed to tame volatile “hot money.” Why is the U.S. flirting with making such an appalling mistake yet again? Because a) multinational corporations have bought our political system and b) because our government would rather play power politics than keep its own (declining) economic house in order. It is remarkable how stuck we are in the 1950′s, with an invincible economy at home and a Cold War abroad. As a report by the Senate Finance Committee once put it: Throughout most of the postwar era, U.S. trade policy has been the orphan of U.S. foreign policy. Too often the Executive has granted trade concessions to accomplish political objectives. Rather than conducting U.S. international economic relations on sound economic and commercial principles, the executive has set trade and monetary policy in a foreign aid context. An example has been the Executive’s unwillingness to enforce U.S. trade statutes in response to foreign unfair trade practices. Ironically, it may eventually be our own decline that solves our trade problems, by rescuing us from our own arrogance and stupidity. When we finally realize we can’t take our economy for granted, we may finally stop giving away the store in international trade. P.S. There have been huge demonstrations against KORUS-FTA in Seoul, South Korea. If you live in the Bay Area, there’ll be a protest outside Nancy Pelosi’s San Francisco mansion on January 29. Click here for more details.

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Les Leopold: Financial Socialism by and for Wall Street Elites?

January 21, 2011

More than 70 percent of Americans say big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, a Bloomberg National Poll shows. An additional one in six favors slapping a 50 percent tax on bonuses exceeding $400,000. Just 7 percent of U.S. adults say bonuses are an appropriate incentive reflecting Wall Street’s return to financial health. A large majority also want to tax Wall Street profits to reduce the federal budget deficit. A levy on financial services firms is the top choice among more than a dozen deficit-cutting options presented to respondents. Bloomberg As bonus season arrives, the gap between the American people and Wall Street couldn’t be wider. And where is Washington in this great divide? Don’t ask. At a moment when Americans desperately want jobs on Main Street and expect Wall Street to pay its fair share, Washington officials are hard at work — seeking jobs for themselves on Wall Street. (Congratulations, Peter Orszag, on parlaying your position as Obama’s OMB director into a top job at CitiGroup, the bank that received hundreds of billions in taxpayer bailouts and guarantees on your watch!) Most Americans rightly sense that our mixed free-enterprise economy, which once built a broad middle class, has devolved into a system of financial socialism by and for elites. The public wants and deserves answers to these basic questions: 1 . Why do people in the financial sector make so much more money than the rest of us? Mainstream economists claim that your income reflects the economic value you produce — at least in free and open markets. But are proprietary traders, for example, really 100 times more valuable than neurosurgeons? In the UK, some economists say no: The British New Economics Foundation calculates that “While collecting salaries of between £500,000 and £10 million, leading City bankers destroy £7 of social value for every pound in value they generate.” Let’s try a back-of-the envelope calculation of Wall Street’s net social value. Compare their bonuses and profits for roughly the last five years (about $500 billion) with the economic losses produced in the financial crisis the bankers caused (about $4 trillion in value destroyed, not counting the ongoing travails of the 22 million people who haven’t yet been able to find a full-time job). For every dollar “earned” on Wall Street, about 8 dollars were destroyed. (In case you’re suffering from financial amnesia and forgot how the financial sector single-handedly caused the economic crisis, please see The Looting of America . Chapter One can be found gratis on Alternet.com.) There’s plenty of room for argument about this kind of calculation. But even Wall Street wizards would have trouble defending the billions they’ve acquired by profiting from a bubble that blew up the economy. What’s the real value of junk CDOs that were rated AAA and then sold for enormous profits before they blew up? We could make a strong case that those who profited from such bubble investments – like the people who sold synthetic CDOs to Wisconsin school districts — should pay back their fraudulent profits. (In fact, the school districts have filed a lawsuit toward that end.) 2. Do current profits of financial firms come from tax-payer bailouts? The old free-market mantra was that you could make as much as you wanted, so long as you were willing to accept all the risks that went with it. Joseph Schumpeter, a great defender of capitalism during the 1940s when much of the world was turning towards socialism, called the process of winning and losing “creative destruction.” In his vision of capitalism, the best and the brightest staked everything in their quest for success, and only the true innovators survived. Inefficient enterprises would be left by the wayside. So… are the survivors of the economic collapse like CitiGroup, Morgan Stanley, Bank of America, Goldman Sachs and JP Morgan Chase, receiving their just rewards? Actually, it sounds a bit quaint these days to suggest that the rich must actually suffer the consequences of failure. These top financial institutions did not have to pay for their reckless gambling and gaming because they were deemed to big too fail, and so were bailed out. Goldman Sachs, for example, made a very bad bet when it purchased $13 billion of financial “insurance” from AIG to cover its toxic assets. AIG, due to its own enormously bad business decisions, could not pay up and was on the verge of bankruptcy. Had it gone under, as Schumpeter probably would have urged, Goldman Sachs would have received pennies on the dollar for its bad gamble, and might have gone broke. Instead, AIG was bailed out by taxpayers and Goldman Sachs got 100 cents on the dollar. It gambled, lost, and instead of suffering the consequences, was made whole by the government. And now Goldman Sachs execs are hauling in tens of millions in bonuses (disguised as stock options, even as its profits slip a bit from astronomical highs.) Clearly, the “free and open” market did not determine who should be spared “creative destruction.” Instead, CitiGroup, Goldman Sachs, JP Morgan Chase et al were saved because of their deep political connections. These companies would be kaput were it not for taxpayer bailouts, hastily contrived loans, and all kinds of market guarantees from their friends at the Fed. Schumpeter would have recognized this scheme in a flash: It’s precisely the kind of crony socialism that he detested, only this time the game was was designed by and for financial elites in the world’s largest capitalist economy. (Please don’t compare the Wall Street rescues to the GM and Chrysler bailouts. Wall Street received ten times as much and will pay themselves a hundred times more than the top auto-executives. And the auto industry didn’t topple the US economy and send millions to the unemployment lines.) 3. But since Wall Street is paying us back, why shouldn’t they go back to earning whatever they can? Let’s follow through on that logic. Let’s say you raid your husband’s pension fund for $100,000 and take the bus to Vegas, naively hoping to triple your money. As luck would have it, you lose it all. Desperate, you manage to borrow another two million from a rich friend (Wall Street calls it “leverage”) — and then you really load up on your bets. Tragically, you lose that too. I hate to tell you this, but you’re in big trouble now. Don’t expect the government to come around and offer to cover your losses with taxpayer bailouts so you can keep on gambling till the lights go out, and then, if you win, pay back the government. That is, unless you’re too big to fail — say, a very large, well-connected investment bank. In that case, party on! It’s true, Wall Street has paid us back for much of the bailout money we gave them. That’s the good news. The bad news is that, having been rewarded for their bad behavior, they’re now back at the casino tables, playing many of the same games that took down the economy in the first place. This time there are even fewer players who are now way too big to fail. And fewer players means less competition — hence the rise in banking “fees,” especially for the average consumer. 4. Where does all their wealth come from? There are only two possible sources for all the money the financial sector is spewing: The bankers are either creating new wealth or they’re siphoning off wealth from the rest of us. Hedge fund honchos like to boast about how they weren’t bailed out and therefore are entitled to their enormous hauls. (The top 10 in 2009 earned an average of $900,000 an HOUR. The top 25 earned as much as 658,000 entry level teachers.) But our noble hedge fund managers have a great deal of difficulty accounting for what I call their “paradox of productivity.” You see, there’s supposed to be a connection between the productivity of your employees and your profits. Apple Corporation, for example, earned about $6 billion in 2009 by expertly engaging its 35,000 employees. (They went on to earn $6 billion in the last quarter of 2010 alone.) Along the way they offered us an array of popular new products that people are enjoying and putting to use. Appaloosa, the hedge fund, earned about as much as Apple in 2009 by speculating on god knows what. But it has fewer than 250 employees and it’s not at all clear what these individuals added to our economy — certainly not the iPad. How can 250 workers, no matter how wise and talented, produce as much real worth speculating on stuff as 35,000 Apple employees can make inventing, manufacturing and marketing useful products? They can’t. So hedge funds must be siphoning off wealth from elsewhere, not creating it themselves. (If you think I’m wrong, please prove otherwise, because I haven’t found a single book or paper about hedge funds, even from insiders or academics, that explains this paradox of productivity.) Ever since the crash, I’ve been calling for a ban on Wall Street bonuses and for new taxes on the financial sector. Though I felt like I was hollering in the wind, apparently most Americans agree (if we can believe the polls cited above). I naively thought that during the crash the government would come done hard on Wall Street as it did during the 1930s. I was wrong. Instead we have institutionalized a festering problem that allows Wall Street to continue siphoning off the nation’s wealth. So we have to think about a more radical restructuring. I believe the only way to end financial socialism for elites is to turn the core of high finance into group of heavily regulated public utilities — like power, water and electricity (not semi-private entities like Fannie and Freddie before they were nationalized). Financial socialism for elites has failed and will fail again, plunging millions of Americans into joblessness and sinking our nation deeply into debt. Big government has many faults, of course. But the American people, I believe, can tell the difference between public utilities that aim to serve the economy and a private oligopoly that only serves a tiny elite. Ironically, those who run the government don’t want government to end financial socialism (maybe because of financial industry campaign contributions–or because of Wall Street’s inviting revolving door). It may take another crash before Washington is willing to listen. Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the One-sided Class War, (hopefully to be published in 2011).

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Video: Ziemba Expects `Relatively Weak’ 4.3% Growth for Russia

January 7, 2011

Jan. 7 (Bloomberg) — Rachel Ziemba, a senior analyst at Roubini Global Economics, discusses the investment environment in Russia and the outlook for the nation’s economy. Ziemba speaks with Lisa Murphy on Bloomberg Television’s “Fast Forward.” (Source: Bloomberg)

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Video: Record Gold Prices Take Luster Off Jewelry Demand, Sales

December 22, 2010

Dec. 22 (Bloomberg) — Bloomberg’s Gigi Stone reports on the impact of rising gold prices on jewelry demand and jewelry makers. The rising value of bullion, reaching a record $1,431.25 an ounce on Dec. 7, has upended the economics of jewelry for buyers and sellers alike, with a mix of outcomes around the world. U.S. purchases of gold jewelry have fallen 36 percent by volume in three years. Women in India, where demand is booming, are buying hollow bangles made to look like solid gold. (Source: Bloomberg)

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Robert E. Prasch: Join a World-Wide Bank Run in December — Move Your Money

November 24, 2010

“A spectre is haunting Europe.” Its not the revolution that Karl Marx supposed would come about. Nor is it Parisian students and workers taking to the streets as in May 1968. It is the vision of hordes of Europeans striking back at those who caused the 2008 financial crash. This time, organizers are calling for the use of a new weapon, one available to any of us with a bank account. It is the simple act of removing all of our money from the banks, and doing so en masse on the same day — December 7th. While it is hard to know who first thought of this marvelous act of political theater, it has begun to take serious traction in France and is now spreading across Europe. It has especially taken off since a ringing endorsement of the idea began making the rounds on YouTube and Facebook by the always amusing, and surprisingly thoughtful, ex-soccer star Eric Cantona. Cantona, already famous for his performances with Leeds United, Manchester United, and the French National Team, has remained in the public eye while developing new interests in photography, film, and live theater (Happily for the discerning taste of the French public, he is an excellent photographer, and in the latter endeavors he has the advantage of being mentored by a well-established and highly-talented young actress — his wife, Rachida Brakni). Of late, the famously mercurial temper that Cantona exhibited on and off the soccer pitch has been redirected from rivals and unruly fans. A prominent target is French President Nicolas Sarkozy’s proposal to create a ministry, museum, and mass public debate on “national identity,” all of which Cantona publically ridiculed as “idiotic.” His sights are now trained on the banking and financial system that he — correctly — holds responsible for France’s current economic problems. This is important because Sarkozy and the EU leadership is using this crisis to erode welfare state protections even as ostensibly scarce public monies are deployed to shore up the banks most responsible for the problem. Which brings us to the economics of a mass withdrawal of deposits from the banks. Will it bring about an actual bank run or financial crash? Certainly not. For one thing, an organized and deliberate action such as Cantona proposes lacks the element of panic so characteristic of bank runs. Additionally, the banks and the central banks overseeing them will have time to prepare for the event, and should be able to reallocate their holdings of cash, reserves, and other assets in advance. If necessary, banks can always borrow short-term funds on the inter-bank market or even directly from the central bank. A mass withdrawal should, however, shrink the profitability of banks, as retail deposits are normally considered cheap and stable sources of funds with which to finance loans. Large European banks, relative to their American peers, are more dependent on retail deposits, so they will especially miss these funds when the time comes to calculate profits and bonuses. But what of the politics? Here in the United States it is now overwhelmingly clear that a dozen or so of the largest financial institutions responsible for the crash and ensuing recession have gained, not lost, by their irresponsible decisions. They repeatedly tell us that they have “learned lessons.” This is true, they have: Learned that their past decisions have enriched senior management beyond belief. Learned that their market share is now substantially larger than before the crash. And learned that the government has deemed them Too Big To Fail (this latter designation lowers their cost of funds and enhances their profitability). Showing admirable “bi-partisanship,” Republican and Democratic administrations have worked hard and seamlessly to bring about these “lessons.” This summer, the Dodd-Frank Financial Reform and Consumer Protection Act enshrined the perspective of financial elites that reform should be primarily symbolic. In a sentence, over $12,000,000,000 of stock market, real estate, and other asset values disappeared, while rates of home foreclosures and unemployment soared, with virtually NO political or legal consequences. I might be a cynic, but I hope to never be as cynical as those who engineered these outcomes. Bringing Cantona’s symbolic protest here to the United States could mark the beginning of a new politics, one marked by actions taken outside of the normal party process where “hope and change” are now effectively stifled by the duplicity of our elected officials. Moreover we, the people, need a victory. We need to do something that simultaneously creates a spectacle and an unmistakable political message. So let us join with Cantona and the good people of Europe by withdrawing our money from the four largest American banks on December 7th (Bank of America, J.P. Morgan Chase, Citigroup, and Wells Fargo). They deserve our contempt several times over, so lets present them with their just rewards! Sadly, the next largest two in size, Goldman Sachs and Morgan Stanley, do not have many retail accounts. But perhaps we could gesture at them with a middle finger on our merry way to withdraw money from the others! In preparation, open an account at a credit union or a community bank over the next few weeks so you will have somewhere to put your money when the protest ends. If you are worried about the security of your funds on the day of the protest, withdraw all but a token sum beforehand and then close your account on December 7th. Perhaps happiest of all, this protest has no downside. You don’t even need a permit — after all, you are just going to the bank! Your actions will tie up their bank operations all day, and their back offices for some time afterwards. While waiting in line, you will have a chance to meet friends, neighbors, and like-minded fellow citizens who care deeply about the future of this nation. You will hurt the profits and the public image of several irresponsible and predatory financial institutions. You will embarrass the political leadership of the nation. And finally, your money will almost certainly end up in a more service-oriented and socially responsible institution. You will be glad that you turned out on December 7th. Robert E. Prasch is a professor of economics at Middlebury College where he teaches courses on Monetary Theory and Policy, Macroeconomics, American Economic History, and the History of Economic Thought. His latest book is How Markets Work: Supply, Demand and the ‘Real World’ (Edward Elgar, 2008).

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Stuart Holland: Europe Needs a Gestalt Shift

November 23, 2010

The eurozone must use all available methods to implement New Deal-style programs before it’s too late. Angela Merkel has recently sought support for measures to penalize EU member states with debt in excess of 60% of GDP — the nominal limit of the Stability and Growth Pact, or SGP. Meanwhile, Germany has introduced a balanced budget provision into its constitution. This is not unrelated to the word for debt in German, Schuld, which also means guilt and leads to Nietzsche’s claim that creditors seek to punish debtors for it. Yet what is needed in Europe now is also German: a Gestalt shift to recognize that while EU member states are deep in debt from salvaging banks and hedge funds, the European Union itself has next to none. It had none at all until May this year, when the European Central Bank began to buy up tranches of some member states’ national debt. But this is both costly and ineffective. Spreads on Greek bonds have risen to 10%, which is unsustainable. A serial default of several eurozone member states is possible. A simpler and costless solution would be to cut the Gordian Knot on national debt by transferring a share of it to the European Central Bank. If this were up to 60% of GDP, as allowed by the SGP, it would reduce the default risk for the most exposed member states, lower their debt servicing costs, and signal to financial markets that European governments have a proactive response to the current crisis, rather than being passive victims of unelected credit rating agencies. A ‘tranche transfer’ would not be a debt write-off. The member states whose bonds are transferred to the ECB would be responsible for paying the interest on them, but at much lower rates. Yet debt stabilization alone is not the answer to Europe’s current crisis. EU governments are aiming to cut both debt and fiscal deficits on a scale that threatens beggar-my-neighbor deflation, denies their 2008 commitment to a European Economic Recovery Plan, and risks a double dip recession and a massive crisis of confidence both in the markets and in governments. The eurozone needs to learn from Roosevelt’s New Deal, whose success gave Truman the confidence to fund the Marshall Aid, from which Germany herself was a beneficiary. The key was borrowing to invest through US Treasury bonds. These do not count toward the debt of US states such as California or Delaware, nor need European bonds count toward the debt of EU member states. Many economists have claimed that Europe cannot save itself until it has the fiscal federalism to transfer resources from stronger to weaker member states. Germany is strongly opposed to this. Yet Europe neither needs such fiscal federalism, nor the ‘economic government’ called for by Nicholas Sarkozy, to finance a New Deal-style recovery program. The institutions and powers are already in place. The European Investment Bank — already twice the size of the World Bank — issues bonds that are its liability, not that of member states, which is why national governments need not count funding from it on their national debt. Since 1997, the EIB has been given a joint cohesion and convergence remit by the European Council to invest in health, education, urban regeneration, green technology and support for small and medium firms. Since then it has quadrupled its annual lending to €80 billion, or two thirds of the ‘own resources’ of the European Commission, and could quadruple this again by 2020. This would be equivalent in funding terms to postwar Marshall Aid. The EIB only co-finances investments. But this could be matched by net issues of EU bonds or euro bonds by the ECB, which would attract surpluses from the central banks and sovereign wealth funds of emerging economies and stabilize the eurozone. When Jacques Delors proposed such bonds in 1993, both Germany and France were opposed. Now only Germany is opposed. Nor does this depend on the ECB in place of governments. The Lisbon Treaty confirms that the ECB’s primary objective shall be to maintain price stability. But also that “without prejudice to that objective, it shall support the general economic policies of the Union in order to contribute to the achievement of the latter’s objectives.” This mirrors the constitution of the Bundesbank, which obliges it “to support the general economic policies of the government.” The European Council is also empowered by the Treaty to define “general economic policies,” and the European Economic Recovery Plan is already one of them. With the EU heading for a double dip recession, there is no risk to price stability. This calls for a German Gestalt shift both on debt stabilization and on issuing EU bonds. Or, if Germany will not shift, their introduction — like the euro itself — by some rather than all member states both to safeguard the eurozone and to make a reality of a European recovery program. Stuart Holland is a visiting professor Faculty of Economics University of Coimbra and former adviser to Jacques Delors. Cross-posted from New Deal 2.0 .

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Video: RDQ’s Ryding Says Federal Reserve Monetizing U.S. Debt

November 4, 2010

Nov. 4 (Bloomberg) — John Ryding, chief economist at RDQ Economics, talks about Federal Reserve’s decision yesterday to resume large-scale asset purchases. Fed policy makers announced they would buy an additional $600 billion in Treasuries through June in a second round of unconventional monetary stimulus. Ryding talks with Matt Miller and Carol Massar on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Video: Das Says G-20 Trade Imbalance Still ‘Underlying Problem’

October 25, 2010

Oct. 25 (Bloomberg) — Arnab Das, head of global markets research at Roubini Global Economics, talks about the emerging market members in the Group of 20. He speaks with Francine Lacqua on Bloomberg Television’s “On The Move.”

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Video: LSE’s Desai Backs U.K. Deficit Cuts, Sees Slow Recovery

October 18, 2010

Oct. 18 (Bloomberg) — Meghnad Desai, a professor emeritus of the London School of Economics and a member of Britain’s House of Lords, talks about the U.K. government’s deficit cutting plans. He speaks with Andrea Catherwood on Bloomberg Television’s “The Pulse.”

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Brad DeLong: Economics for Parrots

October 1, 2010

It is said that the early nineteenth-century British economist J.R. McCulloch originated the old joke that the only training a parrot needs to be a passable political economist is one phrase: “supply and demand, supply and demand.” Last week, US Federal Reserve Chairman Ben Bernanke said that McCulloch’s economics — the economics of supply and demand — was in no way discredited by the financial crisis, and was still extraordinarily useful. It’s hard to disagree with Bernanke’s sentiment: economics would be useful if economists were, indeed, like McCulloch’s parrots — i.e., if they actually looked at supply and demand. But I think that much of economics has been discredited by the manifest failure of many economists to be as smart as McCulloch’s parrots were. Consider the claims — rampant nowadays in the U.S. — that further government attempts to alleviate unemployment will fail, because America’s current high unemployment is “structural”: a failure of economic calculation has left the country with the wrong productive resources to satisfy household and business demand. The problem, advocates of this view claim, is a shortage of productive supply rather than a shortage of aggregate demand. But it should be easy — at least for an average parrot — to tell whether a fall in sales is due to a shortage of supply or a shortage of demand. If a fall in sales is due to a shortage of demand while there is ample supply, then, as quantities fall relative to trend, prices will fall as well. If, on the other hand, the fall in sales is due to a shortage of supply while there is ample demand, then prices will rise as quantities fall. Continue reading at Project Syndicate.

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Bernanke, Regulators Testify On Financial Reform Implementation

September 30, 2010

WASHINGTON — Federal Reserve Chairman Ben Bernanke and other top regulators said Thursday their agencies are working vigorously to put into effect the sweeping overhaul of U.S. financial rules and are closely coordinating with each other. Bernanke said the Federal Reserve is working with the Treasury Department to develop ways for regulators to best detect financial dangers that could damage the economy. “It is essential that the (overhaul law) be carried out expeditiously and effectively,” Bernanke testified at a hearing of the Senate Banking Committee. Deputy Treasury Secretary Neal Wolin said, “We are moving as quickly and as carefully as we can.” The regulators said they will collaborate in the Financial Stability Oversight Council, a powerful assembly created by the new law and headed by Treasury Secretary Timothy Geithner. The council, which has its first meeting on Friday, is charged with keeping watch over the entire financial system. At the same time, Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and other regulators affirmed the importance of their independence and the value of having divergent views within the council. Unlike the Treasury Department, which is part of the Obama administration, the others are independent regulatory agencies. “Coordination’s going to be extremely important,” Bernanke said. But he also said that independence “is very important for a lot of good reasons,” such as providing “multiple sets of eyes.” Bair said “there will be differences.” Mary Schapiro, chairman of the Securities and Exchange Commission, said the regulators already have had “lots of rigorous debate behind the scenes” on several issues. The new law, enacted in July, toughens government oversight of Wall Street and banks, provides stronger protections for consumers and gives the Fed and other regulators new powers to restrain risky financial practices. It’s aimed at preventing another financial crisis like the one that struck with force two years ago and plunged the country into a deep recession. The agencies are charged with writing scores of new rules to put meat on the bones of the overhaul law. As sweeping as the law is, Congress left much of the substance of the new rules to the discretion of regulators. The rule writing, just under way, already has drawn intense lobbying from financial industry interests. Bernanke also said the Fed is helping Treasury identify companies that are so big and so interconnected that their failure could take down the entire financial system. Those companies – which are likely to include Wall Street firms, big hedge funds and insurance companies – would be subject to tougher regulations. The law includes a process for shuttering big, complex financial companies using money from investors and loans from Treasury. __ AP Economics Writer Jeannine Aversa contributed to this report.

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Dan Dorfman: Will the Real Economy Please Stand Up?

September 28, 2010

Unlike some of the people you see in my HuffPost writings, I am not an economic expert. Like you, I read the financial pages, watch the financial shows, scan some internet sites and try to use my noodle to make sense out of the wildly conflicting and, at times, seemingly insane economic opinions. That conjures up a great dilemma, though. With more and more economic experts coming out of the woodwork — both on Wall Street and in Washington — who are we supposed to believe? How about President Obama, who tells us “we are moving in the right direction and the economy is getting stronger by the day?” Or New York Times columnist Paul Krugman who insists “we’re in early stages of a third depression?” Or maybe the National Bureau of Economic Research, which recently told the nation the 18-month recession ended in June? Or should we heed the roar of Wall Street, which is signaling loud and clear that the economy is clearly, but slowly mending by driving up the Dow more than 750 points in the past couple of months? Then again, maybe Standard & Poor’s thoughtful and perceptive senior economist, David Wyss, has the right idea. “We’re having a half-speed recovery, nothing to get excited about, but it’s better than none,” he tells me. Or perhaps, Madeline Schnapp, a forward-thinking economist out of West Coast liquidity tracker TrimTabs Research, who says: “We’re still stuck in first gear and haven’t exited the recession yet.” The answer, judging from these decidedly contrary views, is we seem to be caught in an environment of ‘up in the air economics’. In other words, there’s a thick fog of uncertainty out there, and nobody has the faintest idea when it will evaporate. It all brings me back to a memorable event that took place on October 26, 1881. That was the infamous day of one of the Old West’s most famous gunfights — a shootout between the Earps — aided by “Doc” Holliday — and the Clantons, at a vacant lot behind the OK Corral in the Tombstone Arizona territory. Now, nearly 129 years later, a slew of additional gunfights are taking place between the economic bulls and bears at what might appropriately be called the Economics Corral. One of the more intriguing economic gunmen is a skeptical grizzly of a 34-year-old man named Michael Larson, editor of a monthly newsletter out of Jupiter, Florida, The Safe Money Report Based on a fair number of highly negative and unpopular, but on-the-money forecasts, Larson has demonstrated he’s lightening fast on the economic trigger, not the kind of guy with whom an economic bull would want to tangle. Larson’s ability to repeatedly score both financial and economic bulls-eyes is well documented in past interviews I’ve done with him. For example, he was well ahead of the Wall Street herd in forecasting such dreaded events as the credit and housing crises, a major downturn in commercial real estate and a wicked decline in stock prices. His latest thinking, indicative of much more bloodletting, is spelled out in a brief commentary he just fired off to his newsletter subscribers. His summation: “The economy is on the ropes, a double-dip recession is all but inevitable, and the rally presents a fantastic selling opportunity.” Larson contends the latest batch of economic data couldn’t be more clear, pointing in particular to a deceleration in industrial production growth from 0.6% in July to 0.2% in August; likewise, a slump in the New York Fed’s economic index to a 14-month low in September, while the Philadelphia Fed’s index fell below the zero line for the second consecutive month. Larson also observes that banks repossessed more homes in August than in any month in U.S. history, while companies across the spectrum are either reporting anemic sales and earnings or cutting future targets. To Larson, it means the handwriting is on the wall, namely a hefty drop in stock prices. For starters, he sees the Dow — currently trading at around 10,812 — wrapping up the year at about 10,000 or possibly in the 9/000s. It’s worth recalling that in the gunfight at the OK Corral, several people were killed. Financially speaking, Larson is convinced the dragging economy will produce even more fatalities at a similar hot and heavy gunfight now under way at the Economics Corral. What do you think? E-mail me at Dandordan@aol.com

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Ian Fletcher: Is a Flat Tariff the Answer to America’s Trade Mess?

September 25, 2010

The House Ways and Means Committee has finally approved a bill that would attempt to crack down on Chinese currency manipulation, a key cause of America’s trade deficit, by threatening China with retaliatory tariffs. Leaving aside the bogeyman of a trade war–which China is unlikely to start as the nation running the trade surplus and thus the nation having something to lose–this raises the obvious question of whether tariffs are a plausible long-term solution to America’s trade problems. What would happen, that is, if America reverted to its historical norm (from Independence to after WWII) of being a tariff-protected economy? The obvious question here is what kind of tariff are we talking about? As I have documented in other articles and in the book Free Trade Doesn’t Work , there are any number of valid criticisms of the economics of free trade. There is not one thing wrong with it, but at least half a dozen things, and they get complicated very fast. As a result, the nightmare that haunts criticisms of free trade in this country is this: what if these criticisms imply that America needs a complicated technocratic tariff policy? This seems to be suggested by the complexity of the defects in free trade and by the fact that the nations which have most successfully repudiated free trade actually have complicated technocratic tariff policies. That would spell trouble, as the political difficulties of achieving such a solution in America are no secret. The dangers of a special-interest takeover are not imaginary. Even if America has in the past done a lot more successful picking of winners than laissez faire ideologues are prepared to admit, it’s so hard to convince people of this fact that we might as well take the pessimistic assumption that this is not feasible as our baseline, and if it later turns out to be feasible, treat it as gravy. Billionaire investor Warren Buffett says that one of his criteria for investing in a company is that it must have a business that even a fool can run, because sooner or later a fool will. A similar philosophy should guide our construction of a tariff policy. We need a broad-based policy that can survive imperfect implementation and political meddling, a certain amount of which will be inevitable. We do not need an intricate, brittle, difficult policy that will only create work for bureaucrats, lawyers, and lobbyists. Among other things, any policy too complex for the public to understand will be beyond the reach of democratic accountability, the only ultimate guarantee that a tariff policy will remain aimed at the public good. One of the great puzzles of American economic history is how the U.S. once succeeded so well under tariff regimes that were not particularly sophisticated. This is where the idea of a so-called “natural strategic tariff” comes in. This idea says that there may be some simple rule for imposing a tariff which will produce the complex policy we need. The simple rule will produce a complex policy by interacting with the existing complexity of the economy. All the complexity will be on the “economy” side, not the “policy” side, so all specific decisions about which industries get protection, how much, and when will be made by the market. No intricate theory, difficult technocratic expertise, or corruptible political decision-making will be required. There are obviously any number of possible natural strategic tariffs. The one we will look at here (probably the best) is actually the simplest: A flat tax on all imported goods and services. Prima facie , this is strategically meaningless because it protects, and thus promotes, domestic production in all industries equally. And if a tariff is going to win the U.S. better jobs, it will do so by winning us strong positions in the sorts of industries (largely but not exclusively high technology) that have the per-man-hour productivity to pay high wages today and have a future in terms of spawning the industries of tomorrow. While a flat tariff would help reduce the deficit, which is extremely important in its own right, it would provide the same incentive for domestic production of computer and potato chips alike, so it would not push our economy towards any industry in particular. Or would it? The natural strategic tariff is a bet that it would. The key reason is this: Industries differ in their sensitivity and response to import competition. Although this is a complex issue, the fundamental dynamic is clear from the obvious fact that a flat tariff would almost certainly trigger the relocation back to the U.S. of some industries but not others. For example, a flat 30 percent tariff (to pluck a number out of thin air) would not cause the relocation of the apparel industry back to the U.S. from abroad. The difference between domestic and foreign labor costs is simply too large for a 30 percent premium to tip the balance in America’s favor in an industry based on semi-skilled labor. But a 30 percent tariff quite likely would cause the relocation of high-tech manufacturing like semiconductors. This is the key, as these industries are precisely the ones we should want to relocate. Therefore a flat tariff would, in fact, be strategic. The exact level at which to set the tariff remains an open question. Thirty percent is suggested here because it is in the historic range of U.S. tariffs and is close to the net disadvantage America’s trade currently faces due to America’s lack of a VAT. The right level will not be something trivial, like two percent, or prohibitive, like 150 percent. But there is absolutely no reason it shouldn’t be 25 or 35 percent, and this flexibility will provide wiggle room for the compromises needed to get the tariff through Congress. Granted, a natural strategic tariff would be an imperfect policy. But it would be infinitely better than the “free” (on America’s part but not on the part of our trading partners) trade we have now, and relatively politics-proof. Above all, it is a policy people are unlikely to support for the wrong reasons (i.e., producer special interests) because it does not single out any specific industries for protection. It thus maximizes the incentive for voters and Congress to evaluate protectionism in terms of whether it would benefit the country as a whole–which is precisely the question they should be asking. It would also create the right balance of special-interest pressures: some interests would favor a higher tariff, others a lower one. This is a prerequisite for fruitful debate, as it means both views will find institutional homes and political patrons. The tariff’s uniformity across industries would avoid the problems that occur when upstream but not downstream industries get tariff protection. For example, if steel-consuming industries do not get a tariff when steel gets one, they will become disadvantaged relative to their foreign competitors by the higher cost of American-made steel. And why should steelworkers be protected from foreign competition at the price of forcing everyone else to pay more for goods containing steel? The only reasonable solution is that steelworkers should pay a tariff-protected price for the goods they buy, too. This logic ultimately means that all goods should be subject to the same tariff. The natural strategic tariff is more ideologically palatable than most other tariff solutions. Above all, it respects the free market by leaving all specific decisions about which industries a tariff will favor up to the marketplace. It will thus be considerably easier for ideological devotees of free markets to swallow than some scheme in which tariffs are set by a federal agency, leading to that nightmare of free-marketeers: government picking winners. One obvious objection is simply that a tariff is a tax increase. So it is. But it does not have to be a net tax increase if the revenue it generates is used to fund cuts in other taxes. In order to obtain a “clean” policy debate, in which the tariff is debated purely on its merits as a trade policy, unmuddied by differing opinions about the total level of taxation, any tariff proposal should be packaged with compensating cuts in other taxes. Another objection to a tariff is that if American industry is granted tariff protection, it will just slumber behind it. Many industries indeed long to shut out foreign competition, reach a lazy detente with domestic rivals, and coast along with high profitability and low innovation. But a flat tariff resists this danger because it does not hand out a blank check of protection: it gives a certain percentage and no more. Any industry that cannot get its costs within striking distance of its foreign competitors will not be saved by it. This discipline, although unpleasant for the losers, is the price we must pay for having a tariff that actually works, rather than one which eliminates the discipline of foreign competition entirely and protects all industries, whether or not their protection is useful to the economy as a whole. And the logical remedy for competitive sloth is stiffened antitrust enforcement. Another objection to a tariff is that our trading partners would just shrug it off by increasing subsidies to their exporters. This would force us into an endless game of matching these moves on a country-by-country, industry-by-industry, and even product-by-product basis. However, such subsidies by our trading partners would be restrained by the fact that they would be very expensive in the face of an American tariff . Right now, these subsidies are relatively affordable only because they don’t have to climb an American tariff wall. But if they did, their cost would increase dramatically. Currency manipulation is probably the only subsidy that is affordable over prolonged periods of time (and even then problematic in the end), as it involves buying foreign assets and debt, thus accumulating wealth rather than just expenditures. But other subsidies amount to a give-away from the exporting to the importing nation. While this doesn’t prevent them absolutely, it does tend to set a limit. This is all we need, especially as we have no hope of eliminating or countervailing all foreign subsidies no matter what we do, tariff or no tariff. One final point: a natural strategic tariff would need to include a rebate on reexported goods in order to avoid handicapping American exporters. There would, of course, be any number of other administrative complexities, but this is true of any tax proposal in a complex economy. Whether a flat tariff is ultimately the best trade policy for America is an open question, but it is worth considering the possibility simply because it sets a baseline, the “least we can do,” for a solution. And nothing about it precludes adopting a more complicated approach later. Even if we do not adopt such a policy, knowing that we plausibly could will give us crucial leverage in threatening our trading partners. It is thus an idea that even would-be free traders, who merely want to get America’s trading partners to stop interfering with genuinely free trade, should take seriously as a Rooseveltian “big stick” to hold in reserve as our diplomats talk softly to Hu Jintao. Ian Fletcher is the author of Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council , a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net .

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Charles Ferguson: Summers Down, Fifty Odd More to Go

September 24, 2010

Critics of the Obama administration’s remarkably friendly policies towards Wall Street have recently been encouraged by the appointment of Elizabeth Warren and the announced departure of Larry Summers. Unfortunately, these two developments do not solve our problems, or even indicate that President Obama is interested in solving them. As usual with this administration, Elizabeth Warren’s semi-appointment was a cosmetic measure; she is there temporarily, reporting to Tim Geithner, and the new consumer protection agency has limited scope and enforcement powers, typical of the watered-down financial “reform” bill recently signed. As for Larry Summers’ departure, well, one down, about fifty more to go. The Treasury Secretary is still Tim Geithner, who as president of the New York Federal Reserve did nothing to stop the fake economy created by the financial sector, and who then helped Henry Paulson botch the bankruptcy of Lehman Brothers and force AIG to pay off Goldman Sachs. Geithner’s successor at the New York Fed is William C. Dudley, formerly chief economist of Goldman Sachs. Geithner’s chief of staff at Treasury is Mark Patterson, a former Goldman Sachs lobbyist. On the White House staff we have David Lipton and Mike Froman, fresh from Citigroup, which gave Froman a $2 million bonus just after his appointment. Chairing the SEC we have Mary Schapiro, formerly head of FINRA, the investment banking industry’s self-regulatory body, which stood by happily while all those AAA-rated securities were being sold, often by investment banks that were secretly betting they would fail. At the Commodity Futures Trading Commission we still have Gary Gensler, a former Goldman Sachs executive who helped ban the regulation of derivatives in the Clinton administration. And Ben Bernanke still runs the Federal Reserve, despite Bernanke’s abysmal record before and even during the crisis. Given this cast, their movie has been utterly predictable, as my movie makes painfully clear. In the wake of the financial crisis, Britain imposed a 50% tax on banking bonuses, and the European Parliament passed strict regulation of banking compensation to eliminate the ‘heads we win tails you lose’ pay structures that helped cause the crisis, and made it so much worse. The Obama administration has done nothing, and in fact has resisted attempts to tax or control financial compensation. There have been no antitrust investigations of banking, despite the fact that five U.S. firms control more than 95% of global derivatives trading. No attempt to break up the biggest banks or control the “too big to fail” problem, despite a financial industry even more concentrated than before the crisis. The three big rating agencies are still paid by the banks who issue the securities they rate. Lobbying continues unabated and quite obviously, there are no controls on the revolving door, given who runs this administration. No attempts to force disclosure of the massive financial conflicts of interest that have corrupted academia and the economics discipline, turning supposedly independent professors into cheerleaders for the banks. No reforms of corporate governance, and no attempts to get back the billions of dollars that financial executives looted from the companies they destroyed. And finally, we have the Justice Department’s absolutely perfect record — literally zero prosecutions; not a single Wall Street executive or company arrested or charged, much less tried and convicted. In the worst financial bubble in history, nobody committed a crime. It was possible to conceal liabilities, inflate assets, bet against the securities that you sold as totally secure, without committing a single fraud. Isn’t that amazing? So, yes, it’s nice that we won’t have Larry Summers making policy anymore, but it will take a lot more departures, and a lot better decisions, before we approach even minimal decency. In fact, the most depressing part of the CNBC Town Hall was President Obama’s reaction when that amazing woman told him off — his timid evasions as the great orator was stripped away to reveal — emptiness. But people are getting angry and ever more impatient with a President who has turned out to be a wimp rather than a fearless agent of change. It is unfortunate that so far, the only organized response has been the Tea Party; it might be time for a third party in America based on nothing more than common sense and honesty. With Arianna Huffington warning of Third World America and Paul Krugman writing ” Banana Republic, here we come ,” it might just be time to rise up and throw the rascals out, rather than waiting for them to comfortably resign.

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Video: Davies Sees Global Bank Capital Requirements Rising: Video

September 13, 2010

Sept. 13 (Bloomberg) — Howard Davies, chairman of the London School of Economics, talks about bank capital rules agreed to by regulators yesterday in Basel, Switzerland. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Davies speaks on Bloomberg Television’s “In the Loop With Betty Liu.” (Source: Bloomberg)

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Nouriel Roubini: We’re Headed For A ‘Growth Recession,’ 400 Banks May Fail (VIDEO)

September 3, 2010

Are we headed into a ” growth recession ?” Speaking with CNBC Europe from Lake Como, Italy, Nouriel Roubini, the widely followed chairman of Roubini Global Economics, predicted that the U.S. economy will continue to grow modestly, but that it will continue to feel very much like a recession. “The second half of the year is going to be worst than the first,” Roubini. “All the tailwinds will become headwinds” By the end of the year more than 400 of the 800-plus institutions identified as “problem” banks will fail, Roubini said. The U.S. economy may be technically growing, he added, but has hit “stall speed.” GDP growth below 1 percent, without hiring and an increase in demand, Roubini said, is essentially a “growth recession.” The world economy will not be able to “decouple” from the U.S. consumer, he said. “In Europe, Germany is strong but the rest of the continent is pretty dismal. The rest of the world cannot cope without the prop of the U.S. consumer.” As for solutions, Roubini advocated further spending. “What we need is credible spending plans over the medium term on health care, welfare and retirement age,” Roubini said. “This will create a fiscal constraint lasting well into next year.” WATCH the full interview with CNBC:

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Dan Solin: An Investment Strategy for the Next Depression

August 31, 2010

You can’t avoid the predictions of the “inevitable” depression. There’s plenty of ammunition to support them, including a slower than anticipated economic recovery, high unemployment, record foreclosures, declining housing prices and the prospect of runaway inflation (or deflation). Every day I get calls from investors who are absolutely certain we are headed for a depression. They want to know if I agree and what they should do to prepare. I have no idea whether we are headed for a depression or a recovery. Neither do those who make predictions so confidently. In 1987, one of the bestselling books was The Great Depression of 1990 , by Ravi Batra. In 1929, Irving Fisher, Professor of Economics at Yale University, famously stated: “Stocks have reached what looks like a permanently high plateau.” Jim Cramer told his viewers shortly before Bear Stearns filed for bankruptcy: “Bear Stearns is fine.” Hank Paulson advised us on May 7, 2008 that “The worst is likely to be behind us.” My personal favorite comes from financial expert Donald Luskin. On September 14, 2008 he wrote an article in the Washington Post stating “…anyone who says we’re in a recession, or heading into one — especially the worst one since the Great Depression — is making up his own private definition of “recession.” And probably for his own political purposes.” But I digress. Let’s assume we are headed for a depression. How would it affect your investments and your investment strategy? The best data we have relates to the Great Depression of 1929. I looked at the worst rolling periods during that time to see how different portfolios were affected. The time period I selected was July 1, 1929 to June 30, 1932. A globally diversified portfolio consisting 100% of stocks lost more than 87% of its value. Ouch! At the other extreme, a portfolio consisting 100% of bonds had a positive return of more than 8%. Before you rush out and buy bonds, you should focus on basic principles of asset allocation. I would not permit my clients to invest in an all stock portfolio unless they confirmed they had a time horizon of at least fifteen years before they would need 20% or more of their invested funds. When I extend the end date from June 30, 1932 to June 30, 1944, the total return on the all stock portfolio is more than 23%. Investors are focused on the wrong issue. The critical question is not: Will there be a depression? That’s a question no one can reliably answer. The financial media has an interest in making dire predictions because fear means more readers and viewers and that translates into advertising dollars. The real question is: Am I in the right asset allocation? The focus on asset allocation is the same whether you are investing for a depression or a recovery. Here are some general guidelines: If your time horizon is less than 5 years, you should have no exposure to stock market risk; If your time horizon is 8 years, you should have no more than a 60% exposure to stock market risk; If your time horizon is 15 years or longer, you can have a 100% exposure to stock market risk (but I would still encourage you to have at least 10% of your portfolio in bonds). On average, an asset allocation of 60% stocks and 40% bonds is suitable for most investors. Historical data tells us those who had the right asset allocation and didn’t panic withstood the ravages of the Great Depression. Unfortunately, historical data is not necessarily predictive, but it’s far more reliable than the musings of “financial astrologers”. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog. Here is the trailer for my new book, Timeless Investment Advice .

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Aaron Shapiro: The Great App Bubble

August 25, 2010

When I recently received my new iPhone 4, I took great delight in organizing my apps into folders, finding new apps in the app store, and seeing how beautiful various apps looked on the new screen. Then I used it for a couple of days and realized, not counting pre-loaded Apple software, I use exactly five apps: the New York Times , Dropbox, Pandora, MenuPages and Skype. Why am I wasting time collecting and organizing all these apps? We’re in an app bubble. My app library — littered with exactly 87 apps I used once and never touched again — now reminds me of a graveyard of defunct company logos from the dot-com boom. Like the go-go days of 1999 when everyone had to have a Web site, today everyone wants an app. iPhone, iPad, Android apps for all, plus Blackberry for the very ambitious. Here are eight signs we’re in an app bubble: Apps don’t generate profit for developers. Apple CEO Steve Jobs has said the App Store has generated more than one billion in revenue for developers. That sounds like a big number. But in this context it’s not. One billion dollars in revenue for the approximately 225,000 apps is $4,444 per app — significantly less than an app costs to develop. In a well-thought-out analysis of the economics of iPhone apps, authors Tomi T. Ahonen and Alan Moore paint a bleak picture. A typical iPhone app costs $35,000 to develop. The median paid app earns $682 per year after Apple takes its cut. With these calculations for the typical paid app, it takes 51 years to break even. It’s not any better for free apps. A free app also costs about $35,000 to develop. But there are so many free iPhone apps that at a rate of twoseconds per app, it would take approximately 34 hours for someone to check out each one. That’s not great odds for a revenue-model based on advertising. Apps aren’t very profitable for Apple either. According to Apple Insider, “Apple has long maintained that the App Store isn’t meant to be a profit generator, as much as a means of attracting customers to the iPhone and iPod touch.” The App Store’s gross profits amount to just one percent of Apple’s total gross profits. iPhone users don’t find their apps very valuable. In 2009, analytics start-up Pinch Media reported that people barely use the majority of apps they download. Only 20 percent of consumers utilize a free app the day after they download it. By 30 days out, less than 5 percent of consumers are still using it. Paid apps (page 13 of the company’s fascinating 33-page slideshow) have a slightly better performance record, but they still get hit with a steep drop in usage within a period of 11 days. The value of most apps may be in satisfying the curiosity of what the app can do, not in its usefulness or relevance in a user’s daily life. Apple brags more about the value of their app mass than the value of the apps themselves. This is the case both on the App Store page, iPad advertising and in a recent keynote speech where Steve Jobs said people have downloaded five billion apps in the last two years. Meanwhile, only a handful of apps have been featured for their usefulness. Ditto for Android advertising. I feel like I’m back in the days when Alta Vista bragged about spidering more Web pages than Lycos. Marketers are spending money on iDevice apps at the expense of improving their mobile Web sites that everyone with a smart phone can access. According to Ahonen and Moore, iDevice app development actually costs 10 times more and reach is 50 times worse. Sex appeal will only trump pragmatic reach for so long. Venture capital is flooding into the app economy in spite of the questionable ROI proposition. Prior to the iPad launch, venture-capital firm Kleiner Perkins Caufield & Byers doubled the size of its “iFund investment pool” to 200 million, Reuters reported. Recently CNET , an E! Online co-founder, and a couple of other partners teamed up to form AppFund, a company that provides funding and direction for app developers. And there are plenty more Internet funds spending much of their bankroll on app startups. There are so many apps, finding the one you want takes time and effort — time and effort that could be spent getting the information in a faster way. The iPhone 4 can display 2,149 apps. That’s 2,144 more than I need; 1,969 more than could be displayed via iOS3; and 2,001 more apps than could be displayed by earlier versions of the operating system. Graph out this increase in app display capacity, and it looks like an obelisk. But still 2,149 is only 0.96 percent of the 225,000 available iDevice apps. Steve Jobs has said 15,000 apps are submitted to the App Store each week. With this many apps to sort through, finding new, useful ones to download can be a painstaking task. Then on my phone, if I want to find an app I don’t regularly use or a new one, I need to use the search function to find it. Can you think of a faster way to get information? The browser. Once mobile Internet gets faster, apps as the key to on-the-go information and tools will be on the outs. Does this mean companies should stop making apps? Unfortunately, no. Until the bubble bursts, apps are the only mobile game in town. And without a doubt the future of digital is the ubiquitous, pocket-sized screen. What’s needed are apps tied to real business models that have real ROI. And,companies should build apps with their eyes open about what they should realistically expect to accomplish with what they develop. Having an app for an app’s sake is not enough.

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Video: Lilico Sees ‘Rapid Growth’ for U.K. Economy Through 2011

August 24, 2010

Aug. 24 (Bloomberg) — Andrew Lilico, chief economist at Policy Exchange, and Charles Davis, an economist at the Centre for Economics and Business Research, talk about the U.K. recovery and the outlook for economic growth in 2011. They talk with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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Jack Myers: Management Shifts at Magazine Publishers Signal Redefining of the Business

August 10, 2010

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Dr. Vladimir A. Masch: Harnessing Our Technological Strengths for the Economy: Risk-Constrained Optimization

August 9, 2010

In my last blog “Balanced Capitalism” (July 26) I tried to explain the urgent need in society-wide modeling. But I am a realist, meaning a pessimist. I do not expect to see such a project soon. Nevertheless, the complexity, uncertainty, and perils of the 21st century undoubtedly will generate a large number of crucially important complex and long-term socioeconomic and technical problems. Solving these problems requires the application of advanced analytical tools that combine computers and sophisticated mathematical models. Using such a combination demands, however, embedding it in an ensemble of models and methods that would neutralize its potentially dangerous miscalculations. Models create illusions of knowledge and objectivity. Models need filters. Which models? Fashionable econometric models are useless here; the historic data for non-crisis period would drastically change for the century of “black swans.” Moreover, if they contain no such constraints as limits on the balance-of-trade, they are severely dangerous. The current crisis, and our inability to handle it, are greatly due to both the government’s and Fed’s stubborn and stupid use of such non-protective models. Optimization models remain as the natural choice. A prominent economist Robert Dorfman (a co-author with Paul Samuelson and Robert Solow of Linear Programming and Economic Analysis ) used to say that he saw the world as an enormous problem of linear programming. Similarly, I see the world as an enormous problem of optimization under radical, “uninsurable” uncertainty. That is, we know almost nothing about the future. At best, we can get no more than “guesstimates.” They may include some plausible predictions about technological trends, but they still would be scenario-specific, while we do not have any credible idea about the probabilities of potential scenarios. Even more important, we know almost nothing about what is the right way to long-term sustainable survival of society. Sure, this corrupt and dysfunctional political system has to change, and so has capitalism. Unanimous “yes,” I think. But how? The best we can do is trying to prevent, mitigate, and postpone the most obvious catastrophes. Until now, neither economics nor Operations Research, Decision Science, and similar disciplines had any methods of addressing such overwhelmingly difficult problems. Now Risk-Constrained Optimization (RCO) provides the required capability. I’ve been fortunate to be able to develop the required ensemble of models and methods. Namely, RCO provides the necessary ensemble of many novel concepts, models and methods that reasonably neutralize dangers and are critical to each other’s success. They may be combined with other approaches, and they may be modified – nothing in this world is perfect. But all these techniques, associated with seven diverse disciplines plus use of computers, appear to be necessary basic components of any dependable methodology of decision-making for non-trivial (complex and long-term) problems. Of course, we have to guess a tremendous lot and to use subjective judgment, but RCO combines “guesstimated” knowledge about the future with subjectivity in a sensible manner. Thus, for the first time in more than 60 years, RCO legitimizes the high-level analytical use of a “computer-optimization model” combination . That perhaps can be considered as a “basic innovation” – a major technological or scientific breakthrough. Also, RCO is the only currently existing methodology for strategic risk management in organizational (corporate or public) planning under radical (and less severe, too) uncertainty. RCO constructs a set of robust and flexible, reasonably good and safe long-range candidate strategies. The final strategy is selected from that set subjectively. As with any protective equipment, RCO could reduce the need for knowledge about the future . Perhaps the most important of the RCO component models and methods is imposing on optimization models an additional function of self-filtering, so that they become very efficient “optimizing filters.” As an inseparable component of the outlined above ensemble, RCO introduces a new paradigm of decision-making – “catastrophe avoidance,” which replaces the current economic paradigm of utility or profit maximization. The new paradigm is good for all times, but it fits especially well the type of problems we face in this century. Once more – time has come to address crucially important problems facing both this country and the mankind. RCO currently provides the only known, scientifically and practically viable possibility of modeling such problems. I consider it my duty to outline this novel fundamental possibility. Use it or lose it. We have developed powerful computers that perform billions operations per second, and mathematical programming models and algorithms that can deal with millions of constraints and variables. (Compare that with statistical models that can at best handle dozens of variables.) But they are never employed where they are desperately needed and where they should bring real benefits – as high-level analytical tools in long-range social and business strategic planning and decision-making. And our present economic crisis – crisis that destroyed many trillions of wealth, many millions of jobs, and is far from ended — confirms that sad conclusion. In other words, our technology has created two new Wonders of the World, but – outside the Information Revolution in short-term operations — we are using them like Neanderthals, to crack nuts. From its very inception in 1947, linear programming (LP) was described as an activity aimed at the “optimum,” or “best,” allocation of limited resources. (There are many types of mathematical programming, besides linear; I will collectively call “LP” all of them.) “Optimization” has a strong positive connotation: its models and methods are supposed to find “the best.” But it does that only if we have perfect knowledge of the future. Even the slightest change in the given values of the model’s coefficients, supply and demand data, costs, or prices may lead to complete change of solution. The LP solutions are notoriously unstable and therefore extremely dangerous. We may have perfect knowledge only in the simplest – and short-term, too – problems, such as “rearranging chairs on the deck of the Titanic.” For any serious problem, LP does not “optimization” but “extremization”: it gets us out on a limb and, as a rule, too far. Of course, the black belts of Operations Research, starting from the originators of LP, understood very well that perfect knowledge about the future is impossible. They created a branch of mathematical programming called “stochastic programming” (SP) that allowed to formulate and solve optimization problems in a larger universe – under “insurable risk,” that is, if we know probabilities of the future scenarios. The main tool of SP is multi-scenario model. Suppose we have 12 scenarios that differ in their values of, say, prices of resources and products. We put, side by side, 12 “scenario submodels” that have identical structures, but different price values. The submodels are integrated into a single model by, say, a constraint on how much of a raw material is available. (So that the total use of this raw material in all 12 scenario solutions does not exceed its amount available.) To each submodel we attach a weight that equals the probability of the corresponding scenario. Then we solve the unified problem as a usual LP model. If the model’s goal is maximizing profit, we maximize here the weighted average of profits obtained in 12 submodels. Depending on their price values, scenario solutions may be different. The optimal solution is a weighted compromise between 12 scenario solutions. It avoids extremes and is therefore less risky. SP has some excellent properties. For instance, it somewhat improves the quality of solutions in comparison with the quality of input data, so it is, to some degree, self-correcting. If we include a proper constraint in the model, it will allow harmful emissions only up to the specified limit. But only “on the average” — SP does not care what will be emission level, if we apply its derived solution, under any individual scenario. It may be less risky than the solution of a deterministic (that is, a one-scenario) model, but it still is risky. It creates a single solution, which looks like the “true optimum.” Again, except for trivial problems, this is an illusion. In bad times, illusions are hazardous. The main limitation of SP is, however, its low applicability. We do not have in any serious problem what SP absolutely requires – reliable information about scenario probabilities. In his 1990 book The Fifth Discipline , Peter Senge proposes a great idea. He suggests that a “basic innovation” results only from combining of a special ensemble of efficient “component technologies” that come from diverse fields of science or technology, and only when all necessary components of that ensemble come together. Senge classifies as “basic innovations” the creation of the telephone, the digital computer, or commercial aircraft — major technological or scientific breakthroughs. Senge describes the creation of the commercial aircraft in the following terms: ” [T]he McDonnell Douglass DC-3, introduced in 1935, … for the first time brought together five critical component technologies that formed a successful ensemble. They were: the variable-pitch propeller, retractable landing gear, a type of lightweight molded body construction called ‘monococque,’ radial air-cooled engine, and wing flaps. To succeed, the DC-3 needed all five; four were not enough.” In the 21st century, we have many crucially important problems that may define the fate of the humankind. Given the gravity of these problems, getting help from computers and mathematical programming might be tantamount to a “basic innovation,” perhaps no less important than the very creation of these tools. I will not mince words here. It is extremely important to design a powerful tool; it is no less important to make that tool truly useful. The more powerful a tool is, the more dangerous it may become when wrongly applied . Senge strongly emphasizes that the power of the ensemble comes mainly not from the individual components, but from their combined impact within the process. In his words, they form an inseparable ensemble and ” … are critical to each others’ success.” In other words, we need a yin yang of technologies. Our task is to discover whether a set of technologies with such an inestimable property does exist in our field of decision-making under radical uncertainty, and if it does — to develop and combine all its components. Of course, each “basic innovation” is usually created by many people and organizations during a substantial period of time. According to Senge, about 30 years “is a typical time period for incubating basic innovations.” Since I worked on RCO alone (of course, using some embryo results, previously obtained by others), the development of RCO took longer – starting from the 1960s, longer than Moses wandered in the desert. Novel models and methods came through the years one at a time, each replacing some weak link. RCO was granted an USA patent in 1999, but its final features were developed in the 2000s. (From 2004 to 2009, I’ve published several articles on RCO and made presentations at international scientific conventions. A definitive 51-page article on RCO is to be published in the Fall of 2010. As mentioned in the end of this blog, all these materials are available for asking.) Work on RCO, including linking it with other decision-making approaches, continues. In combination with computers, RCO merges in the required ensemble a number of technologies that are associated with seven fields: Economics, Decision Science, Operations Research/Management Science, Scenario Planning, Risk Management, Utility Theory, and Portfolio Theory, with a digression into the eighth field – Psychology. In each of the seven fields, RCO introduces novel concepts, models and methods. Exactly as required by Senge, models and filters are inseparable and ” … are critical to each others’ success.” Not going into technical detail, I will mention here just two most important, closely interconnected novelties: change of paradigm and “strong screening” by special (enhanced) stochastic multiscenario models with risk-limiting constraints. RCO demonstrates the need, and shows the way, of changing the general paradigm of economic decision-making . The present paradigm maximizes satisfaction of our needs and wants. This paradigm is incorrect, because it does not take into account two crucially important features: the income to make that satisfaction possible, and our desire for self-preservation, for ensuring safety of the existing comfortable situation. (A certain way to get into a crisis is to rely on a paradigm that denies the very possibility of a crisis. That’s what we see now.) Instead, RCO deals with a simpler, easier to solve, more realistic and pressing problem — how to avoid a catastrophic outcome in any of multiple types of risk facing us in the future. But it continues to use, as a tool, enhanced multi-scenario LP models, screening its results through five consecutive filters. Those filters eliminate, modify, or scale back too risky decisions or strategy candidates developed by the system. An LP model consists of two parts: the model’s goal, “objective function” (it is a description of what we maximize – say, long-term profit), and constraints (what resources are available, how much product can we sell at a given price). LP solutions are especially sensitive to costs and prices, which define the value of the objective function. A price modification that changes the total value of that function by just one dollar may completely change the solution, locating a new factory on another continent. And who in the world can predict faraway prices and costs with such precision? As a preeminent economist, Oscar Morgenstern, used to say, we now and again may be lucky to determine just the correct sign (plus or minus) of some data. The objective function is therefore not at all dependable: it indicates the direction of search for solution – at best, very approximately, and at worst very badly, maybe even opposite to the correct direction. The “constraint cages” are, however, much more reliable. The purpose of RCO is to construct the proper cage. How to do that? Again, I will not go into technical detail. Sufficient is to say that RCO starts where SP ends. Suppose we have the solution of our special SP multi-scenario model and derived from it a strategy. If we see any undesirable outcomes in any type of risk and in any individual scenario that exceed what we consider acceptable for that scenario, the decision-maker adds to the model additional “risk-limiting” constraints of such type as “Emission of sulfur for Scenario 187 should nor exceed 1,000 tons.” Then we re-run the model. Since it is an optimization model, it finds the best way to modify the strategy to meet that target. The new strategy will be “worse” from the point if view of the overall profit, but it will be less risky. We repeat this “Dutch auction” procedure until all our apprehensions are met, within the limits of what is possible. Please notice: The procedure exactly matches the aim of the catastrophe avoidance paradigm . That is what I call a perfect yin yang of technologies. Let me emphasize the following: it is the decision-maker, rather than the modeling professional, who has to define what is acceptable, and who has to impose the additional constraints. And even an unsophisticated decision-maker is able to do that because the constraints are simple expressions of his concerns about the outcomes; they do not require understanding the model’s structure and complexity. One way or another, somebody’s subjectivity will be inserted into the model, and it better be subjective preferences and apprehensions of the decision-maker, who undoubtedly knows more about the hidden realities and not-modeled complexities of the problem. The model is now “customized” to the decision-maker(s) and becomes a “self-filtering” combination of our “guesstimated” knowledge about the future, on the one hand, and subjective knowledge, intuition, and preferences of the decision-maker(s), on the other hand . The “self-filtering” optimization model is the strongest filter of RCO, but it is only one of its five filters – which also, in accordance with a very wise admonition of Peter Senge, come from different disciplines (that diversifies the methodology of screening and thus increases its effectiveness). RCO may produce trees of strategy candidates with different optimal trade-offs between improving the results and protecting from risks. Then it reduces that multitude to a small set of the best and reasonably safe candidates. The final choice of a strategy to be implemented is made from that set by the decision-maker(s) subjectively. I apologize to the reader for abundance of semi-technical detail (which is not really difficult). But I guess that for everybody – including the professionals in the field — reading this blog would be useful. Let me repeat this truism: the time has come to address serious socioeconomic problems. I do not know — maybe we are still able to do something. RCO is the only realistic way to combine optimization models and computers in trying to solve these problems. (Of course, RCO is also applicable to solving any organizational optimization problems under uncertainty.) Once again, it is my duty to outline this novel fundamental possibility. Anybody who is interested can get additional information and materials from me; see my email address in the bio. Copyright © 2010

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Video: RDQ Economist Ryding Discusses U.S. Labor Market: Video

August 6, 2010

Aug. 6 (Bloomberg) — John Ryding, chief economist at RDQ Economics, talks with Bloomberg Television about the U.S. labor market. U.S. companies hired fewer workers than forecast in July, Labor Department figures in Washington showed today. (This is an excerpt of the full interview. Source: Bloomberg)

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David Berri: Why Macroeconomists — and Some Politicians — Should Watch Sports

July 29, 2010

Britt Robson of CNNSI.com recently wrote a column examining the worse offseason moves in the NBA. A perusal of the list reveals some familiar patterns. Decision-makers in the NBA have given significant dollars to scorers like Amare Stoudemire, Joe Johnson, and Rudy Gay. Darko Milicic — a player whose “size”, “youth”, and “potential” hasn’t vanished yet — received $20 million from the Minnesota Timberwolves. Such moves illustrate documented biases in decision-making in the NBA. Specifically, scoring is overvalued and teams have trouble abandoning evaluations made during the NBA draft. These moves, though, also tell a different story. The column Robson offered is essentially written by sports writers each off-season in the NBA. In fact, similar columns are written in the off-seasons of each sport. Year after year, sports writers — and of course, the fans — are convinced decision-makers in sports are getting it wrong. Now sometimes the writers — and of course, the fans — are incorrect. But published research in economics makes it clear that some of the criticism of decision-makers in sports is on target. People in sports will make the make the same mistakes over and over again (shameless self-promotion — Martin Schmidt and I report many of these stories in Stumbling on Wins ). Obviously these stories are important to sports fans. But these stories also inform our understanding of macroeconomic policy. Yes, I know. That seems like quite a leap. A quick review of recent Congressional testimony by Nobel Laureate Robert Solow provides us with the connection. Solow’s testimony — “Building a Science of Economics for the Real World” — focused on how certain macroeconomic models inform the economic policies some people prefer. Here is a quick summary of what Solow had to say: Certain macroeconomic models — specifically the DSGE models — are based on the idea that the economy is comprised entirely of rational people. An implication of this approach: The DSGE story — as Solow emphasizes — “has no real room for unemployment of the kind we see most of the time.” In the DSGE world, the unemployed are people who are rationally volunteering to avoid work; because of a preference to consume more leisure or a desire to retain some flexibility for the future. In other words, there is no involuntary unemployment. Because everyone in the economy is rational and making the best decision given their circumstance, there is no room for government policy. In other words, stimulus packages and unemployment benefits are not necessary in the DSGE world. In fact, these policies can only make things worse. So if you believe people are perfectly rational, it leads you to a certain set of policies. But are people perfectly rational? Behavioral economists and cognitive psychologists have offered ample evidence from laboratory experiments that people are not perfectly rational. Sports fans, though, can see that these experiments may not have been necessary. To be clear, people who work in sports are not stupid. Decision-makers in sports are generally very educated and well-trained for the industry where they are employed. Furthermore, these decision-makers have an abundance of information and very clear incentives. Specifically, when you get it wrong in sports, you not only get fired, you also are the subject of public ridicule. In sum, if there was an industry where decision-makers should be perfectly rational, the sports industry should be it. But people in sports are not perfectly rational. Again, scoring is consistently overvalued by NBA decision-makers. Furthermore, on draft night, NBA decision-makers place too much emphasis on Final Four appearances and not enough emphasis on rebounding. And the NBA is not the only place where decision-making has problems. In the NFL, Cade Massey and Richard Thaler have offered evidence that first round draft picks are overvalued ; while David Romer has emphasized that coaches have problems with decision-making on fourth down . In Soccernomics – by Simon Kuper and Stefan Szymanski – evidence is presented that decision-makers in soccer make systematic mistakes. One of my favorites: Kuper and Szymanski argue that scouts overvalue blond soccer players. And let’s not leave out baseball and hockey. In baseball, decision-makers historically undervalued on-base percentage and over-valued stolen bases. And on the ice, Stacey Brook and I have published research that argues the performance of goalies is not quite as different as their salaries would suggest. The examples cited are but a sample of what we find in the academic research. And one suspects that fans of any team can find more examples just thinking about the decisions made by their favorite team. Despite this evidence, some macroeconomists insist that decision-makers are perfectly rational. This suggests that these people are simply not sports fans. So if you meet one of these macroeconomists, please take them to a game. Remember, some policy makers listen to these economists. And maybe the advice they give would improve if they spent less time playing with DSGE models and more time watching sports.

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Damien Hoffman: OMG! These 5 CEOs Are So Hot Right Now

July 28, 2010

Wall Street and Silicon Valley always need something hot. Although unemployment is high and optimism resembles the scenes at the start of an anti-depressant commercial , we have found five CEOs who are building companies which haven’t stopped to notice the recession… 1) Dennis Crowley — CEO Foursquare Foursquare is a location-based social networking website, involving an application for mobile devices and a game intended for registered users. Through mobile websites, text messaging or device-specific applications, people are able to update their location and connect with friends, while earning rewards for their online activity. The company is “so hot right now” because it is in the process of adding on a new promotion. Barbie, the iconic fashion doll manufactured by Mattel (NYSE: MAT), will be used by Foursquare to advertise location-based scavenger hunts. Text, photo and video clues for the hunts will be provided by Barbie through the use of Twitter. This promotion, officially happening on July 20th, 2010 is an example of how Mattel has been able to expand into the digital and social media world of the 21st century. An American Internet entrepreneur, Dennis Crowley graduated in 1998 with a B.A. from the S.I. Newhouse School of Public Communications at Syracuse University, and also in 2004 with a Master’s degree from New York University’s Interactive Telecommunications Program. While attending NYU, he co-founded Dodgeball, a location-based social networking service used by mobile devices. Four years after Dodgeball was acquired by Google (Nasdaq: GOOG) in 2005, Crowley developed Foursquare as a second version of the original Dodgeball service. In 2005, MIT’s Technology Review magazine named him one of the “Top 35 Innovators Under 35.” His work has been followed by major news organizations, such as MTV (NYSE: VIA-B), NBC (NYSE: GE), Newsweek , The New York Times (NYSE: NYT), Slashdot, Time Magazine , The Wall Street Journal (NYSE: NWSA) and Wired . Currently, Crowley is an Adjunct Professor for NYU’s Interactive Telecommunications Program. 2) Andrew Mason — CEO Groupon Groupon is an electronic commerce website, offering a single type of product for sale at a discounted rate every 24 hours. These daily deals, made possible through collective buying power, feature what is best to buy, do, eat and see in over 50 cities throughout the United States and Canada. The company is “so hot right now” because of its May 2010 acquisition of MyCityDeal, a European website offering similar services. The collaboration has made the newly formed Groupon MyCityDeal the largest group buying site in the world, active in 18 countries and 140 cities, reaching the US, Canada, UK, France, Italy, Spain, Germany, Austria, Switzerland, Belgium, Sweden, Poland, The Netherlands, Denmark, Ireland, Finland and Turkey. Currently, its staff consists of over 900 employees, working around the globe. Growing up in a suburb of Pittsburgh, Andrew Mason showed a talent for creative organizing. At 15 years old, he started Bagel Express, a delivery service done on Saturday mornings. After graduating in 2003 from Northwestern University with a degree in music, he worked in web design under Chicago serial entrepreneur Eric Lefkofsky. In September 2006, Mason left his employment to accept a scholarship to the University of Chicago’s Harris School of Public Policy. In pursuit of a business idea, he began to work on creating a web-based platform, organizing collective action based on a tipping point. Learning of the project, Lefkofsky offered to supply $1 million in funding. Mason accepted his offer, and dropped out of school to develop The Point, a web platform launched in November 2007. With some modification, he followed the basic premise of The Point to create Groupon, which debuted in November 2008. 3) Tony Hsieh — CEO Zappos Zappos is an online retailer, selling shoes, handbags and purses, eyewear, watches and accessories, apparel, and electronic devices and media, such as DVDs. Through RSS feeds, Zappos publishes information about the latest products and styles, with each product having an image of the latest styles, a description of what is advertised, and a link leading to the product webpage. The company is “so hot right now” because it was acquired in November 2009 by Amazon (Nasdaq: AMZN) for a reported $1.2 billion. In an all-stock deal, Zappos investors and other shareholders exchanged their shares for approximately 10 million Amazon shares. This acquisition will allow Amazon to aggressively expand into the sale of apparel, and benefit from a fiercely loyal customer base. The son of Taiwanese immigrants, Tony Hsieh graduated in 1995 from Harvard University with a B.A. in Computer Science. During the first year after graduation, he worked as a Software Engineer at Oracle (Nasdaq: ORCL), a provider of business software and hardware systems. In 1996, Hsieh co-founded Link Exchange (Internet advertising network), for which he served on the Board of Directors, was responsible for some of the company’s major technologies, and sold to Microsoft (Nasdaq: MSFT) in 1999 for $265 million. After the sale of Link Exchange, he got originally involved with Zappos, working as an advisor and investor. In 2000, he joined the company as CEO. 4) Mark Pincus — CEO Zynga Zynga is an online network of gaming applications, offering a variety of games that are found on many social networks and websites. Users are able to invite friends to play with them, and chat while playing. The company is “so hot right now” because of its developing partnership with Google, which is due to launch its new brand Google Games later this year. Google has recently invested $100-$200 million of venture capital in Zynga, after having raised $500 million. With the upcoming partnership, Zynga will become the cornerstone of Google Games, giving it a solid base to build on, made up of social games and users. The joining of these two powerful companies could change the future of online gaming. Before his career as an entrepreneur, Mark Pincus worked in venture capital and financial services. He graduated with a B.S. in Economics from the Wharton School of the University of Pennsylvania, and with an MBA from Harvard Business School. After graduation from Harvard, he worked from 1993-1994 as a manager of corporate development at Tele-Communications, Inc., now AT&T Cable (NYSE: T). From 1994-1995, Pincus served as Vice President of Columbia Capital, leading investments in new media and software startups. In 1995, he launched his first company, a web-based push technology service named Freeloader, Inc. His second company, a provider for service and support automation software known as Support.com, was started in August 1997, and went public in July 2000. In 2003, Pincus founded his third company, Tribe.net, a social network partnering with major local newspapers, backed by The Washington Post (NYSE: WPO), Knight Ridder Digital, and Mayfield Fund. Pincus founded Zynga in 2007, and currently serves as its CEO and Chief Product Officer. 5) Jeremy Stoppelman — CEO Yelp Yelp is a web site that advertises listings, ratings, and reviews of local businesses through an online community, giving consumers the opportunity to share their opinions and business owners the chance to give contact information. Through Yelp, people find help in choosing where to eat, drink, shop, relax and play, at no cost to use (other than certain advertising features on the site). The company is “so hot right now” because of its June 2010 integration with OpenTable, a feature that allows any logged-in Yelp user to make a restaurant reservation directly from a review page. In the form of a pop-up, this option is linked to many business listings already on Yelp. Currently offering Dining Reward Points, OpenTable accepts reservations for almost 11,000 restaurants, all located within the United States. Interested in entrepreneurship, Jeremy Stoppelman graduated from the University of Illinois with a B.S. in computer engineering, and attended Harvard Business School. From 1999-2000, he worked as a Software Engineer for Excite@Home (provider of broadband Internet access), designing and implementing various website features. Stoppelman was with Paypal (Internet alternative for payment and money transfer) from 2000-2003, holding various positions in engineering and engineering management, ultimately making Vice President. After joining an incubator for a summer internship, he was reunited with colleague Russel Simmons, and teamed up with him to create a community around local information. Yelp was co-founded in 2004, with Stoppelman as CEO. Think some other CEOs are OMG Hot!, let us know in the comments below…

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Dan Solin: Upton Sinclair’s Insight for Improving Your 401(k) Returns

July 27, 2010

It’s surprising that Upton Sinclair would provide today’s investors with an insight for investing success. He was born on September 20, 1878. His parents were very poor. His father was an alcoholic. His grandparents were quite wealthy. The stark difference in the financial circumstances of his parents and grandparents influenced him to become one of the most prominent socialists of his time. He even ran (without success) as the Socialist’s Party’s candidate for Congress from New Jersey. What can this avowed socialist teach us about investing? Here’s a quote attributed to him. It says it all: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” The salaries of brokers and insurance company representatives depend on persuading employers with 401(k) plans to include actively managed funds (where the fund manager attempts to beat a designated benchmark) as investment options in the plan. Billions in fees is generated in this way. The overwhelming evidence supports the view that most of this money is wasted. Plan participants would achieve significantly greater returns if no actively managed funds were in their plans. Instead,the plans should offer a limited number of pre-allocated, globally diversified portfolios of low cost index funds, Exchange Traded Funds or passively managed funds. People who make a living selling actively managed funds react to this news much like a speech by a vegetarian is received at a cattlemen’s convention. One reader (a broker) patiently explained that I didn’t understand the math. He believes the support for index funds in the press is caused by its willingness to accept glib statements from bloggers (like me). He provided no data to support his view. Two distinguished finance professors who clearly do “understand the math” are Eugene F. Fama, a Professor of Finance at the University of Chicago, Booth School of Business, and Kenneth F. French, a Professor of Finance at Dartmouth College, Tuck School of Business. In their recent study , Luck Versus Skill in the Cross Section of Mutual Fund Returns , they attribute outperformance of actively managed funds to luck and not skill. Because there is no evidence of skill, it’s not surprising those funds that do perform well over a given period of time typically cannot repeat their stellar performance. The ramifications of this study hit brokers and insurance companies right where it hurts — in their pockets. If employers understood this data, they would not include actively managed funds in their 401(k) plans because those funds are likely to underperform passive benchmarks by almost 1% per year. The reaction to studies of this sort is interesting. Another reader explained his strongly held view that “managed funds” should be in all 401(k) plans. He bragged his credentials included an M.B.A. He was a consultant to corporations and boards on how to reduce their fiduciary risk. I responded with a number of studies (including some by Nobel Prize winners in Economics) rebutting his views. I encouraged him to send me peer reviewed studies with contrary data. I told him I had an easy solution for eliminating fiduciary liability, rather than simply mitigating it: Require investment advisors to 401(k) plans to be 3(38) ERISA fiduciaries and to accept 100% of the liability for the selection and monitoring of plan assets. Here’s his response: He doesn’t believe in academic studies. He has no confidence in the committee that appoints Nobel Prize winners. He sent me no data. The pattern is very familiar. Research is responded to with rhetoric, but no contrary data. Unfortunately, their clients often don’t have the sophistication to confront them with studies that demonstrate what they are selling is in their best interest, but not in the best interest of the participants in the plan. Employers need to appreciate their potential exposure as fiduciaries to plan participants. It’s only a matter of time before an enlightened court reviews the studies and concludes the inclusion of any actively managed fund in a 401(k) plan violates the duty of prudence. Brokers and insurance companies will never “understand” this evidence. Their salaries depend on their not understanding it. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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Dr. Vladimir A. Masch: Balanced Capitalism

July 26, 2010

In 1991, the Soviet Union disintegrated. Once and for all, that demonstrated that capitalism is better than a “command economy,” at least in two aspects that mostly matter – productivity (effective use of resources) and ability to satisfy the needs and wants of consumers. Well, that conclusion was evident much earlier. Not many 20th century systems could be worse than the Soviet economy. (I know it first-hand. Prior to becoming a scientist, I worked for 10 years in the Soviet industry.) But does such a conclusion let one to rest one on his laurels? To maintain that you are the best, because you are better than Soviets? That was common consent of the “mainstream” American economists. As it turned out, a little premature. Superficial and short-witted. Capitalism is not a monolith. William Baumol and his co-authors in their 2007 book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity , define four types of capitalism: state-guided, oligarchic, big-firm, and entrepreneurial. The authors argue that the most productive is a mix of the last two types, that is, the combination characteristic for the American economy. That judgment may generally be true, but it seems far from universal. In today’s mixed economy, with dynamic relations between state and private sector, separating lines between them are often eroded. We see superb results of some state-guided industries and enterprises, too. South Korea has risen from nothing to a formidable economy because, in the 1960s and 1970s, it has undertaken exactly the same type of central-modeling-guided development (performed by the state together with a brilliant UN team of mostly American economists) that I recommend on this blog. Besides, productivity is not everything. One can pursue a wrong goal very productively. What should be the goal of that creative productive activity? Adam Smith viewed his individualistic approach just as a means, the end being the benefit of society. Like every living organism, a society has a goal – long-term sustainable survival in an acceptable state. From the societal point of view, all four defined above types of capitalism suffer from one common crucial drawback. If you don’t poke the nose of a capitalist enterprise into a negative “externality” (that is, an anti-societal side effect of its activities) and firmly hold it there, it will deny both the very existence and importance of that externality. Any enterprise wishes to get for free as much of limited societal resources as it can. (Here goes both the “invisible hand” of the market and the “visible hand” of the state.) The current state of capitalism is far from the best for society. Even in equilibrium, if the market prices do not reflect externalities and long-term goals of society, it does not provide a social optimum. “Optimum” could be declared as a rough approximation to reality two hundred years ago, when natural externalities were small in scale, gold standard prevented serious man-made externalities, and Great Britain and Europe were able to ship their unemployed to America and Australia. In this century, both Adam Smith and Milton Friedman are dead, wrong. Now we have chemical industry, zillion tons of carbon and sulfur emissions, and trillion-dollar deficits. To maintain the current-price market superiority under new conditions is a cruel hoax. An economic felony, shown as such in recent years. * * * Were we able to find the way to keep capitalists deeply aware of externalities, and block them from doing any societal harm, we could build a better capitalism – and perhaps prevent, mitigate, or postpone the catastrophes threatening us in this century. How then to do that blocking? Of course, there is criminalization of obviously harmful activities. There are also two other obvious routes: either to forbid or limit the volume of the harmful activities (regulation), or to change prices in such a way that the activity becomes disadvantageous and unprofitable. All three can also be combined. And how to find the proper levels of activity limits and price changes? Again, there are different ways to do that. The simplest way is to do what we are doing now — simply calculate some plausible numbers for quotas or taxes that would presumably counteract the first-order impacts of harmful activities. To influence natural externalities, like the effect of carbon emissions on the climate, we design “carbon tax” and climate bills. But externalities can also be man-made, such as trade deficits. “Compensated Free Trade” (CFT), described in my July 16 blog, is an attempt to influence a gross man-made externality, the trade deficit of the USA. For the latest 12 months (till April), this trade deficit equals $550 billion, or around 4 percent of GNP; that level is abnormally low because of the recession, when Americans have largely stopped “buying things they do not need with money they do not have to impress people they do not like.” At better times, the deficit did exceed $800 billion. But not to worry, there already was a deficit surge in recent months. Let me return to the crash of the Soviet Union. It turned out that it was triggered by exactly that deficit externality. We have to be eternally grateful to Ronald Reagan. He not only involved the Soviets in an arms race — he also persuaded Saudi Arabia to lower the oil price to 10 dollars per barrel. (Saudis did not lose: as a by-product, they destroyed the budding American artificial fuel industry. We need a similar Saudi action to deal with Iran, and I expect it will come soon. But beware sheikhs bearing gifts; let us not repeat past mistakes. Let us determine if we need such a clean-fuel industry and, if it is necessary, build it with government subsidies.) Before that, the foreign trade inflows and outflows of the USSR were approximately equal. The drop of oil price halved the inflows, so that the country started to borrow. In 2006, Yegor Gaydar, the deputy prime minister of Russia in the beginning of the 1990s, published a book Death of an Empire ; at the time, it was making tsunami waves in Moscow. He said that the Soviet Union disintegrated primarily because it had to borrow from its enemies. Caveat America! That was the second inference that could be made from the USSR crash. It was less evident but certainly much more valid than “our system is the best possible.” Also, it was more important. This conclusion was, however, very inconvenient for economists and politicians, therefore they didn’t do it. * * * I will not repeat here the arguments of my July 16 blog about the need for CFT. But in many decisions, in addition to the question “Why?” a second question arises: “Why now?” Because it is better to start from a low total USA deficit limit, which is possible only during a recession, thus discouraging hopes of the rest of the world for dipping again, after a recovery, in the fat wallets of those stupid Americans. Because we are starting a huge new stimulus, and, like the old one, it will end to a substantial degree in the deep offshore pockets (true, in deep Wall Street pockets, too). Ever tried to take out water out of a boat by a sieve? Because the total unemployment is 29.7 million Americans, or 18.5 percent of total workers ( Leo Hindery ). By another count, one out of four Americans is unemployed or underemployed ( Robert Reich ). We have to stop destroying our middle class. Because China, India, and Brazil will not enact any significant environmentalist measures (in spite of China now consuming more energy than the USA), and that will further increase their cost advantage over American enterprises. Because “Chimerica” is dead. What we see now are its death convulsions. American people say so. Congress feels it; the White House feels it. CFT is just a means to make the departure less painful — more gradual and comfortable for both parties. Because it is high time to restore the industrial might of this country, to return home our factories, and to make them competitive again, in spite of all unholy combinations of dirty tricks used by some of our trading partners. Because it is the very height of stupidity to behave like a sheep in a forest full of mercantilist wolves. (Even Paul Samuelson said so decades ago; Paul Krugman and, after him, Larry Summers just discovered that revelation and repeated it recently in their media articles. Sure, these poor babies did not know it before.) The sooner we stop coddling — just for sake of political correctness! — the unbalanced and dysfunctional global economic order, the better will be our chances of surviving the crisis. There are many more reasons, but I think that these seven are more than sufficient. * * * I think that everybody in their right mind understands that a global order based on persistent huge deficits of the USA is unsustainable. (Even if he does say the opposite. Tongue is given to man to conceal his thoughts. When one eminent diplomat died, another diplomat asked, “I wonder what he means by that?”) What we need is the fifth type of capitalism – a “balanced capitalism.” (Other possible names are “stabilized capitalism” and “stabilizing capitalism.” Please help to select the best term.) The simplest way to move toward it is as described above – by implementing measures that prevent or mitigate the first-order effects of negative externalities. But that is insufficient. As a rule, those measures underestimate the potential impact and the overall level of these externalities, when they are aggregated over the country or globally. (We need to “internalize” all countrywide externalities, natural and man-made, both short-term and long-term, as well as the global externalities that are related to the protection of global environment.) Besides, for the sake of generality, I will define as externality of social or economic decision not only its effect (“spillover”) on any party directly involved in that decision, as it is done usually. I will also include in this category any unforeseen consequence of that decision, even if it doesn’t impact a directly involved party. With sharply rising uncertainty, reaching now a radical, “uninsurable” level even for short-term, such “unforeseen” externalities become critically important. Moreover, it turns out that not one but rather two “invisible hands” are needed: one for the current production and one for developing new production capacity to satisfy the future demand. An enterprise demand includes covering the needs of the adjacent sectors of industry, so a producer has to have data about the future of not only his industry, but also all related industry sectors. (Since the market knows nothing about the future, the actual results are bad. This might have been acceptable in earlier, more tolerable times, but not in time of sharply reduced domestic investment and economic crises, when “animal spirits” are close to a zero level.) We have to go beyond the first-order effects, too. All economy sectors are ultimately interconnected, and we actually need the so-called “input-output analysis” table, describing the whole economy in terms of coefficients of intersector relations, possibly with some geographical aspects included. The past values of these coefficients are available at many universities and government organizations. But we need their future values, the values after the future innovations, which may or may not occur. We also need to take into consideration the long-term survival goal of the society, represented by its approximate proxies. As such proxies, short-term objectives and constraints include: sufficient growth, low unemployment, stable prices, sufficient satisfaction of needs and wants of population, and a healthy balance of payments. Main long-term ones are: preservation of the industrial base, preservation of the middle class, and attainment of social and geopolitical goals of the country. Of course, all these data would be very rough approximations: we know almost nothing about the future. At best, we can get no more that “guesstimates.” We can make some plausible predictions about the technological trends, but almost nothing is known about connections of the above proxies to the ultimate goal of long-term survival of society. To get all these data would take years of superhuman and costly efforts of a substantial group of scientists. But suppose that we obtained the data. What do we do with it? What results could justify such a Herculean endeavor? A multi-scenario optimization model under radical uncertainty naturally suggests itself. I will not talk in this blog about such a model and methods of its solution. (My system of Risk-Constrained Optimizationâ, or RCO, specially designed for solving such models, will be outlined in the next blog.) Here I will say only that if we could formulate, fill with data, and solve such a model, we could obtain from it the so-called “dual prices,” which would replace the today’s deceptively good prices. The new prices will “nudge” the decisions in desirable direction. If we want to preserve cherry orchards, we should include that request in the model, and it will tell us the required price of cherries. Then we can decide – is our wish affordable, should we abandon it or subsidize it via non-market channels? A capitalism using such prices (mind you – not commands, just different prices) would probably be as close to societal perfection as humanly possible, while not losing any of its positive traits. Moreover, it will be more productive, too, because the information about the future, to be generated by the model, would help private enterprises. Of course, this information will be very far from perfect, but it still should be much better than what they have now. Most important, it will contain data about potential scenarios, their risks and opportunities, and the technologies and strategies best suited to each scenario. There undoubtedly exists a pressing need for society-wide modeling. It can be done, too – the experience of South Korea, cited in the beginning of this blog, as well as my own experience (both are outlined in the next section) confirm that. Of course, the economy of the USA is not the economy of South Korea or the USSR, and planning under radical uncertainty is in some respects a couple of orders of magnitude more difficult than deterministic planning (it reduces though the requirements to quality of data), but the scientific and computational resources of this country are incomparably better, too. The work can be started on small scale, with a very aggregated model, and gradually expanded and detailed. Although the collection of sensitive technological data can probably be trusted only to a government organization, a university or other scientific organization can initiate preliminary methodological work. In time, that will bring substantial benefits to the entity, too. Tennis, anyone? * * * This section is intended primarily for economists. Of course, it contains some interesting non-technical information, too, and non-economists are welcome to browse through it. I’d be happy to provide additional explanations. In South Korea, great attention was given to the technological changes due to new investment. Industry teams of specialists were formed to estimate the changes to be expected from new capacity coming on line, for each year of the planning period. In that way, dynamic (year-by-year) input-output coefficients were generated for all sectors of the economy. In addition, overall constraints were imposed on balance-of-payment deficit, unemployment, minimal school attendance, and several society-wide externalities. South Korea didn’t even have computers yet. The computational work of the input-output analysis (inversion of the matrix by an inferior pivot method, necessary because of that absence) was performed by thousands of people, for months using abacuses or turning the handles of primitive mechanical calculators. Amazingly, these efforts were so well coordinated and executed that they provided highly precise results. Interestingly, post-mortem calculations performed after the planning period had shown that the model forecasts would have come closer to actual outcomes, if static (one-period), rather than dynamic model were used. (See below about the use of a static version in my 1965 model.) The team members received orders of honor, specially established by the Korean government to celebrate exceeding the targets of the Second Five-Year Plan developed by the state on the UN team recommendations. Irma Adelman, a prominent American economist, one of the leaders of the team, proudly told me the details of that project. It was an undeservedly forgotten tour de force, perhaps one of the highest practical achievements of the “dismal science.” In my opinion, if anything in economics ever deserved a Nobel, that was it. Not Utopian concoctions with mathematical fig leaves. As to my own experience, it was as follows. Today, in 2010, I am terribly worried about the current market prices that can easily lead to various global and American catastrophes. In 1964, I was similarly worried about prices of Soviet command economy. They were ridiculous: for obvious political reasons, bread (for instance) was made super-cheap, and all trains from Moscow were full of peasants, each of them bringing home dozens of bread loaves bought in the city, to feed to their cattle and pigs. I had just been appointed to head the laboratory of long-range planning of sectors of industry at CEMI, a Moscow think tank (see more details in my bio). But I could not in good conscience optimize anything under such made-up prices. Therefore I had to go out of my sector-of-industry box and to do something about the whole economy. Very reluctantly, because society-wide modeling is incomparably more complex and difficult than modeling an industry sector. So in 1964-1965, I developed a model for long-range planning of the Soviet economy by industries and regions. (Thankfully, I was guided mostly not by economic “science” but by common sense.) By the way, I also (similar to the South Korean team) had imposed in that model the constraints on the balance-of-payments deficit. Saves from a crisis, you know. Pity it is not done in this country now. (My 1965 and 1967 articles about that model, in Russian and English, respectively, are available at my website .) For several years, the model was a banner project of CEMI. By a government decree, 400 planning and research organizations provided the information for the model. These organizations forecasted technological change, defined trends in consumption and interregional migration, quantified externalities, and so on. Two CEMI laboratories with staff of about 70 people were set up to process that information. I had developed not only the model, but also the algorithm for solving the enormous non-linear programming problem arising from that model. Several techniques were combined to simplify the original model, reduce its dimensions, decompose it into a number of small subproblems, and replace some parts of non-linear programming by matrix inversion methods. One of those techniques was transformation of a dynamic year-by-year model for a ten-year planning period into a static model. As found in South Korea, that might in some cases even improve the results. My laboratory implemented those model and algorithm. The original problem had millions constraints and scores of millions of variables. After all transformations, it was successfully solved by 1972 on computers able to handle much simpler linear programming models with only up to 400 constraints. As far as I know, the results were not implemented. By that time, I had already applied for emigration and was “persona non grata.” * * * The last week exchange of comments to my July 16 blog “Compensated Free Trade” brought up an important point that might be of interest to the present readers. One commentator has suggested that the system of balancing foreign trade, proposed in 2003 by Warren Buffett, is better than CFT. In that system each American exporter receives certificates in the amount equal to the value of his exports. He can auction those certificates to the would-be exporters to the USA, who thus acquire rights of exporting to America of goods that would bring them the same amount of money. Of course, the WB system would very soon achieve a trade balance. But, because the WB system does not set deficit limits for individual countries, as CFT does, is has one vital flaw. A trading partner that has substantial dollar reserves can overbid his competitors and buy all existing certificates. He can use those of them that he needs for his own exports, obtaining (in addition to his presumable cost advantage) another advantage, and becoming as close to an export monopolist as he wishes. (In that process, he can easily destroy his competitors.) He can then sell the rest of certificates to other exporters at somewhat reduced prices, possibly using the certificates as tools of political or economic blackmail. But, even without knowing about that flaw (which I discovered later), Paul Samuelson wrote to me in his letter of October 14, 2004: “I think that Buffett goal would have strong consequences, probably more bad than good.” After a paragraph describing his simulation of the WB system in his models, he continues: “By 2020, the post-Buffet U.S. would have fallen behind the EU and the Pacific Rim. If you disagree, you may well turn out to be right. In economics, 2 + 2 = 4 arguments can rarely settle practical problems. Good luck, Paul Samuelson” Understandably, I was very happy that Samuelson did not find any flaws in my CFT proposals; that he seemingly preferred CFT to the WB system; and that (as told by his assistant) he kept my letter and my article on his desk for unusually long time. Copyright © 2010

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Robert Kuttner: Women on the Verge

July 25, 2010

The campaign to get Elizabeth Warren appointed to head the new Consumer Financial Protection Bureau got me thinking — why is it that so many of the heroic leaders who have pushed the Obama administration to be more steadfastly progressive on financial issues just happen to be female? That honor roll would begin with Warren; it would include Sheila Bair, who heads the FDIC; House Speaker Nancy Pelosi; Senator Maria Cantwell of Washington State; former commodities regulator Brooksley Born; and Heather Booth who spearheaded Americans for Financial Reform. Inside the administration, the member of the senior economics team who has pushed hardest for a more expansive approach to economic recovery is the chair of President Obama’s Economic Council, Christina Romer. What these people have in common is that they are not members of the financial old boys’ club, in both senses. They are neither one of the boys, nor did they come out of the Wall Street milieu. And two of the three Republican senators who broke ranks to provide the sixty votes to pass financial reform, Senators Olympia Snowe and Susan Collins of Maine, are also women. The third, Senator Scott Brown, who must run for re-election in liberal Massachusetts in 2012, in less fluky circumstances than the special election of January 2010, is not so much a profile in courage as an expedient politician. It’s not that all the good guys are female — Rich Trumka and Damon Silvers of the AFL-CIO have played a heroic role, too; as has Paul Volcker; as well as other leading Senate progressives such as Dick Durban, Jeff Merkley, and Ted Kaufman. But Warren and the other female members of the Administration’s loyal opposition have displayed real bravery. Warren surely knew that when she was asking hard questions of Treasury Secretary Tim Geithner, she was reducing the chances that she would be welcomed into the administration. But she never pulled her punches. Sheila Bair, when she was resisting Geithner’s plans to bail out and prop up banks without drastically reforming them at the same time, made herself the odd woman out. Read any of the several books on the financial crisis that rely on insider background interviews, and you will read the same putdowns of Bair emanating from the Geithner camp. Yet Bair has remained steadfast. Gender, of course, is no guarantee of progressive politics, clear thinking, or political bravery. One of the odd things of our era is that two generations after radical feminists began battering down barriers to full participation, some of the most visible beneficiaries are rightwing women, many of them truly whacked out in their views. The fact that Sarah Palin can thank Gloria Steinem is small comfort. For instance, the prize for the most disingenuous commentary on the Shirley Sherrod affair has to go to that female pioneer, Peggy Noonan, former speechwriter for Ronald Reagan. Writing in Saturday’s Wall Street Journal, and spinning the Sherrod affair to suggest symmetrical blame, Noonan began, “She was smeared by rightwing media, condemned by the NAACP, and canned by the Obama Administration. It wasn’t pretty, what was done this week to Shirley Sherrod.” But in the entire piece, which took up nearly half of the Journal’s op-ed page, you never learn what actually happened. The details of the doctored video and the Fox pile-on are left out, suggesting that the entire establishment just happened to gang up on poor Sherrod, while good old Noonan, a paladin of the respectable right, is seeking lessons of redemption. Shamelessness evidently knows no bounds of gender. Sherrod, by contrast, was a picture of dignity and bravery, as she has been throughout her career. It would be comforting believe that greater gender equality, per se, will produce a more constructive substantive politics. Linda Tarr-Whelan has written an important book titled Women Lead the Way . Her research demonstrates that when women hit a tipping point of about 30 percent in leadership roles in organizations of all kinds, the dynamic changes and there is more receptivity to fresh thinking. But we are a long way from that magic number in the House or the Senate, nor in large corporations, nor among President Obama’s top financial officials. (Still, it is to Obama’s credit that his first two selections for the Supreme Court have been women, as have two of his three recent appointees to the powerful Federal Reserve Board.) The Atlantic recently ran one of its patented cover pieces that combine serious exploration of a complex topic with pop-culture hyperbole. This one , titled “The End of Men,” speculated that something about post-industrial society at last will overthrow male dominance (“What if the economics of the new era are better suited to women?”), and that the displacement of males is already well advanced. But this breathless proclamation of writer Hanna Rosin may be a bit premature. Wall Street, after all, is the ultimate post-industrial redoubt — they don’t make anything, they just manipulate paper — and it doesn’t get much more male. The typical trading floor is pure frat-house. And the crowd making financial policy in Washington are only a shade more in touch with their inner-woman. Elizabeth Warren would be a serious offset to the usual financial Animal House . Alas, that’s why her nomination remains something of a long shot. Robert Kuttner’s new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos.

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Bill Baker: When Will the AA Batteries Run Out?

July 23, 2010

Dagong International Credit Rating, a new Chinese credit rating agency, purports to adhere to “fundamental principles of truthfulness, timeliness, and consistency.” It warns that “over-reliance on financing income and debt roll-over will ultimately lead to a strong reaction of bond market, thus when the borrowing costs and difficulties increase, the credit risks will burst dramatically.” Although it rates the United States AA and says “the advantages of a comprehensive institutional system will help them gain the rooms for adjusting finance and debt,” it culls out 18 countries for which it assigns ratings lower than those assigned by Moody’s, S&P, and Fitch (and the United States is among them). Thirteen of these are developed nations that have become, in Dagong’s words: “the biggest source of systemic risk.. (and a) double dip for the world economy… Once the fiscal risk in this sort of countries get out of control, they will have to face even more financing difficulty. Up to then the interest rate attached to the debt instruments will be running up rapidly, and the default risk in these countries will grow even larger; the fiscal fragility may badly threaten the successful recovery of their economic and financial conditions, and may even plague these countries in a relatively long run.” These are interesting observations, because they indeed are truthful and timely as well as the product of consistently applied financial statistical analysis that provides Dagong a superior way to compare sovereign credit risk among nations. But it is also devoid of understanding of the systemic monetary flaws that led to the creation of excessive debt in recent decades. This may explain why China may have not sold much U.S. debt, and why it may feel that it can safely invest in other nations’ credit rather than avoid systemic credit risk generally through allocating more than a trivial share of its currency reserves to gold. Laced through the analysis is recognition that some countries may apply Keynesian solutions because their sovereign and private credit capacity is ample, and their outlook for economic growth may be more intrinsically secure. In this way, China’s policy actions are rationalized by its policy makers (as well as by western pundits). So in addition to having consumed the monetary Kool-Aid of the west, China has embraced the fiscal orthodoxy as well. This point of view echoes Bernanke’s and Greenspan’s view that the global debt crisis was fostered by a “savings glut” in China. Murray Rothbard warns of businessmen clustering together in error. It would be a shame if the Chinese, despite this trenchant analysis of how the world’s credit markets could unravel once again, steadfastly cast their lot with the Bernankes and Krugmans of the economics community. As for the United States, we have already crossed the Rubicon, hopelessly defending a fiat based reserve currency and admonishing all others in the G-20 to spend recklessly and prop up impaired credit instruments at any cost. The Chinese may be rating the U.S. “AA” for now, but if the process of instability of which Dagong hints takes over, we should expect the juice in this AA battery to run out, unable to be recharged by “a comprehensive institutional system (that) will help them gain the rooms for adjusting finance and debt.”

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Video: RGE’s Ziemba Says Recovery of BP Reputation ‘Difficult’

July 22, 2010

July 22 (Bloomberg) — Rachel Ziemba, senior analyst at Roubini Global Economics LLC, talks about BP Plc’s recovery efforts following the oil spill and the need for tighter regulation. Ziemba speaks with Maryam Nemazee on Bloomberg Television’s “Startup.”

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Seinfeld ‘Sponge-Worthiness’ Explained In Economic Terms (VIDEO)

July 21, 2010

There are markets in everything — even, it turns, out in the contraceptive decisions of “Seinfeld” characters. Examining the show’s relation to “option pricing techniques,” Princeton economics professor Avinash Dixit authored the paper “An Option Value Problem From Seinfeld.” (Hat tip the Wall Street Journal’s Real Time Economics .) The crucial economic decision behind Dixit’s paper was Elaine Benes’s dilemma over deciding which of her boyfriends was, in fact, ” spongeworthy .” Faced with a dwindling amount of her favorite Today’s Sponge contraceptive Elaine had to carefully screen potential boyfriends. The paper itself is highly technical, but here are a few snippets: “If sponges were freely available for purchase at a constant price (which is small in relation to the potential value so I will ignore it), then Elaine’s decision would be yes for any quality greater than zero. But when she has a finite stock and cannot buy any more, her optimal decision will be based on a “spongeworthiness threshold” of quality…The threshold depends on the number m of sponges she has: the fewer sponges left, the higher the threshold needed to justify using up one of them. ” Dixit also assigns a measure of Elane’s assessment of each man’s “quality” (the variable Q), and takes a perhaps unintentional shot at Elaine’s, well, “expertise”: Each day she observes the Q of that day’s date. Actually this is only her estimate formed from observing and closely questioning the man (which is what she does in the episode), not the ex post facto outcome. But I assume that she has sufficient experience and expertise to make a very accurate estimate. WATCH a clip from the episode: Download a PDF of professor Dixit’s paper here .

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Video: Gennaro Says Steinbrenner Influence Went Beyond Yankees: Video

July 13, 2010

July 13 (Bloomberg) — Vince Gennaro, author of “Diamond Dollars: The Economics of Winning in Baseball,” and Bloomberg Businessweek’s Hugo Lindgren talk about New York Yankees owner George Steinbrenner. Steinbrenner, who helped to usher in Major League Baseball free agency and multimillion-dollar contracts during his 37-year tenure as Yankees’ owner, died today at the age of 80 from a heart attack. They talk with Pimm Fox on Bloomberg Television’s “Taking Stock.” (Source: Bloomberg)

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Jonathan Lipson: The Great Repression: The Crisis of Richard Posner

July 13, 2010

Panics cause strange behavior. This is as true of financial markets as it is of the public intellectuals who write about them. Take the case of Richard Posner. Since the crash of 2008, Judge Posner, who sits on the Seventh Circuit Court of Appeals in Chicago and teaches at the University of Chicago Law School, has written scores of articles and blogs — and two books — on the financial crisis, including this spring’s The Crisis of Capitalist Democracy . Throughout, Judge Posner surprised many by insisting that we are in a depression caused by bad government policies that were, in turn, based on bad economics. Only heavy government spending can get us out. Because Posner is a prominent public intellectual, what he says about the financial crisis gets attention. Views have been mixed. Some did not like that he broke with his conservative past, embracing large stimulus packages. Others viewed this as a refreshing change of heart. Either way, critics tend to ignore a basic flaw in Posner’s work here, which is that he fails to mention his role — and that of legal academics generally — in creating and popularizing the policies he now criticizes. Posner has, in short, produced a “culpa” without a “mea.” To understand his role in the financial crisis, it is necessary to understand something about Law and Economics, an academic movement of which Posner has (correctly) claimed himself to be a founder. Law and Economics is essentially free-market economics brought to law school. Posner’s leading textbook on the subject, Economic Analysis of Law , was predictably skeptical of financial regulation. Writing before the financial crisis, he argued that “banking regulations go far beyond what a private creditor would insist upon in the interest of safety and seem . . . dubious.” Securities laws were equally ill conceived because the market would do a better job than Uncle Sam. “Capital markets are,” he claimed, “competitive, and competitive markets generate information about the products sold.” It is difficult to overstate the influence of this movement, which began at the University of Chicago in the late 1950s, and blossomed during Posner’s tenure there. According to a 1993 study (by Posner), by the late 1980s, “the influence of [Law and E]conomics . . . exceeded that of any other interdisciplinary or untraditional approach to law.” Funded by the conservative Olin Foundation, Law and Economics research centers sprouted at law schools around the nation, influencing scores of law professors who shaped the views of thousands of lawyers, many of whom went on to become policy makers and regulators. Its adherents or sympathizers include former attorneys general (Edward Levi), solicitors general (Robert Bork), and U.S. Supreme Court Justices (Antonin Scalia). Law and Economics was thus an important link in the intellectual chain that led to the deregulatory fervor of the past 30 years. Yet, Posner omits this vital piece of the story — and his starring role in it — from his major accounts of the financial crisis. Except for a footnote which acknowledges that “some of” his work “succumbed to [the] fallacy” that markets are axiomatically superior to regulation, it as though neither he nor the Law and Economics movement ever existed. The financial crisis is, according to Posner, the fault of virtually everyone except Law and Economics. With re-regulation on the horizon, Posner may recognize that the next real fight is about intellectual liability for the crisis. Because Law and Economics played a role in building a system he now views as flawed, he needs to tell a story that insulates (and thus exonerates) his movement. His version — which we can call the Great Repression — would set the rhetorical parameters of the discussion going forward. That discussion blames the government and the economists, but not the lawyers and legal academics — who were often both ardent advocates for, and implementers of, deregulation. There is nothing wrong with changing your mind, and perhaps Judge Posner should be lauded for doing so publicly. But breaking with the past is one thing. Burying it is another. “I have been moved to criticize a number of economists,” he explains in The Crisis (his newest work), “because there has been so little self-criticism by economists — a bad sign.” “Instead,” he notes without a trace of irony, “we have seen defensiveness.” No defensiveness from Judge Posner, however. Which may make sense: Why defend a crime that was, in his account, never committed? Panic or no, Posner knows that the best defense is a good offense.

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John Selby: Greedy About Life Itself: Solving Our Deficit and Reducing Our Suffering

July 12, 2010

I recently wrote an article in this section on greed as a psychological reflex that we can choose to consciously begin to weed out of our own psyches. In this article I’d like to go a step further and talk about greed related to life itself — and how this greed is breaking our financial backs and heaping unnecessary debt burdens on our children and grandchildren. I’m talking specifically about our compulsive tendency to try and stay alive well beyond our natural stay on earth, by running up massive pre-death bills that sustain our heartbeat and bodies a short time, even though it’s our time to go. Must we ourselves suffer through the ultimate humiliation and degradation of a prolonged hospital incarceration before dying, while medical machines and drugs keep us somewhat alive and run up massive debt for our children? Must we remain passive victims of the medical-legal-religious establishment in this regard — or do we have choice and power concerning this ultimate matter of how and when we die? Facing the Financial Facts Most of us know (based on TV exposes from 60 Minutes etc.) that Medicare will have to cough up well over $50 billion this year just to cover medical costs to sustain dying people during their last two months of life. As 60 Minutes pointed out, this astounding figure represents more than is spent by the Department of Education and the Department of Homeland Security combined. Statistically, around 1.5 million Americans will die this year who are over the age of seventy-five. As they die their inevitable (and once mostly natural) deaths, during their last two months of life they will (as their last act on earth) negatively drain the coffers of their children’s and grandchildren’s financial wellbeing by around $200,000, of which tax-payers will pay around $100,000. Beyond Your Living Will Now that I’m set to hit 65, I feel I can finally speak up about both the economics and the ethics of this situation that all of us will eventually face – and talk about what we ourselves can do to break free from the current medical institution’s grip on the last days of our lives. Feel free to holler at me as loud as you want to – but please also consider seriously what I’m doing in my own life, and what you can do too. The obvious act that we can take is to write a Living Will that clarifies that we want to die a natural death when our time comes to die. But there’s a much deeper level of action required, in order to make our coming deaths significant in the revolution to free our community from the ‘death debt’ that’s ruining our economy. Beyond Greed I’ve made it as legally clear as I could, that after the age of 75 my strong intent is to surrender gracefully to whatever mortal threats come my way willingly, rather than fighting to grab a few more years or months or weeks of life on this planet. I feel in my heart that I’ve already at 64 gotten my money’s worth of life and if I get another ten years, that’s a bonus. Why should I ask the medical system to artificially sustain me beyond 75? Why not surrender gracefully rather than grab greedily at more life? Here’s the joke — who actually wants to end their life with months or years of emotional suffering, mental debilitation, physical trauma and all the rest? Why not go out while you’re ahead – really? What’s this underlying greed to gasp a few more breaths before we check out — what’s the point? Psychology Meets Finance Well, as a psychologist I can answer most of the point: we’re afraid to die. And so we grab onto more life, no matter how humiliating or painful. And if we’re to actively insist on dying when our natural time comes, and to go gracefully into the great beyond, whatever that might entail, then we must successfully resolve our fear of dying. We need to spend regular reflection time all during our lives coming to terms with the truth of life — nobody gets outta here alive. I don’t mean this heartlessly – just the opposite: I’m looking for the most heartful (and financially-responsible) way to bow out gracefully. Luckily we have remarkable hospice organizations throughout the country to help us do just that. What’s important is to embrace all of life and not live in denial of death. > Three Key Reflections To help me surrender to death gracefully and in a timely manner (and with minimum expense) this is what I ask myself regularly: 1. Do I want to be remembered as a bright light showing that death can be surrendered to in optimum fashion, or do I want to be remembered as yet another greedy old bastard who ran up a giant medical bill because I was afraid to let go and take off? 2. Do I want to end my life drugged up and in prolonged pain, living in a soul-numbing hospital environment, eating terrible food while my loved ones suffer emotionally through my artificially-prolonged last gasp — or do I want to move beyond this mortal coil quickly when my time comes, with minimum pain and anguish on all sides? 3. Do I want to drag down my own country’s economy and consume money that could be better spent on education and the nurturing of new generations — or shall I make my final act of life generous rather than greedy? Doing the Right Thing When we see these choices, I think most of us agree that the time of our death is not a time to be greedy – it’s a time for thankfulness for a long (but not overlong) life, and a time to say goodbye feeling good about money saved, rather than guilty about money down the drain. That’s my read. What’s your take on this? John Selby Visit my author site Visit my YouTube video channel

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Dan Dorfman: Why 2011 Will Be A Bummer

June 28, 2010

Forget about that champagne toast on New Year’s eve. A bottle of Budweiser might be far more appropriate. Why beer instead of Don Perignon? Because it won’t be a happy 2011 as the economic mess promises to get messier. Likewise, we’ll all feel more financial aches and pains from Uncle Sam’s heftier tax grab, which will assuredly depress economic growth. This dreary year-ahead outlook comes from Madeline Schnapp, a sharp, perceptive economist who boasts a number of excellent calls on the economic front, especially as it relates to the critical job and housing markets. As such, she’s no stranger in my writings. Her view, it should be noted, is a contrary view. The general expectation is that the recovery will continue to hum in 2011, following a pickup in 2010, as the economy shifts from slippers to sneakers. Schnapp, the economics chief at West Coast liquidity tracker TrimTabs Research, which is partially owned by Goldman Sachs, is convinced the timing is wrong to think about a jitterbug economy next year. A slow fox trot, she believes, is much more in line, based on her work which shows we’re in for a disappointing 2011 economy and a limping stock market to boot. Schnapp figures you don’t really need the IQ of an Albert Einstein to recognize that the 2011 economy will be riddled with a number of significant land mines, which strongly suggests the general expectation of 3% to 3.5% GDP growth next year is overblown. Our economic worrier, by the way, is not looking for a double-dip recession next year, but rather anemic growth (on the order of 2%-2.5%), which reminds her of her favorite quote pertaining to exaggerated economic expectations. It comes from none other than Warren Buffett, who said: “You can’t produce a baby in one month by getting nine women pregnant. It just doesn’t work that way.” It means, Schnapp says, no matter how hard you try or what rabbit you try to pull out of your hat, the recovery process is just going to take a long time. Credit crises that lead to banking crises, she observes, take a lot longer to recover than say a business cycle characterized by bloated inventory. Speaking of economic land mines, Schnapp takes particular note of a bigger tax bite. Noting that the Bush tax cuts expire at the end of this year, she points out that if they all expire en masse, that would translate into tax increases approximating half a trillion dollars. Since that would be political suicide, she says, tax hikes will probably come in at $200-$250 billion, mostly on the shoulders of those individuals earning $200,000 a year. That, she believes, will shave 1%-2% off GDP growth next year. Among the most prominent tax boosts slated to go into effect on January 1, 2011, the top capital gains tax will rise to 20% from 15%, the top dividend tax rate will go up to 39.6% from 15%, the top personal income tax rate will climb to 39.6% from 35%, and the lowest person income tax rate will increase to 15% from 10%. As a result, Schnapp points out, many investors will probably be selling assets in the fourth quarter to avoid paying higher taxes next year. Aside from a larger tax bite, Schnapp takes note of several other developments that will stifle economic growth next year. In brief: –Loss of stimulus measures, such as income tax refunds, cash for clunkers and the homeowner’s tax credit. –Ongoing high unemployment, likely in the 9.5%-10% range, with additional job losses of 900,000 to one million. Adding to labor woes will be more than a million new entrants into the labor force. –A darker housing picture, what with another 7-8 million new mortgage delinquencies projected over the next couple of years on top of the current population of 7.2 million delinquencies. It means, says Schnapp, a bigger inventory overhang and a further decline in housing prices. –De-leveraging cycle here and in European countries–which is a deflationary event and will take many more years to unwind. This will result in less private and government sector growth, huge deficits, higher unemployment, reduced consumer spending and it all adds up to a dismal economic outlook. What about all those expectations of a fast recovery? Schnapp figures they’re strictly a pipe dream. “You’ll have to wait a long time before we see robust GDP growth again of 3% to 3.5%, and that won’t happen,” she believes, “until 2013 or 2014 when the housing market finally gets back on solid footing.” As far as investors go, Schnapp’s advice is “don’t get sucked into a bullish stock market scenario because it’s not real.” What do you think? E-mail me at Dandordan@aol.com.

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SanDisk, Symantec Lead Silicon Valley in Increasing Profit Per Employee

June 13, 2010

By Ryan Flinn June 13 (Bloomberg) — SanDisk Corp. and Symantec Corp. are leading their Silicon Valley peers in boosting profit per employee, as technology workers learn to do more with less. SanDisk earned $684,381 more from each worker last year than the prior year, while Symantec added $430,453, according to Bloomberg data measuring the most recent fiscal year. About half of the companies in a Bloomberg regional index had more profitable workforces last year, helped by job cuts and the start of the economic recovery. Silicon Valley lost about 90,000 jobs during the worst of the slump. The remaining workers had to take on more of the burden, propelling productivity to its highest level since the dot-com boom in 2000. “You can get your people to work harder for an extended period of time, but the question is, is that sustainable?” said Tracey Grose, vice president of research and development for Collaborative Economics Inc. , a Mountain View, California-based consulting firm. Productivity rose 3.8 percent between the second quarters of 2008 and 2009, according to an annual survey by Joint Venture: Silicon Valley Network and Silicon Valley Community Foundation. As companies begin to see orders rebound, they eventually have to bring workers back. “When companies start turning around, they will take on temporary help, and then they’ll start hiring full-time positions,” Grose said. Job Cuts SanDisk , a maker of Flash memory based in Milpitas, cut at least 10 percent of its workforce in late 2008, part of an effort to reduce operating expenses to $800 million or less. Like the housing market, the flash-memory industry had a supply glut. That caused prices to crash, forcing companies to take a loss on every component that went out the door. “These guys were losing probably close to one dollar a part at the end of 2008,” said Joe Unsworth , an analyst at Stamford, Connecticut-based Gartner Inc. “They were absolutely hemorrhaging cash.” Prices recovered after the industry cut capacity and worked through the excess inventory, he said. SanDisk has been profitable since the second quarter of 2009. On an employee basis, the company earned $127,123 last year, up from a loss of $557,258 in 2008. Symantec, the world’s biggest maker of computer-security software, also cut jobs during the recession, reducing its workforce budget by 4.5 percent at the end of 2008. Consumer Rebound At the time, corporate customers were curbing security spending. Sales at Mountain View-based Symantec tumbled for four straight quarters, through September of last year. Customers bought consumer products at a faster pace than business software, helping Symantec pull out the slump, said Chief Financial Officer James Beer . Per worker, net income was $41,035 last year, compared with a loss of $389,418 the previous year. Google Inc. , EBay Inc. and Yahoo! Inc. also boosted per- employee profit last year. Google employees had some of the region’s highest numbers, accounting for $328,734 on average. Oracle Corp., at $65,035, and Hewlett-Packard Co. , at $25,197, were both little changed from the prior year. Thirty-five companies in Bloomberg’s index of 78 Bay Area stocks saw profitability per employee drop last year. And 20 lost money — often because of writedowns and reorganizations. Lam Research Corp. and JDS Uniphase Corp. ranked at the bottom of the list. Wider Loss At JDS, a Milpitas-based maker of fiber-optic equipment, the loss per worker widened to $216,600, from $3,056 the previous year. It was hurt by one-time charges, including the writedown of an acquisition. The timing of its fiscal year didn’t help because it ended last June, before the economic recovery got under way. “Customers were cautious on spending on telecom equipment,” said Jim Monroe, a spokesman for JDS. Things have improved since last year, he said. Bookings last quarter reached the highest level in two years. Lam was hurt when memory producers — such as SanDisk — scaled back production plans during the slowdown, said Carol Raeburn , a spokeswoman for the Fremont company. During the fiscal year that ended last June, Lam had a loss of $111,453 per worker, down from a profit of $115,618. The company completed its purchase of SEZ Holding AG in March 2008, not long before the recession deepened. The company had to write down the value of the business, eating into profit. Lam also cut jobs as it integrated SEZ. “The biggest reason for the loss was a restructuring,” Raeburn said. The memory business has since rebounded, helping Lam post record shipments last quarter. Sales of smartphones, netbooks and tablet computers such as Apple Inc. ’s iPad have helped. “It’s the whole consumer electronics category that’s driving this demand,” Raeburn said. “It just shows you how fast things can change from the doldrums.” To contact the reporter on this story: Ryan Flinn in San Francisco at rflinn@bloomberg.net

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Papandreou’s Overhaul Hinges on Vanquishing Greek Tradition of Corruption

June 11, 2010

By Natalie Weeks and Jonathan Stearns June 11 (Bloomberg) — Socialist Prime Minister George Papandreou promised to undo decades of welfare policy to win an international bailout for Greece. Keeping the lifeline will force him to reverse another legacy left by past leaders, including his father: corruption and a bloated bureaucracy. Papandreou has promised “clean hands” to win public support for austerity measures that will cost all 11 million Greeks — from newborns to retirees — as he introduces in coming weeks a plan to overhaul the pension system, the fattest target in his deficit-cutting campaign. The nation’s financial crisis, which has sparked dozens of anti-government demonstrations including one in which three bank employees were killed, presents an opportunity for a political and economic overhaul that Papandreou must grasp, analysts and investors say. Failure by the 57-year-old, U.S.-born leader threatens default and a cataclysm that may undermine the euro. “Papandreou has a window,” said Loukas Tsoukalis , an economist at Athens University. “If he proves he can deliver the goods, and that the situation is changing, not just in terms of the budget, but the reality in Greece is changing, then he has a great chance of success.” Euro-area governments and the International Monetary Fund have vowed to halt payments from the 110 billion-euro ($132 billion) aid package approved last month should quarterly reviews show Papandreou is failing to meet targets. The threat reflects Greece’s history of understating its budget deficit. Papandreou’s challenge to Greek political tradition extends to his own family. His late father, Andreas Papandreou , founded the Socialist Pasok party. In 1981, he led Greece’s first Socialist government and increased wages for state employees. Anything Goes “It was under Andreas Papandreou that a mindset of ‘anything is allowed and nothing is controlled’ developed,” said Christos Giannaras, a philosophy professor at Aristotle University of Thessaloniki in the northern part of the country. “Policies such as getting rid of wage increases based on merit, skill and level of responsibility had unbelievable social repercussions.” Greece’s so-called core public sector has about 403,000 workers based on the latest data, according to Spyros Papaspyros , chairman of the federation of civil servants’ unions. Finance Minister George Papaconstantinou plans to start documenting the number of state employees and a report is scheduled to be published later this year. The younger Papandreou has promised austerity measures equal to 14 percent of gross domestic product in a bid to bring Greece’s deficit within the European Union limit of 3 percent of GDP in 2014 from 13.6 percent last year. He has reduced wages and pensions, increased levies on tobacco, alcohol and fuel, pledged to limit public-sector hiring to one employee for every five that depart, and promised a crackdown on tax evasion. Pension Overhaul Papandreou faces his toughest test as he seeks to overhaul the pension system. With some retirees earning more than when they worked, Greece may spend 25 percent of GDP on pension costs by 2050 unless policies are changed, the government estimates. Papandreou’s proposals would raise the retirement age to 65 from 62.5, increase it with life expectancy and index benefits to prices. He also proposes to restrict early retirement. The minimum contribution period would be raised to 40 years from 37 years by 2015 and pensions would be awarded on the basis of earnings over an entire working life, instead of the last five years. This is an “even harsher test” than the austerity measures that lawmakers approved last month, according to Sotiris Rizas, a researcher at the Academy of Athens’s Center for the Study of Neo-Hellenic History. ‘Major Reorientation’ Overall, the goal is a “major reorientation” in the 238 billion-euro economy by scaling back the role of the state to make it more efficient and restore investor confidence, according to the EU-IMF aid agreement with Greece. Papandreou, educated at Amherst College in Massachusetts and the London School of Economics, has a challenge on his hands as Greeks made 900 million euros of payoffs nationwide in 2008, according to Berlin-based Transparency International. The latest survey of 6,000 Greek citizens found that the rate for a bribe to pass a car-emission inspection was 300 euros and the cost to jump to the top of a waiting list for an operation in a state hospital was about 2,500 euros. Greece ranks as the most corrupt euro country and 71st of 180 worldwide in terms of corruption, according to the organization’s survey published last year. ‘Not Attractive’ “Greece isn’t an attractive investment nation due to the bureaucracy and inefficiencies inherent in its economy and political system,” said Nick Stivactas, business manager at Ingredients Plus Pty Ltd., a Sydney, Australia-based seller of chemicals. “I commend the Pasok government for the initiatives they have put in place.” The shrinking of the civil service must also ensure that merit-based hiring ends political parties’ decades-old practice of using state jobs to reward supporters, according to Nikiforos Diamandouros , the Strasbourg, France-based official responsible for investigating complaints about EU institutions. “I would hope that there is a sufficient degree of realization of how critical the situation is in Greece so that the government will push forward,” Diamandouros said. “The timeframe is now and not tomorrow.” Cracking down on tax cheats is also a central government objective. Papandreou has said these people deprive the state of as much as 30 billion euros a year. Target Tax Evaders The finance ministry has said it will target professions in which tax evasion allegedly runs rampant. In November, the ministry put the spotlight on evasion by doctors and vowed to stamp it out. The ministry fined 11 physicians for dodging taxes and will press criminal charges against four of them as part of a “name-and-shame” crackdown. Previous Greek governments, including the New Democracy administration of Kostas Karamanlis , whom Papandreou defeated, failed to follow through on anti-corruption promises. Greeks increasingly realize they now have no choice, said Claude Giorno, head of the Greece desk at the Organization for Economic Cooperation and Development in Paris. “There is a change in culture which is spreading, probably rapidly,” he said. “Most people are seeing the consequences of this poor management. They need to catch up pretty quickly, but in a sense there is not much alternative.” Popular Support In a poll published May 8, 54 percent of 1,000 people surveyed by ALCO for the Proto Thema newspaper said they supported the bailout and the accompanying wage and pension cuts and tax increases. A separate poll of 1,030 people by Kappa Research on May 6, the day Greece’s parliament debated the austerity program, showed 55.2 percent accepted the measures to stave off bankruptcy. Papandreou’s government has already struggled with corruption in its ranks. Deputy Culture Minister Angela Gerekou resigned on May 18 after the government said her husband owed about 5.5 million euros in unpaid taxes and fines. In another case, former Pasok Transport Minister Anastassios Mantelis said when speaking last month to a bribery probe that he received money from the Greek unit of German engineering company Siemens AG in 1998, according to Kathimerini newspaper . The OECD’s Giorno said controlling the budget depends on improving health care and education, steps that would help fight corruption. As long as “the quality of services is really poor,” Greeks will continue to make under-the-table payments to doctors for better treatment, Giorno said. They’ll also spend on private education because of dissatisfaction with state schools and engage in the “national sport” of tax evasion, he said. To contact the reporters on this story: Natalie Weeks in Athens nweeks2@bloomberg.net ; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

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ESPN Zone To Close

June 9, 2010

LOS ANGELES — The Walt Disney Co. plans to close five ESPN Zone restaurants in Baltimore, Chicago, New York, Las Vegas and Washington, D.C., saying the economics of the business were “very challenging.” The company said Wednesday that the two ESPN Zone restaurants in Los Angeles and Anaheim will remain open and operated by other companies. The sports bar and restaurant had arcade games and big-screen TVs and served up burgers and beer. The first ESPN Zone opened in Baltimore in July 1998 in the tourist attraction area known as Inner Harbor.

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Studying Economics In College Can Influence Your Political Affiliation, Fed Study Finds

June 7, 2010

Taking an economics course in college may have swayed your political leanings, according to a new study by the Federal Reserve’s Bank Of New York. In fact, that undergrad Macro class may still be shaping how you view the world. The Fed’s study (hat tip to the New York Times ‘s Economix Blog ) delved into how the content of a person’s education influences their civic behavior, including party affiliation, political donations, and volunteerism. Though the study’s authors acknowledge that students choosing to study economics may already be right-leaning, they found that economics courses are correlated with GOP affiliation: The number of economics courses completed by the graduates of these… schools significantly decreases the likelihood that a person does not join a political party and the likelihood of joining the Democratic party, while the number of economics courses is positively related to the likelihood of joining the Republican party. For example, taking five economics courses is associated with an eight percent decrease in the likelihood of joining the Democratic party and more than a 10 percent higher chance of joining the Republican party. Interestingly, the report reveals that course choices (and not just the level of a person’s education) affects civic behavior and opinions on social issues many years after graduation. For instance, the study found that business majors — which are treated separate from economics majors — are less likely than students with other majors to have voted in the 2000 presidential election or volunteer for a cause, political or otherwise. Those taking economics classes, the study found, were less inclined to favor “regulation or government intervention affecting prices for specific goods and services, including wages and salaries.” The authors surveyed 2,000 graduates who attended one of four large public universities in Indiana, North Carolina, Florida, or Nebraska during the years 1976, 1986, or 1996. Here’s more from the study: “Those who completed more economics courses were more likely to agree that tariffs reduce economic welfare and less likely to think that trade deficits adversely affect the economy. The more economics courses taken the less likely respondents were to believe that government should regulate oil prices, and the more likely they were to believe that the minimum wage increases unemployment. Finally, the more economics courses taken the less likely respondents were to believe that government that the distribution of income should be more equal.” READ the study here: Is Economics Coursework_ or Majoring In Economics_ Associated With Different Civic Behaviors –

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Chao Deng: Will China’s Cranes Keep Rising?

June 6, 2010

Many investors are betting heavily this will be the Chinese century. But before racing to invest in China, listen carefully to James Chanos, a New York-based hedge fund manager whose fame and fortune soared after being among the first to bet against Enron and other high-flying stocks that later collapsed. Since late last year, Mr. Chanos has stirred intense debate around the world with his repeated warnings that China’s hot property markets represent a dangerous “bubble.” During a recent conversation with students in a business journalism class at Columbia University’s Graduate School of Journalism, Mr. Chanos said China’s property markets, primarily high-rise buildings such as offices and condos, are “on a treadmill to hell.” He has made similar comments in interviews with Charlie Rose, The New York Times and other news organizations. Some respected commentators, including New York Times columnist Thomas Friedman, disagree with Mr. Chanos. They say Chinese officials are keenly aware of the potential threat and already have taken significant action to avert trouble. Whatever the case, Mr. Chanos’s thinking – and the views of his critics – are worth a closer look because of Mr. Chanos’s remarkable track record and because of China’s rapidly growing impact throughout the world. The Outlook Mr. Chanos, a Yale graduate and the founder of Kynikos Associates, has achieved international fame as a “short seller,” a technique that essentially involves betting that an investment’s price will sink. Mr. Chanos says he doesn’t know precisely when the bubble will burst but that short sellers can prosper with strategically-placed bets. How? He says commodity stocks, such as those of companies in the iron ore, copper, nickel and steel businesses that have prospered due to Chinese construction, probably will tumble when the Chinese building boom halts. He also is looking for opportunities in stocks of Australian and Brazilian companies that sell raw materials to China. He declined to name specific stocks. Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing, has also kept a close check on China’s booming property markets. Prices of residential houses in some areas like Shanghai have dipped recently. But he says it’s “premature” to conclude the boom is over, given that in 2008, buyers regained confidence after a slight price drop off, and that housing prices in China subsequently recovered. While Chovanec does not characterize himself as “short on China,” he is skeptical that the Chinese government is taking enough steps to curb speculation. Even as China adopts new policies to try to steer clear of further inflation, the country is not immune, according to James Rickards, a Senior Managing Director at Omnis Inc. Rickards, who described China as “the greatest bubble in history” to Bloomberg, said in a phone interview that exogenous factors outside of China’s control may still cause a collapse in the country’s housing market or stocks. Some respected commentators have taken strong issue with Mr. Chanos’s comments. Writing in The New York Times, Tom Friedman said he is “wary of the argument that China’s economy today is just one big short-inviting bubble, à la Dubai.” “I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution),” Mr. Friedman wrote. “But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).” Experts who predict continued prosperity for China argue that the Chinese government already has taken influential steps to restrain surging prices. “The Chinese government is not being draconian yet,” said Jim Rogers, co-founder of the Quantum Fund, in a phone interview. “They’re taking gradual steps.” Rogers said China’s urban centers near the coast are indeed in a property bubble, but that the idea China’s stock market is in trouble is “embarrassing.” He said it is more likely that the U.S. is in a bubble than China, considering that China’s stock market is down 65 percent from its record high. While Mr. Rogers says there may still be investment opportunities in China’s real estate market, he said he isn’t buying property there. When asked whether commodity values could drop if China’s property market suffers, Rogers said maybe, but many more factors are at play in determining the commodity market. Daniel Rosen of Rodium Group, a New York-based firm that studies Chinese markets, said in an email that one shouldn’t underestimate the durability of broader demand for commodities–and that strategies like Chanos’ to short commodities related to the Chinese property market are not well-founded. The Chinese government can control the real estate bubble — and even with price corrections in the upper-end of the housing sector, there should be “a fairly soft landing” in the mass market, according to Rosen. Can China Do More? Some experts believe China could do more to discourage buyers from flipping real estate. The country still wants to retain its engine of growth, so it essentially has “one foot on the accelerator and one foot on the break,” said Patrick Chovanec. Among the ideas suggested by Chovanec: China should encourage its citizens to invest abroad by giving them a greater range of investment options in global markets. At present, Chinese people have few outlets to place their savings, which is why many have resorted to pouring money into domestic real estate. Whether Chinese leaders will have the wisdom to steer clear of a crisis and help China’s economy to remain competitive in the longer term remains to be seen. But this much is clear: Chanos’s highly charged views have touched off a debate that is likely to attract increased world-wide attention amid continued nervousness about the roller-coaster ride of world stock prices recently.

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Warren Mosler: G20 Says Expansionary Fiscal Policy Not Sustainable

June 6, 2010

The G20 has dropped its support for fiscal expansion. The deficit hawks are prevailing. But why is that? We all either know or should know that operationally Federal spending is not constrained by revenues, as Chairman Bernanke stated last year, when asked on ’60 Minutes’ by Scott Pelley where the funds given to the banks came from : “…we simply use the computer to mark up the size of the account that they have with the Fed.” We know that when the Fed spends on behalf of the Treasury it simply credits a member bank or foreign government’s reserve account at the Fed. We know that a US Treasury security is a credit balance in a securities account, also at the Fed. We know that buying a Treasury security means US dollars (numbers on the Fed’s spreadsheet) shift from a Fed reserve account to a Fed securities account, which adds to the ‘national debt.’ We know that government deficits = ‘non government’ saving (net dollar financial assets) to the penny, as a matter of national income accounting. And we know paying off the Treasury securities happens continuously when Treasury securities mature and the Fed simply shifts those US dollars from the securities account back to a Fed reserve account (including the interest). So why should we care if US dollars are in a Fed reserve account or a Fed securities account? We should not, yet most still do. There are two featured sides to the argument, pro and con, deficit hawks and deficit doves. The deficit hawks aren’t the problem. They have no argument that makes any sense as a point of simple monetary operations. There is no such thing as the Federal Government running out of money, being dependent on foreigners or anyone else for funding to be able to spend, and the US is not the next Greece. The problem is the deficit doves featured by the media don’t understand actual monetary operations and reserve accounting, and so they take the same ‘fundamentally wrong’ positions as the deficit hawks. The difference is nothing more than timing and degree. In effect, the media is showing only one side of the argument. To be a credible media deficit dove, you agree deficits are ‘bad’ but only in the long term, arguing that in the short term we need tax cuts or spending increases now, and deficit reduction later. You agree that deficits can be too high, but argue they have been higher, particularly in World War II, so current levels should be easily manageable, further agreeing there is a level that could not be manageable. You agree markets could be ‘unfriendly’ and a lack of confidence could translate into far higher interest rates, but argue that the current low rates for Treasury securities are the markets telling us that currently they do have confidence in the US and they are eager to fund current deficits. You agree that ‘bang for the buck’ matters and support tax cuts and spending increases based on higher ‘multipliers.’ The two ‘sides of the story’ are in fact on the same side, just with differing degrees. The media does not feature the true deficit dove story. Nor do any of the true doves have even a small piece of the administration’s ear, or the ear of anyone in Congress willing to speak out. There are maybe a hundred of them, including many senior economics professors. The nagging question is why this professional, highly educated, highly experienced collection of true doves, who happen to be correct and could get us back to full employment and prosperity in reasonably short order, does not get a fair hearing. The answer may be credentials. My BA in Economics from the University of Connecticut in 1971 doesn’t cut it, nor the fact that the very large fund I managed was the highest rated firm for the time I ran it. And my net worth never getting anywhere near a billion hasn’t helped either. Seems billionaires get celebrity status and airtime for just about anything they want to say. The same is true of the Economics professors who’ve got it right. Without being from and at the usual ‘top tier’ schools none can even get published in main stream economics journals, where submissions featuring obvious accounting realities are routinely rejected. In fact, any economist who states accounting identities and operational realities such as ‘deficits = savings’ or ‘loans create deposits’ or ‘Federal spending is not constrained by revenues’ is immediately labeled ‘heterodox’ and unworthy of serious mainstream consideration. Even the late Wynne Godley, who did have reasonable credentials as head of Cambridge Economics, and was the number one UK economics forecaster, was labeled ‘unorthodox’ because his mathematical models featured the deficits = savings accounting identity. The breakthrough could happen at any time, in addition to economists at the ‘right schools’ or right financial sector firms, there are government officials with sufficient credentials to lead the breakthrough, including the head of the CBO and OMB, the Treasury Secretary and Fed Chairman, as well as former Fed officials, particularly from monetary operations. Unfortunately Treasury Secretary Geithner, a potential hero due to the celebrity of his office, and the rest of the G20 are acting out the deficit hawk position, acting as if they do indeed believe the US has run out of money, is dependent on its creditors, and could be the next Greece. They speak as if they have no idea that the euro nations operate within a unique institutional structure that puts them in a ‘revenue constrained’ financial position similar to the US States, but with nothing equivalent to the US Treasury to run the countercyclical deficits for them. They speak as if they have no idea that the US, UK, Japan, and others with ‘normal’ central governments taxes function to regulate aggregate demand, and not to raise revenue per se. They act as if they don’t realize they can immediately make the fiscal adjustments- cut taxes and/or increase government spending- that will restore aggregate demand, employment, and output. In short, they act as if they were all still on the gold standard, an institutional arrangement where indeed government spending was constrained by revenues, and, as a consequence, the world witnessed repetitive, devastating deflationary depressions, far worse than what we’ve seen so far in this cycle. The results of unnecessarily allowing a universal lack of aggregate demand to persist are already tragic, and if policy continues along the line of this weekend’s G20 results no relief is in sight, and it could all get a whole lot worse.

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Manufacturing in U.S. Expands Faster Than Forecast as Export Orders Climb

June 1, 2010

By Courtney Schlisserman June 1 (Bloomberg) — Manufacturing in the U.S. expanded in May for a 10th month as factories boosted payrolls to keep up with rising global sales. The Institute for Supply Management’s manufacturing gauge fell less than forecast to 59.7 from 60.4 in April, which was the highest level in almost six years. Readings greater than 50 point to expansion. The group’s export index climbed to the highest level in two decades. Companies including Deere & Co. are seeing orders increase as U.S. and overseas customers update equipment and rebuild inventories. Manufacturing growth and consumer spending may be strong enough to help the world’s largest economy weather any effects from the European debt crisis. “The manufacturing recovery is proceeding at a very quick pace,” said Zach Pandl , an economist at Nomura Securities International Inc. in New York, who projected the index would drop to 59.8. “This strong report should dampen concerns about the European fiscal crisis derailing the U.S. recovery. U.S. growth is on a pretty strong trajectory here and it would take a pretty large shock to derail it.” Stocks rebounded from earlier losses after the report showed manufacturing continued to propel the economic recovery. The Standard & Poor’s 500 Index rose 0.2 percent to 1,091.71 at 10:45 a.m. in New York. Treasury securities trimmed gains, leaving the yield on the benchmark 10-year note at 3.29 percent, the same as late yesterday. Home Building A report from the Commerce Department showed construction spending rose 2.7 percent in April, the most since 2000, as demand related to the end of a tax credit spurred builders to break ground on more houses. Economists projected no change for April, according to the median forecast in a Bloomberg News survey. Economists forecast the manufacturing gauge would fall to 59, according to the median of 76 projections in a Bloomberg News survey. Estimates ranged from 56 to 62. Other reports today showed manufacturing growth from China to the euro region weakened in May. The Purchasing Managers’ Index for China fell to 53.9 in May from 55.7 in the previous month, the Federation of Logistics and Purchasing said. A separate index released by HSBC Holdings Plc and Markit Economics fell to the lowest level in a year. A gauge of manufacturing in the 16-member euro region declined to 55.8 from 57.6 the previous month, London-based Markit Economics said. That’s below an initial estimate of 55.9 released on May 21. Production, Orders The ISM’s production index eased to 66.6 from 66.9, the highest since January 2004. The new orders measure was unchanged at 65.7. The employment gauge climbed to 59.8, the highest level since May 2004. The measure of export orders increased to 62, the highest since December 1988. The measure of orders waiting to be filled rose to 59.5 from 57.5. The index of prices paid fell to 77.5 from 78. The inventory index decreased to 45.6 from 49.4 in April. A figure lower than 50 means manufacturers are cutting stockpiles. Manufacturing has been a leader in the economic recovery as demand from abroad strengthened and firms picked up production and spending to meet demand after a record drawdown in inventories last year. Companies may spend a “considerable while longer” restocking goods, Deutsche Bank Securities economists Joseph LaVorgna and Carl Riccadonna said in a note to clients May 25. Factory Jobs Factories added 101,000 workers to payrolls in the first four months of the year, according to Labor Department data, marking the most successive gains since 2006. Manufacturing production climbed 6 percent in the 12 months to April, the biggest year-over-year gain in a decade, according to figures from the Federal Reserve. One issue that may restrain manufacturing in coming months is the effect of the European debt crisis on U.S. trade. A stronger dollar along with the potential for slower demand from Europe may be a drag on U.S. exports. 3M Co., the maker of 55,000 products from Post-It notes to dental implants, continues to watch the situation in Europe though it has not seen any falloff in its business, Chief Financial Officer Patrick Campbell said May 18. The company expects a “similar level” of business in the second quarter as it had in the first, he said. Europe’s Influence “We are on track to a similar level of performance that we were in the first,” Campbell said during a webcast presentation at the Electrical Products Group conference in Longboat Key, Florida. “Thus far we have not really seen any change in our activity in Europe here as we’ve gone through the second quarter.” Deere, the world’s largest farm equipment maker, on May 19 reported second-quarter profit that topped analysts’ estimates and raised earnings and sales forecasts for a second time this year. The company is benefitting from growing demand in the Americas for machinery such as tractors and signs of stabilization in U.S. construction-equipment markets. “Our performance, no doubt, reflects some improvement in overall economic conditions,” spokeswoman Susan Karlis said on a conference call. “It certainly reflects strong demand for large farm machinery in the United States and other key markets.” To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

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Manufacturing in U.S. Expands for 10th Month as Factories Propel Recovery

June 1, 2010

By Courtney Schlisserman June 1 (Bloomberg) — Manufacturing in the U.S. expanded in May for a 10th month as factories continued to help propel the economic recovery. The Institute for Supply Management’s manufacturing gauge fell to 59.7, higher than forecast, from 60.4 in April, which was the highest level in almost six years. Readings greater than 50 point to expansion. Companies including Deere & Co. are seeing orders increase as U.S. and overseas customers update equipment and rebuild inventories. Manufacturing growth and consumer spending may be strong enough to help the world’s largest economy weather any effects from the European debt crisis. “Manufacturing is still doing very well,” Ken Mayland , president of ClearView Economics LLC in Pepper Pike, Ohio, said before the report. “Fundamentally, confidence has come back to the consumer and so consumer spending is increasing moderately, We’re seeing strong rebounds from capital spending on equipment and exports, and the third factor is inventory stocking.” Economists forecast the gauge would fall to 59, according to the median of 76 projections in a Bloomberg News survey. Estimates ranged from 56 to 62. Other reports today showed manufacturing growth from China to the euro region weakened in May. The Purchasing Managers’ Index for China fell to 53.9 in May from 55.7 in the previous month, the Federation of Logistics and Purchasing said. A separate index released by HSBC Holdings Plc and Markit Economics fell to the lowest level in a year. A gauge of manufacturing in the 16-member euro region declined to 55.8 from 57.6 the previous month, London-based Markit Economics said. That’s below an initial estimate of 55.9 released on May 21. To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

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Commodities&rsquo Biggest Drop Since Lehman Bear Signal

June 1, 2010

By Millie Munshi and Elizabeth Campbell June 1 (Bloomberg) — The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil. The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. Commodities extended their decline today, led by a 2.9 percent slump in crude oil and 3.8 percent drop in copper, as the rate of manufacturing expansion in China and Europe slowed. The pace of growth in a U.S. factory index is also expected to weaken, according to economists’ forecasts before a report scheduled for later today. “As risk-taking falls, expected growth is reduced,” said Colin P. Fenton , the chief executive officer of Curium Capital Advisors LLC in Boston, who was a commodity analyst at Goldman Sachs Group Inc. and at Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.” While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors are dumping holdings at the fastest pace since February. Supply and Demand The Journal of Commerce Industrial Price Commodity Smoothed Price Index reflects clearer signs of supply and demand than futures markets because half the items it tracks don’t trade on exchanges used by speculators, said Lakshman Achuthan , the managing director at the New York-based Economic Cycle Research Institute. The gauge dropped to 25.97 on May 28 from 60.56 on April 30. In June 2008, a month after the index reached its peak, the Paris-based OECD said the U.S. would grow at a 1.1 percent rate the following year. Commodities continued to drop, and in October 2008, the index fell at a 56 percent annual rate, which was then the lowest level since 1949. Almost two months later, the National Bureau of Economic Research, the panel that dates American business cycles, said the U.S. was in a recession. The world’s largest economy shrank 2.4 percent, the worst contraction since 1946. Now, “the collapse in the commodity index is telling us that the peak in global industrial growth is imminent, it’s here right now,” said Achuthan. “Markets are going to have to deal with the reality of a slowdown.” Manufacturing Indexes Slide China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg survey of 18 economists. A gauge of manufacturing in the euro region fell to 55.8 in May from 57.6 the previous month, Markit Economics said. The Institute for Supply Management’s factory index in the U.S. dropped to 59 last month from 60.4 in April, according to the median estimate in a Bloomberg survey of 62 economists. The report is due at 10 a.m. New York time. Europe’s debt crisis is only starting to weigh on global growth, said Michael Aronstein , a strategist at Oscar Gruss & Son Inc. who predicted the 2008 commodity plunge and is betting against a rally this year. The European Union announced an almost $1 trillion loan package last month to halt a slide in the euro and local bonds that threatened to shatter the currency union. Budget cuts across the region may curb demand for Chinese imports as well as commodities including gasoline, aluminum and steel. Sagging Demand Raw materials may drop another 10 percent because the economy is on the “cusp” of deflation, said Philip Gotthelf , the president of Equidex Brokerage Group Inc. in Closter, New Jersey. That would drive the Reuters/Jefferies CRB Index of 19 commodity futures down 22 percent from a Jan. 6 peak and into what investors consider a bear market. The gauge plunged 8.2 percent in May, the most in 18 months. Gotthelf correctly predicted in October 2008 that oil would fall below $40 a barrel and said he is now shorting most commodities and buying gold. The S&P GSCI Total Return Index of 24 commodities declined 2.1 percent as of 10:17 a.m. in London, the most compared with closing prices since May 17. Economic forecasts have been rising. As a group, the OECD’s 30 member nations will grow 2.7 percent this year, the organization said. The expansion will reach 3.2 percent in the U.S. and 10.1 percent in China, according to separate surveys of economists by Bloomberg last month. Fundamental Strength “The market is underestimating the strength of the fundamentals and overestimating the impact that the European sovereign-funding issues will have on growth,” Jeffrey Currie , a Goldman Sachs analyst, said in an interview from London. He says the decline is a “buying opportunity.” Freeport-McMoRan Copper & Gold Inc. Chief Executive Officer Richard C. Adkerson told analysts on a conference call May 11 that while “there is still a lot of uncertainty” about the world economy and its reliance on demand from China, the Phoenix-based mining company sees “some pockets of demand improvement” and is taking steps to ramp up copper production. “There are headwinds, concerns both in Europe and in Asia that are making investors rethink their decisions and maybe take some profits, but I believe that the longer-term growth story remains intact,” said Michael Cuggino , who manages about $6 billion at Permanent Portfolio Funds in San Francisco. “I don’t think it’s a broader slowdown. I think it’s a correction.” Lower Prices Inflation is almost non-existent. In April, U.S. consumer prices unexpectedly dropped 0.1 percent, the first decrease since March 2009, government data show. In the 12 months ended in April, the cost of living rose 2.2 percent, following a 2.3 percent year-over-year gain in March. Bank of America Merrill Lynch says prices will continue to deteriorate. On May 25, the Charlotte, North Carolina-based bank cut its oil forecast for the second half of the year to $78 a barrel from $92. Doane Agricultural Services Co. in St. Louis said May 18 that corn will drop 14 percent by October to $3.25 a bushel. Corn for December was at $3.7625 today. Copper, a commodity former Federal Reserve Chairman Alan Greenspan saw as an economic indicator, declined 7.4 percent in May, the biggest monthly slide since January, and traded at $3.0295 a pound at 10:12 a.m. London time today. Burlap, used for industrial packaging, is down 9.7 percent this year, almost matching its 9.9 percent drop in 2008. Manufacturing Risk “If commodity prices are coming down, there is some downside risk to the manufacturing sector,” said Chris Rupkey , the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s too early to see it in people’s numbers yet, but if I had to guess, people will shave their estimates” for growth this year, he said. Commodities last fell into a bear market in 2008, when the CRB plunged 56 percent in five months as the U.S. suffered the worst financial crisis since the Great Depression, growth contracted on a global basis for the first time since 1981, and the Journal of Commerce index was below zero. Now, a slowdown in Europe, the biggest destination for Chinese exports, will “badly hurt” the Asian country, said Lewis Wan , the chief investment officer for Pride Investments Group, which oversees $150 million in Hong Kong. The Shanghai Stock Exchange Composite Index tumbled 21 percent this year as the government enacted measures to cool its property market. As of last month, the European Union’s economy was expected to grow 1.1 percent this year after contracting 4.1 percent in 2009, the biggest drop since 1992, according to 19 economists surveyed by Bloomberg. Euro Outlook A “wave of fiscal austerity” in Europe will depress the expansion in the region, in the U.S. and in China, according to Arnab Das , the head of global market research at Roubini Global Economics in London. The euro on May 19 dropped to $1.2144, its lowest level against the dollar since April 2006, as Spain was forced to rescue banks and policy makers including Italian Prime Minister Silvio Berlusconi said they would cut spending to combat a financial “tsunami” in the region. Investors are getting less bullish, according to the U.S. Commodity Futures Trading Commission. Speculative net-long positions , or bets on rising prices, for 16 commodity futures have dropped 33 percent in the past three weeks, CFTC data show. That’s the lowest level since Feb. 9, after the net-longs plunged 58 percent from a 20-month high on Jan. 12. “It’s the uncertainty that’s the biggest problem,” said John Kinsey , who helps manage C$1 billion ($995 million) at Caldwell Investment Management Ltd. in Toronto. “Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten. People are afraid this is going to slow the economy. It’s hard to see a way out of it.” To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net ; Elizabeth Campbell in New York at ecampbell14@bloomberg.net .

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Commodities’ Biggest Drop Since Lehman Seen as Bear Signal

June 1, 2010

By Millie Munshi and Elizabeth Campbell June 1 (Bloomberg) — The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil. The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors who stocked up on oil and more than doubled copper prices last year are dumping holdings at the fastest pace since February. Freeport-McMoRan Copper & Gold Inc. said in April that copper sales will drop 7.6 percent this year and Chinese inventories may weaken demand later. “As risk-taking falls, expected growth is reduced,” said Colin P. Fenton , the chief executive officer of Curium Capital Advisors LLC in Boston who was a commodity analyst at Goldman Sachs Group Inc. and at Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.” The Journal of Commerce Industrial Price Commodity Smoothed Price Index reflects clearer signs of supply and demand than futures markets because half the items it tracks don’t trade on exchanges used by speculators, said Lakshman Achuthan , the managing director at the New York-based Economic Cycle Research Institute. The gauge dropped to 25.97 on May 28 from 60.56 on April 30. Economic Indicator In June 2008, a month after the index reached its peak, the Paris-based OECD said the U.S. would grow at a 1.1 percent rate the following year. Commodities continued to drop, and in October 2008, the index fell at a 56 percent annual rate, which was then the lowest level since 1949. Almost two months later, the National Bureau of Economic Research, the panel that dates American business cycles, said the U.S. was in a recession. The world’s largest economy shrank 2.4 percent, the worst contraction since 1946. Now, “the collapse in the commodity index is telling us that the peak in global industrial growth is imminent, it’s here right now,” said Achuthan. “Markets are going to have to deal with the reality of a slowdown.” Europe’s debt crisis is only starting to weigh on global growth, said Michael Aronstein , a strategist at Oscar Gruss & Son Inc. who predicted the 2008 commodity plunge and is betting against a rally this year. Sagging Demand The European Union announced an almost $1 trillion loan package last month to halt a slide in the euro and local bonds that threatened to shatter the currency union. Budget cuts across the region may curb demand for Chinese imports as well as commodities including gasoline, aluminum and steel. Raw materials may drop another 10 percent because the economy is on the “cusp” of deflation, said Philip Gotthelf , the president of Equidex Brokerage Group Inc. in Closter, New Jersey. That would drive the Reuters/Jefferies CRB Index of 19 commodity futures down 22 percent from a Jan. 6 peak and into what investors consider a bear market. The gauge plunged 8.2 percent in May, the most in 18 months. Gotthelf correctly predicted in October 2008 that oil would fall below $40 a barrel and said he is now shorting most commodities and buying gold. Fundamental Strength Economic forecasts have been rising. As a group, the OECD’s 30 member nations will grow 2.7 percent this year, the organization said. The expansion will reach 3.2 percent in the U.S. and 10.1 percent in China, according to separate surveys of economists by Bloomberg last month. “The market is underestimating the strength of the fundamentals and overestimating the impact that the European sovereign-funding issues will have on growth,” Jeffrey Currie , a Goldman Sachs analyst, said in an interview from London. He says the decline is a “buying opportunity.” Freeport Chief Executive Officer Richard C. Adkerson told analysts on a conference call May 11 that while “there is still a lot of uncertainty” about the world economy and its reliance on demand from China, the Phoenix-based mining company sees “some pockets of demand improvement” and is taking steps to ramp up copper production. “There are headwinds, concerns both in Europe and in Asia that are making investors rethink their decisions and maybe take some profits, but I believe that the longer-term growth story remains intact,” said Michael Cuggino , who manages about $6 billion at Permanent Portfolio Funds in San Francisco. “I don’t think it’s a broader slowdown. I think it’s a correction.” Lower Prices Inflation is almost non-existent. In April, U.S. consumer prices unexpectedly dropped 0.1 percent, the first decrease since March 2009, government data show. In the 12 months ended in April, the cost of living rose 2.2 percent, following a 2.3 percent year-over-year gain in March. Bank of America Merrill Lynch says prices will continue to deteriorate. On May 25, the Charlotte, North Carolina-based bank cut its oil forecast for the second half of the year to $78 a barrel from $92. Doane Agricultural Services Co. in St. Louis said May 18 that corn will drop 14 percent by October to $3.25 a bushel. Copper, a commodity former Federal Reserve Chairman Alan Greenspan saw as an economic indicator, declined 7.4 percent in May, the biggest monthly slide since January, and traded at $3.07 a pound at 11:41 a.m. Singapore time today. Burlap, used for industrial packaging, is down 9.7 percent this year, almost matching its 9.9 percent drop in 2008. Manufacturing Risk “If commodity prices are coming down, there is some downside risk to the manufacturing sector,” said Chris Rupkey , the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s too early to see it in people’s numbers yet, but if I had to guess, people will shave their estimates” for growth this year, he said. Commodities last fell into a bear market in 2008, when the CRB plunged 56 percent in five months as the U.S. suffered the worst financial crisis since the Great Depression, growth contracted on a global basis for the first time since 1981, and the Journal of Commerce index was below zero. Now, a slowdown in Europe, the biggest destination for Chinese exports, will “badly hurt” the Asian country, said Lewis Wan , the chief investment officer for Pride Investments Group, which oversees $150 million in Hong Kong. The Shanghai Stock Exchange Composite Index tumbled 21 percent this year as the government enacted measures to cool its property market. Euro Outlook As of last month, the European Union’s economy was expected to grow 1.1 percent this year after contracting 4.1 percent in 2009, the biggest drop since 1992, according to 19 economists surveyed by Bloomberg. A “wave of fiscal austerity” in Europe will depress the expansion in the region, in the U.S. and in China, according to Arnab Das , the head of global market research at Roubini Global Economics in London. The euro on May 19 dropped to $1.2144, its lowest level against the dollar since April 2006, as Spain was forced to rescue banks and policy makers including Italian Prime Minister Silvio Berlusconi said they would cut spending to combat a financial “tsunami” in the region. Investors are getting less bullish, according to the U.S. Commodity Futures Trading Commission. Speculative net-long positions , or bets on rising prices, for 16 commodity futures have dropped 33 percent in the past three weeks, CFTC data show. That’s the lowest level since Feb. 9, after the net-longs plunged 58 percent from a 20-month high on Jan. 12. “It’s the uncertainty that’s the biggest problem,” said John Kinsey , who helps manage C$1 billion ($995 million) at Caldwell Investment Management Ltd. in Toronto. “Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten. People are afraid this is going to slow the economy. It’s hard to see a way out of it.” To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net ; Elizabeth Campbell in New York at ecampbell14@bloomberg.net .

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