-
Bernanke Puts a Low Speed Limit on Growth
Tweet Share on Facebook November 20, 2007 Comment (1)The Federal Reserve released its first quarterly economic forecast today, projecting economic growth, unemployment, and inflation for the next three years.
Here are the Fed's numbers—economic growth: 1.8 to 2.5 percent for 2008, 2.3 to 2.7 percent for 2009, and 2.5 to 2.6 percent for 2010; unemployment: 4.8 to 4.9 percent for 2008, 4.8 to 4.9 percent for 2009, and 4.7 to 4.9 percent for 2010; core inflation: 1.7 to 1.9 percent for 2008, 1.7 to 1.9 percent for 2009, and 1.6 to 1.9 percent for 2010.
My take: While that may be a great forecast for bond investors—unspectacular growth with low inflation—most Americans should be less than thrilled by it. Here is the key sentence from the report: "Economic activity was projected to expand at a pace broadly in line with participants' estimates of the rate of expansion of the economy's productive potential in 2009 and to continue at much the same pace in 2010."
In other words, growth at 3 percent or more is inflationary. Yuck. Compare those numbers with the 1983-1990 Reagan boom when annual growth in gross domestic product averaged 4.1 percent. The Clinton boom, too, was right around 4 percent. If Bernanke and company are right, that's all the more reason for America to adopt policies to make us more innovative and productive so the economy can grow faster than the low-ball Bernanke speed limit.
-
Is the Market Forecasting a Recession?
Tweet Share on Facebook November 19, 2007 CommentAnother lousy day on Wall Street as I write this, but Mr. Market isn't making his recession call quite yet, according to Jason Trennert of Strategas Research:
We've constructed the Strategas Bellwether Index out of those stocks most highly correlated with GDP—the fit between the index and GDP growth is 74%. Worth noting, the index has shown a slowdown in growth, but still does not appear as weak as during the 2001 recession.
-
Bond Market to Bernanke: You're Blowing It!
Tweet Share on Facebook November 19, 2007 CommentEconomist James Glassman of JPMorgan notes that while the Federal Reserve will be unveiling its new quarterly economic forecasts tomorrow, the bond market is already doing some forecasting of its own—and the message is a total downer:
Market forecasts, those embedded in asset prices, however, have proven to earn their keep. Three numbers in particular are highly informative: 4.5% (the Fed's interest rate target); 3.31% (2-year Treasury note yield); 4.14% (10-year Treasury yield). Market prices imply that policy rates are still 100 basis points above equilibrium levels. The Federal Open Market Committee says the risks are balanced. Few outside the Beltway think so. ... The market view that the Fed will continue to cut rates, including a high probability that this will happen again on December 11, isn't about the upcoming data. It is about a realization that Federal Reserve policy needs to become accommodative, and soon, if there is any hope of cushioning the economy from the damage of drying credit pipelines. Forecasts are helpful, but forecasts can't incorporate what we can't see. And markets don't like what they see.
-
Why China Won't Dump the Dollar
Tweet Share on Facebook November 16, 2007 Comment (1)Kurt Brouwer over at the new-and-improved Fundmastery blog tells us why China won't dump the dollar:
We have known for a long time that those countries that export heavily to the U.S. do not want to see lots of appreciation in their own currencies because that would make their products less competitive here. Among these exporters, China is the largest. ... If China dumps dollars, then the dollar might fall and its own currency would probably appreciate versus the dollar, thus exacerbating a problem it already faces. In addition, China does not want to do anything that would help push the U.S. into a recession because when the U.S. economy slows, the rest of the world does too. In conclusion, it seems unlikely that China would dump dollars. In addition, China will probably have to keep increasing its dollar reserves for some time to come.
-
What I Am Reading Today
Tweet Share on Facebook November 16, 2007 Comment1) Kimberly Strassel of the Wall Street Journal deftly analyzes Rudy Giuliani's campaign strategy.
2) Tim Kane of the Heritage Foundation dismisses the link between the dollar and the trade deficit.
3) Russ Roberts of George Mason University tells "Why We Trade."
4) CNBC's Larry Kudlow is impressed by a peppier Fred Thompson.
4) Barry Ritholtz of the Big Picture sees inflation everywhere.
5) Donald Luskin of the Conspiracy to Keep You Poor and Stupid puts the beatdown on 2012/2016 presidential candidate Eliot Spitzer.
-
What the Democratic Debate in Las Vegas Taught Me
Tweet Share on Facebook November 16, 2007 CommentOK, I admit it. I did not watch the Democratic debate from Vegas live. Sorry, Hillary, Barack, and John, but Michael, Pam, and Dwight come first on Thursday. (Surprise, surprise, The Office did a little dramedy last night. Nice.) But I did TiVo the debate, and when I got around to watching it (also, I admit, after watching Survivor: China), I was surprised at what I learned:
1) Massive tax hikes on the middle class are suddenly a big vote-getter. Who knew? Here's a chunk from Barack Obama about his idea to make Social Security solvent by raising the income cap on payroll taxes:
I've heard [Hillary Clinton] say this is a trillion-dollar tax cut on the middle class by adjusting the cap. Understand that only 6 percent of Americans make more than $97,000, so 6 percent is not the middle class—it's the upper class. ... But understand, this is the top 6 percent, and that is not the middle class.
OK, so this is Obama's deal: He wants to reduce the take-home pay of more than 10 million "upper class" Americans today—and if he wants to call, say, a mid-level marketing manager in suburb of New York or Chicago or L.A. "upper class," more power to him—and subject those folks to a $1.3 trillion tax increase.
To what end? So future retirees from, in all likelihood, a far wealthier America can receive a richer set of benefits because those benefits are linked to our rising standard of living rather than inflation. I love that sort of bold, contrarian thinking. I am sure his odds in the popular RealClearPolitics betting markets are surging even as I write this. Wait. I just checked. Obama's odds have actually dipped another percentage point to 16 percent vs. 71 percent for Hillary. Just wait.
2) One of Bill Clinton's big accomplishments was really a bust. I recently read a story about how many lifelong Republican CEOs are planning on abandoning the GOP in 2008 and voting for Hillary Clinton. And it was clear from their comments that they're betting on Hillary really being Bill 2.0 when it comes to economic policy. Yet when Hillary was asked whether the North American Free Trade Agreement was a failure, here was her answer: "NAFTA was a mistake to the extent that it did not deliver on what we had hoped it would, and that's why I call for a trade timeout when I am president." Translation: NAFTA was a mistake. By the way, the unemployment rate when NAFTA took effect in 1994 was a lofty 6.6. percent vs. 4.7 percent today, as roughly 30 million net new jobs have been added.
3) Competing in the global economy doesn't matter. Would you think that in a two-hour debate the subject of making America more productive and innovative so we can better compete with rising Asia might have earned a mention or two? Nope. Just a lot of talk about unfair trade and dangerous products from China. Just remember: Rising worker productivity will determine our future standard of living.
-
Does America Really Need a Recession?
Tweet Share on Facebook November 15, 2007 CommentGiven the credit crunch, mortgage meltdown, and higher oil prices, it's certainly understandable why people would be wondering if the economy might be headed for a recession. But some folks have gone further. Some almost seem to want a recession. Newsweek columnist Robert Samuelson recently wrote of the "often-overlooked benefits" of economic downturns. They dampen inflation and punish financial speculation, for instance. What's more, Samuelson argues, a recession would trigger "a faster—and healthier—drop in home prices. ... By making homes more affordable, a quick and sharp price drop might revive housing more rapidly."
Another apparent recessionista, to borrow lingo from my pal Larry Kudlow, is economist John Makin of the American Enterprise Institute. "A recession," Makin wrote recently, "is the most desirable outcome" to the deflating housing bubble. Avoiding a downturn, he says, through more Fed rate cuts "would involve so much government intervention and so much reinflation by the Fed that risk-taking would be encouraged even further, resulting in an even larger bubble and a larger subsequent recession."
Heck, Democrats might want to get on this gloomy train before it leaves the station. Consider this: Two of America's big economic problems, according to the party's various presidential candidates, are rising income inequality and our big trade deficit. Guess what, a recession— even a depression—might be a great cure for both of them. According to income inequality data collected by academics Thomas Piketty and Emmanuel Saez, the top one tenth of 1 percent of Americans received 3.73 percent of income, including capital gains, in 1928. By the 1939, that number had dropped to 1.77 percent.
Another great decade for income equality was the 1970s. The top 10 percent took in 34 percent of income vs. 48 percent in 2005, the most recent year Piketty and Saez have run numbers for. Of course, the '70s was a decade where stocks went nowhere, inflation raged out of control, and the economy shrank in 1 out of every 3 months. But hey, we were all in that sinking boat together. Certainly a recession today might help make incomes more equal by dragging down the stock market and hurting upper-income people with big portfolios.
Terrible economic times are also great for turning trade deficits into trade surpluses. As George Mason University economist Don Boudreaux has noted in his Café Hayek blog:
Only 18 of the 120 months of that dreary decade [the 1930s] did the United States run a trade deficit. ... For each of the remaining 102 months of the decade of the 1930s, the U.S. ran a trade surplus. On an annual basis, the only year of the decade of the 1930s that the U.S. ran a trade deficit was 1936; in each of the other nine years the U.S. ran a trade surplus. And for the Depression decade taken as a whole, the U.S. ran a substantial trade surplus. Exports over those economically challenging ten years totaled $26.05 billion while imports totaled only $21.13 billion. In other words, the U.S. trade surplus during the entirety of the 1930s was nearly 19 percent the size of the total value of U.S. exports during that decade.
And what of today? Another dose of tough fiscal medicine might work its terrible magic again, argues economist Michael Darda of MKM Partners:
If the U.S. moves toward anti-growth policies after the 2008 elections, the current account deficit likely would fall faster. ... Tax hikes, trade protectionism, and re-regulation would sap American growth relative to the growth in the rest of the world. This would lower U.S. demand for foreign products and thus reduce the current account deficit. In other words, the standard of living would fall (or rise more slowly) and so would the trade deficit (this occurred during the Great Depression).
My take: Of course, we could go a different route and focus on continuing to grow the economy and boosting all incomes that way, just as we did in the late 1990s and here again the past three years. Furthermore, we could relax the Dobbsian antitrade rhetoric and view the trade deficit as a cyclical phenomenon that already seems to be reversing itself to some extent, based on the latest trade data. And longer term, continued global growth will enrich consumers in developing nations like India and China so they can buy more of our goods. I think I'll take a pass on a recession and vote for more economic growth instead.
-
Kudlow: Dollar Talk May Be Followed by Action
Tweet Share on Facebook November 15, 2007 CommentWisdom worth considering from the outstanding blog of CNBC's Larry Kudlow after President Bush tried to talk up the tumbling dollar:
The mere fact that the president talked at some length about the greenback is significant. It could possibly reflect administration thinking that it's time to be more rhetorically aggressive on the greenback. Mr. Bush clearly is inferring that the dollar should be trading more strongly at a higher exchange rate. ... It would not be surprising if [Treasury Secretary Henry] Paulson soon delivers a beefed-up dollar support statement of his own at the G7 finance ministers meeting in Cape Town, South Africa. Nor would it be surprising if other G7 ministers echoed the U.S. view. ... Fundamentally, U.S. economic growth and inflation are virtually identical to that of Europe. Interest-rate differentials have narrowed substantially. A kind of trading bubble seems to have developed around the euro, probably because while the Fed acted wisely to reduce its target rate to settle down U.S. financial markets during the sub-prime credit turmoil, the Treasury failed to offer any official support for a steady greenback. Official support should begin with some stronger-dollar oratory, such as President Bush offered in the television interview. Such support could also develop into some coordinated dollar purchases by the G7 to back up the rhetoric. Additionally, President Bush may offer a sizable corporate tax cut in his next budget which will be buttoned down after Thanksgiving. That too would strengthen the dollar. Lowering corporate tax rates would promote economic growth, enhance U.S. competitiveness relative to already low corporate tax rates in Europe, and fatten worker wages.
-
A Techno Fix for Climate Change and Peak Oil
Tweet Share on Facebook November 15, 2007 CommentIf you're worried about climate change and/or peaking world oil production, it seems to me that you have two choices. One: Accept a dramatic reduction in your and everybody else's standard of living as we effectively deindustrialize and return to the farm fields. Option Two: Push to make the economy as innovative as possible and as rewarding to entrepreneurs as possible. This piece of news from Technology Review (Efharisto to the FuturePundit) pertains to the latter point:
A company in Japan has developed a novel way of making solar cells that cuts production costs by as much as 50 percent. The photovoltaic (PV) cells are made up of arrays of thousands of tiny silicon spheres surrounded by hexagonal reflectors. The key advantage of the system is that it reduces the total amount of silicon required, says Mikio Murozono, president of Clean Venture 21 (CV21), based in Kyoto, Japan. "We use one-fifth of the raw silicon material compared with traditional PV cells," he says.
-
The Oracle of Omaha Is Blind to the Death Tax's Effects
Tweet Share on Facebook November 15, 2007 CommentSo multibillionaire investor Warren Buffett is worried that the permanent elimination of the "estate" or "death" tax (the tax is to be eliminated in 2010 and then reinstated in 2011 as the Bush tax cuts expire) would turn America into a wealth-concentrated plutocracy. He told Congress as much yesterday. What's more, he wants the revenue from estate taxes to be used to pay for lower taxes for lower-income Americans. (Payroll taxes, I guess, since fewer and fewer pay income taxes anymore.) Now an observation and comment or two on what the Oracle of Omaha had to say:
1) Buffett is known for his frugality. I'm surprised he doesn't worry that high estate taxes merely punish saving and investing and wealth building (particularly in the form of small businesses) and create an incentive for consumption and leisure by folks who know they can't easily pass on their wealth to future generations.
2) Estate taxes contribute only around 1 percent of total federal revenues, or about $25 billion. Is risking the possible negative side effects really worth a relative budgetary pittance? And certainly any tax cuts for lower-income Americans could be paid for through spending cuts.
3) This all reminds one of Buffett's plea earlier this year for higher income taxes on the wealthy. He's publicly lamented paying a lower tax rate than his office assistant. But if Buffett so worried that he doesn't pay enough in taxes, he can cut Uncle Sam a check. If he and Bill Gates are worried about creating a financial aristocracy, then they are free to disperse their fortunes—as both, indeed, seem to be doing. Maybe they can get their superwealthy friends to do the same.
4) As I write this, I am sitting in a greenroom at the Capitol Hill studios of the new Fox Business channel and watching humorist-actor Ben Stein opine on the estate tax. His view is that there should be an estate tax as a revenue raiser but that the threshold should be raised from the current $2 million to somewhere in the $10 million to $20 million range so the IRS doesn't nab middle-class folks who were diligent savers throughout their lives. Yet that would raise less revenue and is thus self-defeating if the one reason you support the estate tax is that it's a revenue raiser.
