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Why the Slowdown Went Global
Tweet Share on Facebook December 7, 2008 CommentFrom the mind of JPMorgan economist Jim Glassman:
"The housing, credit debacle was supposed to be a US issue. So, how come virtually every economy on the planet is downshifting—and has been since last winter—and by proportionately similar amounts? The rhyme.
Two reasons in particular stand out. First, the speculative surge in oil prices—how else can a $100
dollar plunge in the per barrel price of petroleum since July 15 be explained?—hit everyone, everyone who consumes more oil than they produce. If the price of oil were a reflection of fundamental demand, then a drop in the price of oil would cushion but not boost demand. But if the price is the reflection of outside—financial speculation—it’s a different matter.Second, the transformation of manufacturing in this past decade that “outsourced” many factory jobs to east Asia meant that economies like China that have specialized in the assembly business have inherited the natural volatility of the goods-producing economies, reflected in inventory behavior. In other words, the outsourcing of factory jobs also outsourced the natural volatility of good to the developing economies. The slowdown in the developed economies then radiates through the developing economies as well."
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Barack Obama, You're Bringing Me Down
Tweet Share on Facebook December 7, 2008 Comment (3)"The economy is going to get worse before it gets better," Barack Obama said on Meet the Press. Twice. Maybe I should stop listening. As I learned today in the NY Times:
"The most concrete thing that neuroscience tells us is that when the fear system of the brain is active, exploratory activity and risk-taking are turned off. The first order of business, then, is to neutralize that system. This means not being a fearmonger. It means avoiding people who are overly pessimistic about the economy. It means tuning out media that fan emotional flames. Unless you are a day-trader, it means closing the Web page with the market ticker. It does mean being prepared, but not being a hypervigilant, everyone-in-the-bunker type."
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November Jobs Report: 533,000 Reasons for Obama to Change Direction
Tweet Share on Facebook December 5, 2008 Comment (5)It's not just the we had the worst monthly job losses (-533k) in 34 years, look at the terrible revisions to previous months. Turns out we lost 403k in September and 320k in October. That equals 1.2 million in just 3 months.
Now interestingly, I got an email from the econ team at Goldman Sachs last night that argued for a "more diversified" policy approach to the economy from the Obama administration. That is wonkspeak for tax cuts. Even if the $500 billion+ stimulus spending plan has a positive effect, it is going to come too slow. Tax cuts can work much faster. Withholding schedules can be changed. Payroll tax deductions stopped. In addition, there should be a tax holiday for corporate taxes along with a big rate cut. All this would boost confidence and let individuals and business keep more of what they earn. Fear is killing this economy.
A bit more from GS to really depress you:
"If real spending falls further in the first quarter of 2009, as we currently project, it will not take much, only about a 1% annualized drop, to make it the largest cumulative correction since World War II. The current record is the slump precipitated by the credit controls of 1980, which pushed real spending down at an 8.6% annual rate in the second quarter of that year following a 0.6% drop in the first quarter.
As remarkable as the current correction in real spending may seem, it is more remarkable that it is occurring in the face of a sharp drop in energy prices. In other words, nominal consumer spending is on course for about a 9% annualized decline this quarter. If this figure holds, it would be the largest quarterly setback in nominal spending since World War II."
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Pethokoukis Web Picks
Tweet Share on Facebook December 4, 2008 Comment (2)1) Larry Kudlow has had enough of Bailout Nation.
2) The fabulous Fausta has noticed that Obama has ditched his windfall profits plan for now.
3) Free Market Politics is all over the Big 3 bailout.
4) Over at Growthology, economist Tim Kaine depresses me.
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Barack Obama and Arnold Schwarzenegger: A Warning from California?
Tweet Share on Facebook December 4, 2008 Comment (9)Big deficits. Lots of infrastructure spending. Fun economic facts about California and Gov. Arnold Schwarzenegger, courtesy of the WSJ. Team Obama should pay close attention:
1) The Golden State is facing a $40 billion deficit over the next two years with a $145 billion budget that has grown 40 percent during the past four years.
2) Last month the Governor called for a 1.5-percentage-point increase in the state sales tax rate for three years. This would bring the state and local sales tax rate in many localities, like populous Orange County, to 9.25%.
3) Arnold also wants to triple the car tax, which is the same reviled tax that got the previous Governor, Gray Davis, recalled from office. The last time the sales tax was raised, in 1991, California's retail sales slumped to their lowest ebb in 30 years.
4) The state has a debt of $60 billion and the worst credit rating among the 50 states. But in November Californians approved a $10 billion bond for a high-speed rail system that will add $600 million in annual debt servicing costs to the state budget every year until the middle of the century.
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Bill Gross: The Death of the Long Boom and Dow 5000
Tweet Share on Facebook December 4, 2008 Comment (6)Bill Gross of Pimco basically tells us America is doomed, that we are abandoning the 25-year economic experiment that brought this nation and the world fabulous wealth. Free markets lose, government wins (my bold):
1) We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. Welcome to a new universe stock market investors!
2) Animal spirits, and with them the entrepreneurial dynamism of risk-taking has likely experienced a body blow. Not only have dancers on the financed-based dance floor been shown the exit à la Chuck Prince, but those that remain have been publicly chastened and handcuffed. Golden parachutes, options, executive compensation and bonuses themselves are now at risk. Care to climb to the throne of this new world? Well, yes, egos will always dominate, but the rules will be changed and hormone levels lowered.
3) The benevolent fist of government is imperative and inevitable, but it will come at a cost. The champion of free enterprise, Ronald Reagan, knew that growth of the private sector was in no small way dependent on deregulation and the lowering of tax rates. Now that those trends have necessarily come to an end, no rational investors should expect innovation and productivity to be unaffected. Profit and earnings per share growth will suffer.
4) My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.
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Will U.S. Treasury Issue 'Carter Bonds'?
Tweet Share on Facebook December 4, 2008 Comment (2)The Asia Times reports: "Japanese economists, increasingly concerned that the United States might seek to pay its enormous and growing debt obligations in a weakened US dollar, are looking to the possibility of US Treasuries being issued in yen."
When I read this, I started to feel a growing sense of malaise. Then I realized why as I read further: "The idea of issuing foreign currency-denominated US Treasures is not new. The Jimmy Carter administration, buffeted by the two oil crises of the 1970s, sold "Carter bonds", denominated in German marks and Swiss francs, in 1978 to attract foreign investors into Treasuries."
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Cutting Taxes to Save the Economy
Tweet Share on Facebook December 4, 2008 Comment (2)File under "Barack Obama Would Rather Go Hunting With Sarah Palin Than Do This." Stuart Butler at the Heritage Foundation offers up a long-term tax plan to right the economy:
1) Further extend or make permanent the tax rate reductions of 2001 and 2003, which are set to expire in 2010, including a repeal of the death tax.
2) Reduce the corporate tax rate to 25 percent or lower for at least 10 years, and preferably permanently. Not only would this reduction improve the after-tax return on investment, but it would also make American exporters more competitive with foreign firms, which generally enjoy lower corporate rates than U.S. firms.
3) Further reduce marginal income tax rates for at least five years, which would improve anticipated future after-tax family income.
4) Extend so-called “bonus appreciation” for at least two more years. This allows a business to deduct 50 percent of the cost of equipment in the year of purchase and so reduces the effective cost of the equipment. Currently this policy is set to expire this year.
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The Paulson Plan to Save Housing
Tweet Share on Facebook December 4, 2008 CommentSave the homeowner, save the world. At least that is the line of thinking that the Treasury department seems to be coming around to. Reports say that Team Paulson is considering the following plan: 1) Treasury would encourage banks to issue mortgages at 4.5 percent by offering to purchase securities underpinning the loans; b) The purchases would be funded by borrowing money at 3 percent; c) Christopher Meyer of Columbia University thinks the move would help 1.5-2.5 million people buy homes.
I have a few thoughts and observations:
1) Apparently Treasury thinks it can make money off the spread. Also just like TARP, Uncle Sam is telling us that the plan "costs money. It costs money because it will save money --by sowing the seeds of recovery."
2) That being said, the plan apparently would only apply to home buyers, not those who want to refinance their homes. Going the latter route is more costly, though it would save homeowners some $200 billion a year.
3) While comparisons are being made to the Meyer-Glenn Hubbard plan, that idea was far more expansive.
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Chrysler Exec: Save Us or the Economy Goes Into a Depression
Tweet Share on Facebook December 3, 2008 Comment (9)And speaking of creating a climate of economic fear, here is Chrysler vice chairman Jim Press: "We're on the brink with the U.S. auto manufacturing industry," Press told the AP. "If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it's a huge blow. It could trigger a depression."
