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Global Economy: Broken by Fear
Tweet Share on Facebook December 3, 2008 Comment (5)Consultant and all-around smart guy David Smick, author of The World is Curved, makes some good points here:
1) The great myth of 2008 has been that the financial meltdown has stemmed solely from a U.S.-initiated subprime mortgage market collapse and the resulting global fallout. If that were the case, the problem would represent defaults and/or write-downs on a fraction of a $1.5 trillion problem. This would hardly be a cheerful development, but nonetheless would represent a situation manageable by global financial markets.
2) A number of analysts talk about eight bubbles ranging from the subprime mortgage loans (again, $1.5 trillion) to emerging market debt ($5 trillion) to outstanding credit card debt ($2.5 trillion) to commodities derivatives ($9 trillion) to commercial real estate ($25 trillion) to foreign exchange derivatives ($56 trillion) to credit default swaps ($58 trillion) and so on.
3) Global financial markets see that the eight bubbles represent roughly $200 trillion of worst-case global financial exposure. Factor in a conservative 10 percent drop in the value, or 10 percent default rate, on this exposure and the world would face a $20 trillion challenge. Here's the catch (and why the markets remain so nervous). The GDP of the entire world is only $50 trillion. World stock and bond markets are now valued at less than $100 trillion.
4) Translation: Psychologically speaking, central bank monetary stimulus and government fiscal intervention efforts (in the hundreds of billions of dollars) are no match for the market'sfear of a worst-case scenario involving tens of trillions of dollars. The numbers are simply mind boggling. -
Xavier Becerra: U.S. Trade Representative
Tweet Share on Facebook December 3, 2008 Comment (6)Xavier Becerra will be the next U.S. Trade Representative. Is this a good pick for free traders?
1) America's free trade system "is not only broken but it is broken completely," Becerra said back in 2006 when he argued against the Oman Free Trade Agreement.
2) Says he regrets his vote against NAFTA. Opposed CAFTA but voted for the Peru FTA. Voted to admit China to the WTO. Has a 39 percent rating from the Cato Institute on free trade. Voted against withdrawing from the WTO.
3) Listen to this Daily Kos poster: "If Becerra accepts than it should be a hallelujah moment for progressives and advocates of fair trade. For starters, Becerra is a member of Sen. Bernie Sanders Progressive Caucus, which has long pushed congresses for fairer trade deals.
Me: More to come, but at this point it looks like Becerra is in the Democratic mainstream that has turned its back on the Clinton-era free trade policies. But more to come ... -
Big 3 Bailout: A Done Deal
Tweet Share on Facebook December 3, 2008 Comment (7)Those CEOs apparently jumped through enough hoops for Washington. Either Bush signs it (which he will) or Obama does, my sources tell me. Only just the beginning, though ...
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Obama Stimulus Plan: Another Vote Against
Tweet Share on Facebook December 3, 2008 Comment (5)Supermart investment strategist Ed Yardeni outlines his plan to help the economy:
1) Have the Fed target the 10-year Treasury bond yield at 2 percent and buy mortgage-backed securities.
2) Have the Treasury borrow $1 trillion on behalf of Fannie and Freddie and let them lend it out at 4 percent. (He figures the subsequent boom in refinancing would amount to a $200 billion a year "tax cut" for consumers with mortgages. It would also help deotoxify bank balance sheets.
3) Suspend mark-to-market accounting for three years and reconstitute the uptick rule. (He calls M2M the number one reason a $200 billion subprime problem turned into a multi-trillion dollar problem.)
4) Cut the captial gains tax rate to zero for the next two years.
Yardeni's bottom line: "I am totally against a $500 billion stimulus program focused on infrastructure spending. ... It will certainly be overwhelmed by corruption and won't create anywhere close to 2.5 million jobs over the next two years. The total number of nonresidential construction workers peaked at 3.39 million in January 2007 when construction was booming."
Me: You know, there's that Pigou Club started by Greg Mankiw for people who are pro-carbon tax. Maybe I should start a Reagan Club for those who want to boost the economy more free-market policies and an FDR Club for those who want a "new New Deal." This plan has elements of both, a tax cut plus more government spending. -
Obama: Forget About That Windfall Profits Tax?
Tweet Share on Facebook December 2, 2008 Comment (3)The American Small Business League sent me an email about this:
"President-elect Barack Obama has removed any reference of his promise to implement a windfall profits tax on the oil and gas industry from the Obama-Biden Transition Team website, www.change.gov. ... The promise was displayed prominently at the top of the “economy” section of Obama’s campaign website. That same information was transferred to Obama’s transition website, www.change.gov, when it was launched on Thursday, November 6th. However, the language regarding the windfall profits tax was removed on Saturday, November 8th in an unceremonious and abrupt manner."
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Will Killing the Big 3 Bailout Kill the GOP?
Tweet Share on Facebook December 2, 2008 Comment (8)I don't agree with Pat Buchanan's economics but his from-the-gut political instincts on a potential Big 3 bailout might be right. I think a lot of folks might agree with the following sentiments:
" If the GOP blocks these loans, and the industry dies, the party can forget about Ohio, Michigan and the industrial Midwest. For the Reagan Democrats will never come home again. Nor should they. By the choices we make, we define ourselves and reveal what we truly care about. Thus, consider: We bail out the New York and D.C. governments of Abe Beame and Marion Barry. We bail out a corrupt Mexico. We bail out public schools that have failed us for 40 years.We bail out with International Monetary Fund and World Bank loans and foreign aid worthless Third World regimes. We bail out Wall Street plutocrats and big banks. But the most magnificent industry, the auto industry that was the pride of America and envy of the world, we surrender to predator-traders from Asia and Europe, lest we violate the tenets of some 19th-century ideological scribblers that the old Republicans considered the apogee of British stupidity."
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Why Obama's Stimulus Blockbuster Could Flop
Tweet Share on Facebook December 2, 2008 Comment (18)Hollywood has nothing on Washington when it comes to shamelessly recycling stories and plot devices. Remember that big-budget turkey of the fall, "The Amazing Trillion-Dollar Bailout"? It was the story of how Uncle Sam persuaded American taxpayers (or at least Congress) that if they didn't fork over nearly a trillion dollars to rescue Wall Street, the U.S. economy would tumble into a job-destroying, wealth-eviscerating free fall. (Director Hank Paulson has produced several sequels to that one already.)
But the inside-the-beltway crowd is already cooking up an obvious knockoff of that one. Coming soon in January 2009: "The Wondrous Trillion-Dollar Stimulus." It's the thrilling tale of how the new American president and Congress persuade American taxpayers that if Uncle Sam doesn't borrow hundreds of billions of dollars for a massive spending spree, the U.S. economy will tumble into a job-destroying, wealth-eviscerating free fall. (I can already imagine the teaser trailer. Deep-Voice Narrator Guy: "In a world gone mad, where banks are imploding and automakers disintegrating, only One Man and his Wondrous Stimulus Plan can save America ...")
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Yes, China Sunk the Market
Tweet Share on Facebook December 1, 2008 Comment (4)Again, keep your eyes on China. Why was the market down 680 points today? Larry Kudlow nails it:
"The real source of today’s stock market plunge is a collapse of China’s purchasing managers index, which fell to 40.9 in November from 45.2 in October, its fourth straight monthly drop. Inside the index, export orders fell significantly. All of this suggests big cuts in China production, employment, and investment, including infrastructure investment.'"
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Recession: NBER Makes It Official
Tweet Share on Facebook December 1, 2008 Comment (2)So the National Bureau of Economic Research has declared a recession, starting in December of 2007. This is highly unusual. Since WWII, the NBER had never called a dowturn that included back-to-back quarters of postive GDP growth. Until now. The economy expanded at a 0.87 percent pace in the first quarter and 2.83 percent in the second quarter. Weird.
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Bad Economy Could Cause China Crackup
Tweet Share on Facebook December 1, 2008 Comment (21)I have written a series of blog posts warning about the geopolitical and economic fallout of a sharp slowdown in China's economy. Simply put: Slower growth could lead to dangerous political instability. The sole source of the authoritarian government's legitimacy has been its ability to deliver an even-rising standard of living for more than a generation. Don't believe me? Here is what President Jintao Hu said over the weekend at a party meeting:
“In this coming period, we will starkly confront the effects of the sustained deepening of the international financial crisis and pressure as global economic growth clearly slows. ... Whether we can turn this pressure into momentum, turn challenges into opportunities, and maintain steady and relatively fast economic development is a test of our Party's capacity to govern.”
This is why China has been hesitant to allow any dramatic appreciation by the yuan vs. the dollar. To the extent that a stronger currency slows the economy, the ruling Communist Party views a rapid yuan appreciation as an existential threat. This what journalist Will Hutton, author of The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy, told me early last year:
"Unrest is growing even under current conditions. Such a rapid appreciation of the yuan over a short period could be a tipping point for a wave of unrest, which could threaten the regime's stability. The party leadership sees the demand for fast yuan appreciation as an act of economic warfare. In these terms, you can see why. ... The World Bank estimates that if China's growth rate fell by just 2 percent, up to 60 percent of China's bank loans would become nonperforming–so threatening both China's and, via Hong Kong, Asia's financial system. The flow of saving to finance the U.S.'s deficit would dry up, probably forcing U.S. interest rates up–so worsening the economic slowdown. ... There is the risk of a credit crunch forced by the banking system being overwhelmed by nonperforming loans. ... The risk of political instability is low, but it exists."
Me: Let's remember that China a) has been -- along with America -- one of the primary engines of global economic growth as well as buy of U.S. bonds, and b) has nuclear weapons. While no freedom-loving member of Western Civilization has any love for the current despotic regime, neither do we want to see political and economic chaos in China. Fun China Fact: Back in the 1990s, Pentagon analysts thought a bad economy could result in the fall of the Communists from power and the political dissolution of the country into maybe a dozen smaller nations. Hey, have fun, Hillary!
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