Monday, December 31, 2007

Well, if I'm going to comment on matters political, I suppose I have to predict what's going to happen in Iowa this Thursday. My first thought is to say, "how the heck should I know." But, bravely marching on:

1) Democrats-- I'm going (1) Obama; (2) Edwards; and (3) Clinton, but a VERY close race. Hillary loses because Iowa's rules are unusual, second choices matter, and she's not the SECOND choice of very many. But any of the combinations is possible and I have ZERO confidence in this "prediction."

2) GOP-- (1) Huckabee; (2) Romney; (3) someone else (way, WAY behind).

I expect Huckabee to win this pretty easily (at least 5-8 points, maybe more). He has suffered under the glare he has received as a suddenly viable candidate, but Romney has suffered more. It may be my own biases creeping in, but seeing how blatantly Romney has switched his positions to be in tune with what GOP primary voters has truly not been a pretty sight. Iowa also rewards the religious on the GOP side, ask 1988 caucus winner Pat Robertson!

This prediction I DO feel confident in. Which, of course, means it could be spectacularly wrong, as my political prognostication record is.

One last word on political predictions before I shut up. Every 4 years people make them. Every 4 years they get them VERY wrong. Yet the media rushes to these same people 4 years later to make predictions without ever stopping and asking: why should was ask them, what do they know?" The media all but annointed Howard Dean the nominee last time around. Um, he didn't come close. So the truth is, as a lawyer I work with has said, "the future is hard to predict. Especially when it hasn't happened yet."
As you have heard, former Prime Minister Bhutto was killed last week. There have been riots and other mass disorder around Pakistan since. There have been calls to delay the election, threatened boycotts, and all sorts of other possible ramifications. Much talk of awful days ahead for Pakistan. CAN THE PAKISTANI ARMY HOLD OFF THE FUNDAMENTALISTS???

Don't believe a word of it. The only institution worth a damn in Pakistan is the military. They are a relatively serious professional organization, and although not "secular," they most certainly do NOT wish to be ruled by Al Queda. The military will, if necessary, move heaven and earth not to see the current government fall. And even if it did, the army would dictate what happened next.

Friday, December 14, 2007

Well, I WAS going to do a companion post listing all of the times when democratic candidates lied or otherwise said insane things. But there were precisely NONE of these. You see, democrats certainly pander shamelessly (ask John Edwards), but we as a party are NOT in the business of boldly saying that 2+2 = 8.75. We do NOT promise energy independence within 5 years. We do NOT claim that reducing tax rates magically INCREASES the amount of revenue to the government.

A good post on Rudy's rantings on this issue can be found here.

There are other posts if you care to google. Anyway, since I did listen to the democratic debate, and did take notes, here are some of the mildly (very mildly) interesting comments made:

Richardson advocated a minimum wage for teachers of 40k. That's a LOT of money in some parts of the country. Hmm.

Obama stated that rich people not in farming are getting farm subsidies and family farms are being squeezed. He concluded that we need to cap subsidies and take saved money to invest in conservation/organic crops/nutrition programs. We can save land and improve rural economy.
This is heresy on multiple levels, especially in Iowa! Perfectly sensible of course.

Richardson supports 50 mpg standards, and will reduce co2 emissions by 90%.

Um, it would be nice to know how you'd get from here to there, Bill.

John Edwards: What did America get from free trade with China? Lost jobs and unsafe toys. HEY JOHN, EVER BEEN TO A WAL MART? America got a LOT of much cheaper clothes, toys, electronics, and more. Don't pretend Joe sixpack didn't gain-- that's crazy. This is the closest the dems came to saying something just truly insane. Then, it would be Edwards who said the stupidest thing.

Clinton-- NAFTA SHOULD be changed. Gee, Hillary, how?

Biden-- no trade agreements without environmental and labor protections. Richardson basically agreed.

Ok, so we want more mostly unenforceable window dressing. Its not pretty to see democrats trying to embrace protectionism without embracing it. Embracing it would be honorable. Profoundly stupid, but honorable. But PRETENDING to embrace it? Both stupid and dishonorable. Trade is good, more is better. There are losers. Compensate the losers. That's the most logical approach I think.

Wednesday, December 12, 2007

Today the GOP held its last debate before the Iowa caucuses. Every debate has a fair bit of pandering, but GOP debates are particularly laughable because of just how far out of touch with reality one must be (or at least pretend to be) to win GOP votes these days. Here are my favorite laughable comments:

1) When asked if we face a "Tsunami of debt, Roooooody Giuliani said yes, argued that we needed to cut the number of federal employees (wimpy b/c they are a TINY TINY percentage of the problem, but ok), and that we needed to CUT taxes-- he mentioned the estate tax, and the corporate tax. I'm not making this up! He said that CUTTING the corporate tax from 35% to 25% would INCREASE REVENUE TO THE GOV'T. I doubt VERY seriously that there is a single mainstream economist who believes for a nanosecond that cutting the corporate tax rate would do anything other than signficantly reduce the amount of money received by the US government. This is supply side lunacy. There is something to supply side economics, of course, but this is NOT the part of that branch of economics that has any merit. But it is an article of faith among the GOP at this point that cutting taxes increases revenue. Makes you wonder why they never advocated patriotically CUTTING taxes to pay for the Iraq war. I cannot overstate (a) just how stupid this "viewpoint" is; or (b) the damage it has already done to the republic. To be fair, he did NOT argue that eliminating the estate tax would raise revenue. But, despite a "tsunami" of debt which Giuliani acknowledged he said we should eliminate it anyway. Well, that's a position.

2) John McCain promised a "Manhattan Project" to make us oil import independent within 5 years. He knows perfectly well we will NOT be oil import independent in anything like that time frame, no matter what we do.

In 2006, the United States used about 20.5 million barrells of oil per day. The US produced about 8.36 million barrells per day (we are the 3rd most prolific oil producer in the world, a fact which not many know), thus we imported the remainder, about 12.2 million barrells of oil per day.

Nothing of any consequence has changed in these numbers in the last year.

The idea that any combination of government actions can quickly change these facts, absent say banning all cars from America, is idiocy. John McCain knows this perfectly well.

3) When asked what SACRIFICE would be necessary to pay off our debt, Mayor Roooooody talked about federal worker attrition (fine) and tax CUTS. Yup, that's the sacrifice required to pay off the debt, tax CUTS. Rooody is anything but a loon, but the GOP base these days is so far out of touch with reality, and GOP leaders so unwilling to tell it the truth, that you get craziness like this.

3A) On Health care, Rooooody called for fewer people on gov't health care (that's a perfectly defensible position, even though I vigorously disagree with it) but said that more people should be given tax incenctives to buy private insurance. I know, I know, you're thinking, "what about those that can't afford it." HE'S A REPUBLICAN, HE AINT WORRIED. But never mind that.

3) Rooooooooody then said that as a LOT more people buy private health insurance, prices will come down and quality will increase. Well that's ODD-- as demand soars for a service, the price will DROP and the quality INCREASE? Competition CAN do that (many more people buy computers than 10 or 20 years ago, prices are the same or lower, quality is massively higher), but gee, would you bet your child's health care on it? Typically, if more people wish to buy a product or service prices go UP not DOWN. Computers are a GOOD, not a service. Its much easier to improve the quality of a good, and manufacturing improvements and desgin improvements allow for a decline in price. Not necessarily true with a service.

4) Duncan Hunter said that he wants to bring back high paying manufacturing jobs lost due to bad trade deals. Let's see, we WERE paying $50/hour (counting benefits) in Ohio, we're now paying $4 an hour in China, and we've sunk hundreds of millions of dollars into the factory. And you want us to come back to Ohio? YEAH.

I met Duncan Hunter by chance in the Miami airport and talked with him for about 15 minutes. He certainly seemed a sensible fellow, fully in touch with reality. But we're running for office, sooooooo..........

5) Huckabee says that job migration is due to: (a) excess taxation; (b) excess regulation; and (c) excess litigation. No mention of wages or health care costs. INSANE.

6) McCain and Roooooooody squarely said that they thought climate change was real and was in part caused by human activities. HEY WAIT-- that's a perfectly sensible position, one that I agree with. And Al Gore, and Hillary......

Ah well, a stopped clock is right twice a day.

Stay tuned for my review of democratic idiocy at tomorrow's democratic debate. Hopefully they won't make jackasses of themselves anywhere near as well as the elephants did.

Saturday, December 01, 2007

I don't envy the fed. On the one hand, banks are being hugely hit by the fallout from the subprime crisis. Credit is tightening, become harder to come by, even for reasonably creditworthy borrowers. Housing is absolutely tanking. It appears that the rest of the economy is being hit hard. Oil prices are a giant drag on consumer spending. These things appear to argue for a rapid reduction in rates.

On the other hand, there are medium & long term inflationary pressures building. Gold and other commodity prices are telling us that the markets expect inflation to rise.

Worse, the dollar has dropped rapidly, and signs are that it will continue to decline in value against other major currencies. China and the oil producers are making noise about shifting their foreign reserves partially away from dollars and into other currencies. This means that DEMAND for dollars will decline. Now the price of dollars (its exchange rate is nothing more than a price) depends on the supply and demand for dollars (just like the price of anything else which is bought and sold freely). If demand from China/Saudi Arabia and others falls, and all else stays the same, the exchange rate will decline-- the dollar will drop in value. This is problematic, particularly if it happens quickly. On the upside, a devalued dollar, which of course has damaging effects, but it also should, over time, reduce imports, by making them more costly, and increase exports, by making them cheaper. If imports become more costly, perhaps Americans will CONSUME slightly less, and SAVE slightly more. This would be a very good thing. It WILL happen if the dollar drops far and stays down for a while.

Reducing interest rates puts pressure on the dollar, by making US investments less attractive to foreignors. So if the fed cuts rates, it could easily make a dollar bloodbath worse. And increase inflation expectations. Which is a problem. But now isn't the time to worry about it. To worry about the DOLLAR, yes. To worry about inflation, no. That simply will have to wait, even if it causes more pain to deal w/ it later. As for the dollar-- well, we're going to have to coordinate monetary policy-- Europe can stand lower rates, Japan's are so low still that it barely matters, UK can lower rates. The whole world will have to ease with the fed to avoid a total run on the dollar, but the fed simply MUST, as Summers put it, "Get ahead of the curve." Even at the risk of communicating PANIC to the markets, as Crook alluded to. Panic lasts a short time, but the effects of the interest rate cuts take time to be felt. You have to do it sooner rather than later if you fear possible disaster.

The day before the fed began this cycle of interest rate cuts, on September 18, 2007, I said to a trader I met briefly on the subway that I thought the fed should cut rates 3/4 of a point, and say, "we think we're done." He first looked at me like I was from Mars, but came to agree with me.

I have the same idea now. If the fed cuts by 50 or 75 basis points, it communicates panic. That's VERY bad. I would still do it. And accompany it with an announcement that we are now comfortably ahead of the curve, and the next move is likely up (a year or so from now). Say all that in fedspeak. It'll hurt the dollar, and it WILL build inflationary expectations. AND it will take pressure off of Congress to deal with spending. All this is bad. But I'd do it anyway. A bad recession is worse, both in lost output (which is perishable, and is never recovered) and in risks to the overall financial system (hitting weakening banks with a general business downturn is NOT what I'd really prefer."

Fed Chairman Me has spoken.