Tuesday, January 20, 2009


We have a new Commander in Chief. Bush is really gone. Goodbye, thanks for nothing, don't let the door hit you on the way out, and good riddance. Bush played gracious for weeks, I'm sure even he got tired of it. And now he's gone.

I find it a bit funny that Obama flubbed his lines in the actual swearing in. It looked like either he was terrified (understandable) or he hadn't rehearsed with John Roberts. Obama's not a real spontaneous kind of guy, so I'm assuming he was just scared. Fine.

Anyway, I did watch a fair bit of the day's ceremonies. Not really my cup of tea, a big old parade and all. Watching Bush fly away in the helicopter was just about as satisfying really as watching Obama take the oath of office.

Now the hard part begins. Israel-Gaza, big stimulus package, enormous money needed to save the banking system again (more on that in a post coming up), an economy deep in recession, a health care system hugely in need of root and branch reform, Afghanistan heading south, a broken immigration system. Bush left the country far, far worse than he found it, and Obama has the most full in-box since WW II, by a lot. But you all know this already.

Today is ceremony day. And it was quite a show! And we swore in the 44th President.


Thursday, January 15, 2009

I was right and the ECB was wrong.

I was right. Again. This time it had to do with the interest rates set by the European Central Bank (ECB). Again, the ECB sets interest rates for all of the countries which use the Euro as their currency, much as the Federal Reserve sets interest rates.

In my post of June 6, 2008, I mocked the leaked news that the ECB was to raise interest rates soon.


The announcement caused the dollar, then moving downward, to really tank (It has since rebounded strongly against the Euro as investors flee to the "safe" US in these godawful scary times). In addition, the move was wholly unnecessary, as I argued at the time. I argued that the ECB would harm to the dollar vs. Euro exchange rate and that inflation in the Euro zone was not a problem.

Well, shortly thereafter, as we all know, the world financial system, led by the US, went to hell in a hand basket, dragging the real economy down with it. And, to its credit, the ECB lowered rates by half a point in October, another half a point in November, and 3/4 of a point in December. It lowered rates by an additional half a point today. In short, although it has moved radically slower than the federal reserve to get interest rates down, it immediately stopped increasing rates.

Now I'm not going to sit here and tell you I predicted that the financial crisis (or the real economy) were going to get anywhere remotely near as bad as they did. I didn't. I'm not going to argue that the ECB's blunder in signalling higher interest rates and then following through with them made any real difference. Because in the end it didn't.

But I will sit here and tell you that I argued, (for months) in this blog and in private e-mails with Andrew, that inflation was not a problem here or in Europe, and worrying about it was absolutely silly. And I was right, right, right!! So yes, I was doing a better job running Europe's interest rate policy than the board charged with doing it. Which, given that Jean Claude Trichet is its head, isn't real surprising. Trichet had rocks in his head; still does. European interest rates in Euro-land aren't being lowered anywhere near fast enough. European inflation will drop darn near as fast as here. While Europe's economy isn't anywhere near as bad as ours (yet) it is almost as dependent on oil and thus will benefit hugely as we will from oil's dizzying price declines. And while Europe's economy doesn't adjust as fast as ours (one of the great strengths of the United States) it does adjust. European inflation has already dropped sharply, down to 1.6 % year on year vs. 2.1% in November and 4% in July (shortly after I wrote the above post arguing that there would not be an inflation problem in Europe)!

I was right and the ECB was wrong.

Tuesday, January 06, 2009

New York Times Muddleheaded thinking

I can't begin to think of a better example of why the world is so muddle-headed on Israel than this NYT editorial about Gaza. Read the NYT piece before you read the rest of this post. Andrew, this means you too.


*Time passes while loyal readers swamp the New York Times Website.**

Spot the muddle headed "thinking?"

Israel, aided by the United States, Europe and moderate Arab states, must try to end this conflict as soon as possible and in a way that increases the chances for negotiating a broad regional peace.

That means ensuring at a minimum that Hamas — a proxy of Iran — is not seen as gaining from the war, that the rocket fire is halted permanently and that the terrorist group can no longer restock its arsenal with more deadly weapons via hundreds of tunnels dug under the Egypt-Gaza border.
Ok, let me see if I have this straight. The primary goal must be to "end this conflict as soon as possible." In short, a shriek to stop the killing! Well, I don't think that should be Israel's sole goal to be sure (otherwise why start fighting in the first place) but at least I understand this point.
But in the very next paragraph, without a hint of irony, the Times insists that the rocket fire (from Hamas) be halted permanently, and, to boot, that it cannot get more weapons through the Egypt border.
In short the New York Times agrees with the stated war aims of both Israel (END THE ROCKET THREAT FROM HAMAS) and Hamas STOP THE KILLING OF THE PALESTINIAN PEOPLE). If supporting the war aims of two diametrically opposed parties strikes you as a bit odd and hypocritical, that's because it is.
How this magic solution of an end to the conflict "as soon as possible" is to be married with the goal of ending the Hamas rocket threat the Times neglects to inform us. Unless "as soon as possible" really means "as soon as Hamas is utterly destroyed. That I would support. But the tone of the New York Times piece means that it really means that the military operation end quickly. Which makes no sense; the New York Times knows perfectly well that if Israel ends the operation soon Hamas will rearm and the rocket threat will remain. Either you support the Israeli effort to reduce/eliminate the Hamas rocket threat, or at least show that rockets into Israel have consequences, or you don't. In this instance, you simply can't have it both ways.
In conclusion, as so many do regarding Israel, the New York Times wills the ends but not the means. Given that the Times is such an important paper and cares a lot about Israel, this lame effort to describe the Gaza situation is particularly pathetic.

Monday, January 05, 2009

I am disappointed with the news today regarding Obama's stimulus plan.


First, the leaks indicate that the economic package is to cost between $675 and $775 billion. Although clearly substantial enough to do a lot of good, this is less than I would like, and have advocated. The US GDP is about $14 trillion. Assuming this money is spent evenly over only 2 years (which is not accurate, but I'm simplifying) that means that assuming a $700 billion package, that would be $350 billion each year, or 2.5% of GDP. Now that's not nothing to be damn sure, but with the economy shrinking at about a 5% rate, it isn't quite enough to ensure a return to growth. However, coupled with the enormous amount of stimulus already in the pipeline, as I discussed in my December 5, 2008 post, this package may well be sufficient to lift the economy out of recession. If it packs enough stimulative punch. Which brings me to my real problem with the leaks about the package.

According to the above-mentioned New York Times article, Obama plans for his stimulus package to include "about $300 billion in tax cuts for workers and businesses."

The current plan is to devote about 40% of the cost of the stimulus plan to tax cuts, "including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion."

I suppose given that it was an often repeated campaign pledge, and will not go to the wealthy, I really can't squawk too badly about this $150 billion.

However, the remainder of the tax cuts I am really not happy about, especially in the context of a somewhat smaller package than I would have liked.

First, why am I not jazzed about tax cuts as part of the stimulus package? Well, consumers are tapped out and heavily in debt, and will tend to save this money or pay down debt. I could live with this amount of tax cuts as part of a larger overall package, but the leaked plan leaves "only" approximately $400 billion in spending over two years, or $200 billion per year. This represents only approximately 1.5% of GDP for each of those two years, not nearly enough spending to have the impact I was looking for.

Second, the tax cuts other than the aforementioned tax credits for each worker earning less than $200,000 per year will likely be particularly ineffective.

The first major business tax credit I am unhappy about is one which, "[t]o encourage businesses to expand their work forces and operations, Mr. Obama wants a tax credit for each job created. During the campaign, he proposed $3,000 for each job." This is just silly. Most of the jobs thus created would have been created anyway. This is a wasteful business tax giveaway, and lousy policy to boot, as any marginal jobs created which would not have been create otherwise are, by definition, marginal (barely needed if at all), thus economically inefficient, and relatively less like to survive as jobs over a period of years.

The second tax credit referenced is not yet specific. The Times article stated, "Advisers said [Obama] was now also trying to figure out a way to give incentives to businesses to resist cutting jobs, as so many have been doing."

Tax incentives for businesses not to cut jobs is probably even worse than incentives to create jobs! Businesses need to cut back their workforces in order to maintain a sustainable size going forward. This is a hugely painful process, trust me, I know from painful personal experience, but is entirely necessary. Thankfully, this tax incentives probably won't make too much difference-- if a company needs to lay of 500 people, it really needs to lay them off, and a few tens of thousands of dollars won't make much difference.

Still, it would have been much better for the government to dole out money which would be spent, driving business and consumer demand. Then some of these businesses would in fact need the marginal worker created by the tax incentives to create jobs, and (although in fewer cases) the businesses set on cutting jobs would no longer need to do so.

Finally, and I suppose this doesn't at all surprise me, "The economic plan will also include other tax breaks intended to stir capital investment." It is my opinion that many of these tax breaks merely encourage investment which would have occurred anyway, and thus are primarily a giveaway to businesses. However, the money involved in these tax breaks is unlikely to be particularly huge, so the relative harm is somewhat limited.

I had been hugely optimistic based about the economic stimulus package based upon on what I heard from Team Obama. I am not prone to bouts of wild optimism! But the details which are now emerging about the stimulus package are disappointing. It will still be big and still be very much worth doing, but it won't have anywhere near the impact it could have.

I have no way of knowing, but I suspect that the large amount of tax cuts is done so as to secure moderate democratic and republican support, that is for political reasons not policy reasons. Sadly, any attempt to attract even moderate Republicans generally means making policy worse. But in the scheme of things, increasing the chances of passage, coupled with the huge momentum boost that would create towards the rest of Obama's agenda probably make $100 billion of wasteful tax cuts well worth it. And if the package were $100 billion larger I'd pipe down. But in a $700 billion or so package, $100 billion of almost entirely non-stimulative tax cuts, and $150 billion in only partially stimulative tax cuts constitutes a gigantic wasted opportunity. Still, when I first read the Times article I was hugely disappointed. The more I think about it, the more I am merely disappointed.
Paul Krugman's wrong.


I largely disagree with his statement of current economic conditions, as is clear from my recent blog posts.

First, he says, "The fact is that recent economic numbers have been terrifying not just in the United States but around the world. . . . Let's not mince words: This looks an awful lot like the beginning of a second Great Depression."

No Dr. Krugman, it doesn't. Not as of yet, anyway. I am focusing exclusively here on the US and not the world economy, as Krugman does in his opinion piece. If you look closely at the US economic numbers in recent months you will find an economy clearly suffering just about its worst stretch in decades, but, contrary to what Krugman said, you will find highly similar numbers from the 1981-82 recession and the almost equally severe 1974-75 recession.

Specifically, if you look at the economic numbers which have been released (and not credit or financial market conditions, which do look uncomfortably like the beginning of a second Great Depression) you would be pretty much forced to agree that while the US economy is doing quite badly, it is well within post World War II norms for a steep recession, as opposed to a second Great Depression (which I will loosely define as at least several years of both massive unemployment, and economic output well below what the economy is capable of).

There are many economic statistics I could use to make my case. I will pick two, Christmas season retail sales figures for 2008 (because they are both recent and comprehensive) and the recent November employment report (which I chose because it was particularly awful, and was very widely (and correctly) reported as having been particularly awful. I believe other statistics would support my case equally well.

Item 1: Christmas season retail sales:

As you have likely heard, the retail sales figures over the holiday season were awful. But if you look closely, they appear to be standard recession level figures rather than something worse. I think.

According to MasterCard, a statistic that nearly everyone uses, "total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve."


Now those headline numbers are godawful, and support Krugman's case more than they do mine. However, look more closely.

"When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales."

Does a decline of 2.5%, or 4%, sound like a second Great Depression to you? I think not, although I haven't done the research to be sure. There is no doubt the numbers were awful, but not historically awful. And that should be the standard if you are saying, as Krugman did, that, "recent economic numbers have been terrifying," and that the numbers look like the beginning of a second Great Depression.

I note that simply excluding autos altogether may give a misleadingly positive picture. I am 100% sure that if you included autos the numbers would be significantly worse. But auto sales were artificially high for years and are now artificially low. While clearly relevant in determining whether we are headed for a second Great Depression, I wouldn't put too too much stock in autos as a leading indicator about now. I think using retail sales excluding autos and gasoline is in fact the appropriate measure.

In summary, the various quotes I read when googling this matter were similar to the one in this article, "This will go down as one of the worst holiday sales seasons on record." No doubt it will. But I read, "worst in many years," "probably the worst since 1970" and the like. I did not read, "Much worse than anything we've ever seen," "worse than anyone's worst nightmares" or anything like that. In short, bad but not historically awful.

Item 2: Employment numbers:

December's numbers come out this Friday, and everyone is expecting a whopping job loss, somewhere north of 500,000 jobs, possibly as many as 650,000; a huge monthly loss to be sure. But let's look at November's numbers.

According to the New York Times, the 533,000 jobs lost in November were the most since December 1974. "Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam."


The Times piece then argues that whereas the 1974 numbers came at the end of a severe recession, this recession is just gathering steam. I point this out, but don't address it, because I don't know for sure if this recession is just gathering steam, and neither do you. I do note a crucial point that the New York Times and most other media outlets miss when throwing history around:

The number of jobs lost in December 1974 was a massively higher percentage of the overall labor force than the 533,000 lost in November 2008.

As the Heritage Foundation put it, "In percentage terms, the number of establishment jobs declined by 0.4 percent. In comparison, the December 1974 job losses of 602,000 were twice that number—a 0.8 percent decline from the previous month. The size of the decline in percentages is the same as the peak job losses in the 1981-82 recession but twice that as compared to peak job losses in the 1990-91 and 2001 recessions."


In short, looking solely at November's employment report, and ignoring all other economic indicators, one would conclude that we are in a bad recession, but nothing more. Well, I don't doubt for a second that we are in a bad recession. Hell, the stock market has crashed, unemployment is zooming upward and huge famous companies have failed or been rescued as they were about to fall into the abyss. That's not the question. The question instead is whether this is anything more systemically severe than a bad recession. And the clear answer, based on the data currently available, is no.

In fact, given the fact that the credit markets are easily at their worst since WWII, that the other financial markets have suffered the biggest losses since WWII, the shattering loss of confidence by consumers, financial institutions, and non financial businesses, the fact that as of now we have only seen really bad numbers, as opposed to historically terrible numbers, strongly supports my argument, and not Krugman's, in my opinion..

Two more points before I shut up:

First, I think Krugman's piece was meant as much for advocacy as to describe current conditions. He concludes the piece, "So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?" I certainly have no problems with this advocacy! Even I would agree that the risk of a Great Depression II is the highest since 1945, probably by a significant amount. I don't think that can actually be seriously debated! So a huge stimulus package, which I have advocated for weeks (see my companion post on my big disappointment with the details Obama has released recently about his plans for the upcoming stimulus package) is a fine idea, and I'm glad Krugman is lending his Nobel prize name to the effort again.

Second, everything I have said here is backward looking. That is, I have concluded that the risk of a second Great Depression is minimal based upon the data already released (and the huge government response, which I have discussed in earlier posts). Should data over the next 3-4 months come be substantially worse than the date released in recent months, I could be forced to revise my view. However, even if this occurs, it would likely point to a steeper recession than I and others expect (which I freely concede is possible) rather than a years-long slump, where recovery doesn't occur for years, and then is massively too weak to get the country back to near full employment. I still believe that in order for a bad recession to turn into a second Great Depression, government policy response must be inapt, inadequate, or both. And given that Obama takes office shortly, future policy is likely to be neither. And federal reserve policy under Bernanke is quite certain to be neither.

I agree with the conclusions reached by Ben Bernanke and others: bad federal reserve and fiscal policy caused the slump of the late 1920s to turn into the Great Depression. Despite huge problems with the Treasury Department's response, the federal government has made an absolutely massive response this time around, and it is precisely this response which I think will both prevent this recession from spiraling into a truly terrible state, where unemployment say reached 15%, and also will prevent a many-years long slump that would constitute a second Great Depression.

Friday, January 02, 2009

2009 Legislative Predictions:

18 days till inauguration. Get excited. Get really excited!

Some predictions on the legislative front with a sprinkling of foreign policy thrown in.

Congress and Obama have an unbelievably full in-box as Obama awaits inauguration on January 20th. Doesn't it seem like he's already president? Hasn't the nightmare ended yet?

1) A massive stimulus package will be enacted before the end of February. This prediction isn't really tough. Its been all over the news. I predict that the total amount of all stimulus packages (there may be more than one) will be less than $800 billion. While that is a staggeringly large number, I will likely be a little disappointed in the final number, as I would prefer an even bigger number, both to ensure that the recession isn't needlessly deep, and because I think a large percentage of the money is likely to be reasonably well spent. Go ahead, laugh. That's a reasonable response to the bit about well spent. But a lot of it will.

2) Health care reform. The big enchilada. I don't know when health care reform will pass, but I predict it will. It will be some form of messy compromise, designed to peel of 10 Republican votes in the Senate and 30 in the House. It will allow anyone who wants to to buy into either Medicare (my choice) the Federal Employees' health plan (better than nothing) or perhaps both. It will reform the way insurance companies work. It will forbid discrimination based on pre-existing conditions. It will not, however, require insurance companies to insure patients. And it most certainly will not be a radical reform, like single payer, unfortunately. It will be a messy compromise.

3) Immigration: I predict that no significant action will be taken on immigration in 2009. Perhaps 2010.

4) Energy: I predict that the amount of new spending on alternative fuels and regulations on emissions will be surprisingly high. Cap and Trade, Carbon swaps, fuel cells, batteries, solar panels. You will be hearing a lot about these in 2009. I don't know enough to make a truly detailed prediction, but as between more energy reform and less, I predict more. The shock of $4 a gallon gasoline was profound, and will be useful to Obama when he tries to sell serious energy reform.

5) Iraq: Iraq will worsen slightly, at times, but not enough to throw the planned slow motion withdrawal off track. We will in fact begin withdrawing meaningful numbers later in 2009.

6) Afghanistan: We will, as has been stated, add more troops into Afghanistan.

7) Trade: The sounds of silence. New trade deals are off the table in 2009. Obama needs all the help he can get for his legislative agenda, and pissing off organized labor will have to wait until 2010, or beyond.
Some predictions for 2009

Since my 2008 election predictions were a monster success, I figured I'd take a stab at some 2009 economic and other predictions. I'll come back at the mid-year mark, and in very early 2010 and see how I did. Be gentle, some of these are sure to be embarrassingly wrong.

1. The economy:

As I explained in my earlier post, I expect the economic recovery to begin in about June, 2009. I do not expect it to be vigorous at first, although the economy may show surprising vigor by the very end of this year. Or it could go yet to hell in a hand basket if the credit markets truly seize up again. I'm guessing that the worst will be over by March and growth will resume by June. By the end of the year it will be real, although whether the job market will be improving I'm not sure.

2. The stock market:

The Dow Jones is currently at 8,776.39. I expect it to move up 25% from here, closing the year at around 11,408, give or take 500. I know that sounds like a huge move, but it all it would really do is undo a portion of the losses of the crash-year of 2008. The Dow Jones closed 2007 at 13,364.16. So I'm only predicting it gets partway back. Historically, the markets move prior to changes in the real economy. Since I'm predicting an economic recovery starting in June and picking up steam towards the end of the year, I therefore predict a solid market move starting circa March. I can't tell what month-- that would just be making stuff up as opposed to an educated guess/prediction.

The conditions for a huge year in the market are practically perfect. Ridiculously low interest rates and an economy that has been in recession for a year, and which recession has greatly increased in severity in recent months. That may sound funny, but the market bottom should precede the economic bottom, and that is coming soon. If the credit markets improve, as I predict, and credit begins flowing, this will light a fire under the markets.

The Dow Jones isn't the whole market obviously, but as a market overview prediction it will do nicely.

3. Interest rates: The Fed Funds Rate:

As of now, the Federal Funds rate is set at a target of between 0 and 1/4th of 1 %. Effectively zero. I predict it will move up to 1% by the end of the year, with all of that move coming after August, and possibly even in November/December.

The fed has lowered interest rates truly to the floor. They will want to begin gently easing as soon as they are confident that the credit markets have largely or entirely returned to normal, and the economy is recovering. That should be by the end of next year. They may, in an abundance of caution, leave rates at zero several months into 2010, which would make this prediction wrong, but then they may not. Obviously a lot will depend on the overall economy, and whether inflation is sharply negative, as it may be early in 2009. If inflation numbers come in negative month after month, the fed will be seriously spooked, and will leave interest rates at zero regardless of what happens in the real economy. The fed simply does not want to risk a bad deflation!

4) Interest Rates: The 10 year bond:

These days, the benchmark interest rate set by the credit markets is the 10-year bond. This is currently at 2.24 % after taking a bath late last week. Still, 2.24% is just about the lowest in 40 years. I predict that at the end of 2009, the 10-year bond will be at 4.5%. This is of course a huge move! There are two main reasons for my prediction:

First, I think the rate is somewhat artificially low (or, put another way, the price of the bond is artificially high) as a result of a flight to quality. Investors are terrified of investing in most anything; stocks, bonds, etc, for fear of mass bankruptcies. Uncle Sam is safe (at least from bankruptcy), so investors have rushed to accept historically low yields so as to park their money safely and at least earn something.

Second, Since I predict a fragile economic recovery, that would imply that the markets would no longer fear a big deflation, and I think that deflation fears have really brought down the rates on the 10-year bond, big time. Think about it-- if inflation is negative 2% (deflation), a 2% return is actually 4% after inflation, which isn't bad at all. However, if inflation is 1%, to maintain that same 4% post-inflation yield, interest rates would have to move up to 5%.

5) Oil:

As I write this early in the morning on January 2nd, oil is at $41.65 a barrel. I predict that oil closes 2009 at $52 a barrel. The futures markets are predicting a bigger move up than that. OPEC has moved fairly aggressively to attempt to cut production. They will surely make further attempts. Whether they succeed, I have no idea. Congress is likely to pass major legislation requiring massive increases in fuel economy in future years, and investing huge amounts of money in alternative energy. Given that the US uses 25% of the world's oil, this will register in the markets. But the big oil-market story of 2009 will be that economic Armageddon is avoided. Once the oil markets realize that this is the case, oil should move up quite a bit. My prediction here is actually fairly conservative.