This speech by Dave Cote, CEO of Honeywell (to the Chamber of Commerce) was forwarded to me by a friend. It is one of the best summaries of our fiscal/financial problems I’ve seen in a while. Usually, when I see a 34 minute video I’m loath to give the time necessary to watch it, but this one is both fascinating and deeply disturbing. Take the time.
Cote lays out in words and charts our coming fiscal train wreck if we don’t do something “proactively”. As he says in the speech, we can do what is necessary to solve the problem or at some point, the bond market (as it did in the case of Greece) will do it for us. One will be painful, the other is catastrophic.
Dale’s post below about “Following the House of Bourbon” is essentially given facts and figures by this presentation. For instance, the discussion about China’s defense expenditures being paid for by our interest payments. Cotes points out that if spending remains unchanged through 2020, we’ll be paying almost a trillion dollars in interest a year. At this point, foreign governments own 45% of our 9 trillion in debt. China owns at least a trillion of it. And there’s no end in sight of the sale of government debt here.
The last point Cote makes that echoes Dales warning is about how quickly this will happen if we don’t do something.
While the problem builds slowly and inexorably, financial markets respond abruptly. When that decline does happen, it won’t be a case of minor monthly changes that give us 15 months to adjust. The hurt will come overnight as the herd moves against us. And then it’s too late.
That could happen at any time without warning triggered, as Dale points out, by some seemingly insignificant occurrence that normally would receive only passing attention. I don’t think, for the most part, people understand that very important point or they’d be beating down the doors of Congress.
Cotes also addresses “political will” and whether we have the will to do what is necessary (and endure the political consequences) to get this nation’s fiscal policy on the road to sanity. He notes that the public is more engaged now that in quite some time (and that’s a good thing) but are really focused on the wrong things (although they do recognize the gravity of the situation, he thinks they’re focused on fairly irrelevant portions of it).
The distilled point of course is politicians only have the spine the public gives them and unless they’re assured the public is behind doing what has to be done to solve the crisis, their risk-averse nature will have them continue to kick the can down the road.
Anyway, highly recommended. It will give you a great idea of what our situation is, where we’re headed and what the results of continuing to ignore it promise.
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Krugman’s latest approach to demanding more deficit spending – er, excuse me, “stimulus” spending – centers on the impending election. The Democrats wouldn’t be about to see an electoral tsunami if they’d just listened to him and spent more. The economy would be recovering and we’d only be talking about nominal losses in the mid-term as is historically the case with just about every President.
The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task.
And he further states:
If you look back now at the economic forecast originally used to justify the Obama economic plan, what’s striking is that forecast’s optimism about the economy’s ability to heal itself. Even without their plan, Obama economists predicted, the unemployment rate would peak at 9 percent, then fall rapidly. Fiscal stimulus was needed only to mitigate the worst — as an “insurance package against catastrophic failure,” as Lawrence Summers, later the administration’s top economist, reportedly said in a memo to the president-elect.
In fact, when you look back at the spending forecast that accompanied the Obama plan, you’ll find something very strange (as we’ve pointed out before). You’ll find that it spent more than Mr. Krugman said was necessary at the time:
All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.
It should be huge, huge I tell you! $600 billion at least. We ended up with $900+ instead new figures show. It was 50% bigger than Krugman called for but, now, it was “totally inadequate”.
If you, like me, have essentially turned off the one-note bleat from this guy it is because other than calling for more spending he never, ever reviews his work or analyzes the results of someone actually following his advice. It was huge, it was more than he asked for, and it FAILED.
Has that sunk in yet, Mr. Krugman – your suggestion was less than what was spent and the result was an increase in unemployment and a decrease in economic activity. That, to most, means the idea of a “huge” amount of deficit spending did not have the effect you and the administration claimed it would. It. Failed.
Unlike Mr. Krugman, most of us have come to terms with the Einstein definition of insanity and resist doing the same thing over and over again expecting different results.
Obviously that’s not the case with Mr. Paul “one-note” Krugman. Tuning him out is a perfectly acceptable reaction to his ceaseless call for more deficit spending.
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That’s a pretty brutal add. But it has a nice early 20th century “yellow peril” vibe.
It might also be quite prescient.
In fact, it may set in motion inflationary pressures that will blow up in the Fed’s face.
Randall Wray has put together one of the best summaries I’ve seen on the subject, and it doesn’t give me a warm fuzzy at all. Essentially QE2 (“quantitative easing”) has the Fed buying up toxic bank assets to push up their excess reserves. The thinking is that pushing those reserves into excess will stimulate loans. But it will also stimulate inflation.
Bernake’s claim is the reserve creation will be “temporary”. But – and this is the crux of the problem – it will have difficulty buying back those reserves because of the quality of the assets the Fed is sucking up to create them:
Bernanke carefully tries to navigate these waters by agreeing with the hawks that in the long run, Fed creation of too many reserves would be inflationary, but argues that in current circumstances the greater danger is deflation. Still, he reassures markets that reserves creation is temporary, and that the Fed will “exit its accommodative policies at the appropriate time”. Yet, if the Fed buys junk assets that will never have any value, it will not be able to sell these back to markets later — so there is no way to remove the reserves it created when it buys trash.
Indeed. So without the ability to sell back marketable assets, the reserves remain out there and inflation does too. You might think “deflation” is the biggest threat until you see run-away inflation reduce your retirement funds to zip and push your wages to poverty level.
This is a mess. And as we discussed in this week’s podcast, screwing with the economy at the central bank level is very delicate thing and could go wrong quickly and dramatically.
And what I’m hearing and reading – to include this article – says the possibility of that happening is high.
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That’s the central theme of a Ken Langone op/ed in the Wall Street Journal. Langone is a co-founder of Home Depot who gives Obama a lecture he’s long deserved. He does a good job of summarizing the absurd rhetoric used by Obama and his administration and the attitude they project that has done nothing to help and everything to hurt the recovery:
Your insistence that your policies are necessary and beneficial to business is utterly at odds with what you and your administration are saying elsewhere. You pick a fight with the U.S. Chamber of Commerce, accusing it of using foreign money to influence congressional elections, something the chamber adamantly denies. Your U.S. attorney in New York, Preet Bahrara, compares investment firms to Mexican drug cartels and says he wants the power to wiretap Wall Street when he sees fit. And you drew guffaws of approving laughter with your car-wreck metaphor, recently telling a crowd that those who differ with your approach are "standing up on the road, sipping a Slurpee" while you are "shoving" and "sweating" to fix the broken-down jalopy of state.
That short-sighted wavering—between condescending encouragement one day and hostile disparagement the next—creates uncertainty that, as any investor could tell you, causes economic paralysis. That’s because no one can tell what to expect next.
Again we confront the difference between a politician in a permanent campaign and a leader. And we see the result.
Obama seems mystified by the role of the president. He seems not to understand that leaders don’t use the old, divisive and politically charged rhetoric of the campaign trail, but instead have the job of doing (and saying) what is necessary to move things in a positive direction. That has not been something Obama has done at all when it comes to business.
There’s another point Langone made that is worth featuring:
A little more than 30 years ago, Bernie Marcus, Arthur Blank, Pat Farrah and I got together and founded The Home Depot. Our dream was to create (memo to DNC activists: that’s build, not take or coerce) a new kind of home-improvement center catering to do-it-yourselfers. The concept was to have a wide assortment, a high level of service, and the lowest pricing possible.
We opened the front door in 1979, also a time of severe economic slowdown. Yet today, Home Depot is staffed by more than 325,000 dedicated, well-trained, and highly motivated people offering outstanding service and knowledge to millions of consumers.
If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the ever-rapacious trial lawyers.
Regulations, taxes, compliance and mandates cost businesses billions each year. That’s billions that aren’t spent on employees, customers, expansion or growth. And it is especially stupid to increase all of those in a recession – yet that’s precisely what is going on now. And it keeps the market unsettled and at least defers or may in fact kill any possible action by businesses which may benefit the overall economy.
Obama’s actions and rhetoric are a case study of someone who doesn’t understand his job, doesn’t understand the power of the words he utters (because he doesn’t understand his job) and has been very irresponsible with his rhetoric at a time when the damage that rhetoric can do are compounded by the situation (recession).
OJT is not something a president should be doing – especially in a recession. And for the supposed “smartest guy in the room”, he sure seems like a slow learner when it comes to his job and the requirements of leadership.
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Today’s release of the Producer Price Index raises some interesting and scary questions. The core PPI was up only 0.1%, but a 1.2% increase in good prices and a 0.5% increase in energy prices brought the overall PPI up by 0.4%.
Now, the reason that food and energy are excluded from the core PPI and CPI is that they often show a lot of monthly volatility. Those prices simply rise and fall quickly, so, on a month-to-month basis, they may not mean much. Ultimately, however, a trend of price increases in, say, energy will trend to raise prices across the board, as that increases the cost of production.
The traditional Keynesian argument about inflation is that it tends to decrease when the economy is struggling, as aggregate demand is stifled. Sadly, in the 1970’s we learned that simply wasn’t true, and the existence of stagflation sent the Keynesians back to the drawing board for about 15 years to reformulate a Neo-Keynesian economic model. Essentially what happened in the late 60’s and early 70’s was that the Fed pursued a very accomodative monetary policy. Ultimately, even a slow economy couldn’t prevent that monetary expansion from showing up as inflation.
It should, because the housing boom was kicked off by a similar policy, and since the collapse, the Fed has pursued a policy of “quantitative easing”, i.e., buying $1.2 trillion of securities with hastily printed money. Overall, the monetary base has more than doubled over the past two years, also, as the Fed has kept short-term interest rates at 0%.
So, I guess the question is whether today’s PPI is just a monthly outlier due to the volatile sectors, or whether it’s a sign that monetary expansion is beginning to kick off an inflationary spike that will soon begin to show up in the CPI as real, noticeable inflation.
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Tis the season where absurd and wild claims are made (to be fair – by both sides) hoping they’ll hold up at least until the election has passed. Some, however, just are too off the wall and blow up immediately upon being uttered. An example is this claim by Democratic Congresswoman Debbie Wasserman Schultz:
“On the pace that we’re on with job creation in the last four months — if we continue on that pace — all the leading economists say it is likely that we will — we will have created more jobs in this year than in the entire Bush Presidency,” Wasserman Schultz, a Democrat from Weston, said on FOX News.
On its face, you immediately say –wait a minute, that can’t be true. To make that claim, one has to ignore the jobs lost prior to the “last four months” and disregard the total jobs created during the Bush era. Obviously the same process was going on during the Bush administration (job losses vs. job gains) which ended with a net positive. Wasserman Schultz would like you to ignore the meaning of “net” and job loss numbers in favor of only focusing on the pace of job creation. And I’m not sure she’s right about that.
As Veronique de Rugy points out over at NRO, while the jobs picture during the Bush administration was nothing to brag about, there’s no way that Wasserman Shultz’s claim has any credibility in the face of an economy that has shed almost 3 million jobs in the private sector during Obama’s presidency.
In effect, it’s a shot at getting a meme started with low information voters hoping they’ll accept it at face value and it will influence their vote. You have to love the “all the leading economists” appeal to authority she dropped in there. But if you want hard numbers, well, forget it.
They do exist however. Instead of providing them (you can see them in de Rugy’s post at NRO), a graph will do a much better job of pointing out the absolute nonsense of the Wasserman Schultz claim. While it is possible that more than 675,000 jobs created in the next 4 months somewhere, as we just saw with the latest numbers, the economy is still shedding jobs (95,000). It is the net that counts – not just one side of the ledger. If you “create” 1,000,000 jobs but lose 2,000,000 during the same period, it’s a net loss. And that’s what we continue to suffer right now. So her’s is an empty and meaningless claim that is disingenuous because ignores the whole picture in a transparent attempt to drag the left’s favorite punching bag back into the argument.
While total employment rose slightly (675,000 net jobs) during the Bush presidency, most of it was government employment. During the Obama presidency there’s been no overall growth of employment except slightly at the federal government level and no net increase. What Wasserman Shultz wants you to ignore is the blue bar on the left and the negative net job numbers we continue to see. If you do that, the claim sounds good. If you don’t, then her claim is nonsense.
Bottom line is Wasserman Schultz’s claim is selective statistical nonsense, but I expect to see it somewhere, sometime repeated as gospel.
UPDATE: Dale sends along the Bureau of Labor Statistics spread sheet which shows:
- From Jan 01 to Jan 09, a net of 1,080,000 jobs were created.
- From Jan 09 to present, 3,348,000 jobs have been lost.
- The low point in non-farm employment was Dec 09, when there were 129,588,000 payroll jobs
- Since that low, 613,000 jobs have been created.
- There are 580,000 fewer payroll jobs today than there were in January of 2000.
Make sure you understand that last line. In a nation that has increased its population during the last 10 years, we have a net job loss of 580,000 jobs since 2000.
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As I expected, the official unemployment numbers showed little change from last month. The big spikes in private-sector unemployment came at the end of September. The government’s statistical collection period ends in the middle of the month, however, so all of that was missed by the official number. And today’s release is the last one prior to the election.
Still, it can’t be said that this is a good number, with the official rate hovering at 9.6%.
My personal calculation of the unemployment rate, using the historical average of labor force participation, shows the rate of unemployment also holding steady at 13.2%.
The other day Federal Reserve chairman, Ben Bernanke, addressed a meeting of the Rhode Island Public Expenditure Council. During his speech, he did something Fed chairmen don’t usually do. He spoke about US fiscal policy. His words don’t really relay anything most of us don’t really know, but it is the fact that he felt compelled to say them that make them newsworthy. After I read them, I felt his uneasiness and, like many Americans, his frustration that the political leadership doesn’t seem to understand the problem or its urgency.
A few excerpts from his speech:
[I]n the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it–meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.
Whether you agree or not that government must address health care and “retirement security”, there’s not much to argue with in the highlighted last sentence. This is Econ 101 stuff. This is something Americans running their own households know almost instinctively. The problem – and frustration- is that Americans suppose this point must be just as obvious to their elected leaders, yet with the wild spending continues. While politicians talk about fiscal sanity and pass bills like PAYGO (that they then promptly ignore or make exceptions too), nothing is really being done about the looming economic and financial instability in the debt load brought on by excessive and persistent government spending.
Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. […] In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment. And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. […]
Again, almost everyone recognizes the truth of Bernanke’s words. If you run household, you know that if you amass huge credit card debt you are going to see an increasing amount of your income stream going to service that debt and less of it available for your use. That means less consumption because you are sending that money to a “foreign lender” – the credit card company. That in turn may translate into less of a house than you wanted, a smaller car or no college for the kids. If you run a business you know that increasing the amount of debt you carry and service means an increasing limit to your ability to expand, invest, hire new employees, improve benefits or give raises. At some point, your priorities take second place to the priority of paying back what you owe.
That’s where we’re headed as a country and more quickly than we might want to admit. Most would like to believe that this problem is understood and a high priority for our leaders. But that doesn’t seem to be the case and we see budget projections out 10 years that pile more and more debt on our already staggering economy.
The politicians continue to tell us it is necessary. They assure us that once the crisis passes they’ll address this problem in earnest. But will it then be too late? James Bacon Jr. addressed that recently in the Washington Examiner, discussing the “tipping point” in which the percentage of debt to the GDP hurts economic growth. According to a paper he cites by the World Bank, that assumed tipping point occurs when public debt equals around 77% of the country’s GDP.
Where are we?
According to International Monetary Fund calculations, the U.S. debt/GDP ratio in 2009 was 83.2%, above the tipping point, and will climb to 109.7% by 2015. […] That implies that the U.S. is experiencing a small growth penalty today: about one-tenth of a percentage point yearly. By mid-decade, however, the growth penalty could swell to 0.56% yearly — more than a half percentage point.
Unfortunately there’s no end to deficit spending in sight. Part of that is because politicians in this culture are not rewarded for doing tough and unpopular things. They’re usually turned out of office. And with the rise of career politicians who enjoy the trappings and perks of power and don’t want to give them up, most politicians are risk averse. Their preferred method of dealing with the “difficult decisions” and “sacrifices” Bernanke says need to be made is to kick the can down the road.
The point Bernanke is making is we can no longer afford to do that. Which brings me to the final excerpt from his speech:
Herbert Stein, a wise economist, once said, "If something cannot go on forever, it will stop." One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.
We have a choice right now – but either way, this is going to hurt. We can take charge and attempt a controlled crash landing to try and save as many as we can, or we can fly this problem until it naturally runs out of gas and deal with the consequences then. Unfortunately, it appears the latter choice is likely to be the only choice, given the current fiscal policy of this administration.
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