Monthly Archives: November 2011
Today’s economic calendar is fairly full, so let’s get cracking:
Initial jobless claims continue to drop slowly, with this week’s claims tallying 397,000, finally getting us below the awful 400,000 mark. Once again, though, last week’s number was revised upward to 406,000. These upward revisions have become quite commonplace.
Retail sales growth for October is mixed at best, trending at about 3% for same-store sales and about 5% for total sales.
Nonfarm business productivity jumped an annualized 3.1% in the 3rd quarter, much better than expected. Compensation growth, on the other hand, was restrained, rising an annualized 0.6%. Overasll, unit labor costs fell -2.4%.
Bloomberg reports that their consumer confidence index dropped to its lowest level since the 1st quarter of 2009, to -53.2.
Strong sales for non-durable goods and an upward revision to durable goods resulted in a better-than-expected 0.3% jump in September factory orders.
The ISM Non-Manufacturing index continues to point to steady, if slow, growth in the service sector, with the index at 52.9, just one tick below last month’s 53.
For years I’ve heard people say that China isn’t an expansionist military threat on the par of, say, the old Soviet Union. And for the most part, I believe that. I do believe they’re a regional expansionist military threat and I also believe they’re building their military with unprecedented spending to fulfill that role. That’s fairly obvious in their dealings with other Asian countries within the China sea area.
But are they an international threat to peace?
In some ways, absolutely. For instance, their relationship with Iran threatens to make the unstable Middle East even more unstable. And they’re blatantly disregarding UN sanction and breaking promises to the US about weaponry they are exporting:
China is continuing to provide advanced missiles and other conventional arms to Iran and may be doing so in violation of U.N. sanctions against the Tehran regime, according to a draft report by the congressional U.S.-China Commission.
“China continues to provide Iran with what could be considered advanced conventional weapons,” the report of the U.S.-China Economic and Security Review Commission says.
According to the report, which will be made public Nov. 16, China sold $312 million worth of arms to Iran, second only to Russia, after Congress passed the Iran Freedom Support Act in 2006 that allows the U.S. government to sanction foreign companies that provide advanced arms to Iran.
So, essentially China is calling the US bluff and ignoring the UN. And it is actively trading with a self- declared enemy of the US (and a country which has killed Americans in both Iraq and Afghanistan).
Speaking of the US, China has even gone further:
Most of the weapons transfers involved sales of Chinese anti-ship cruise missiles, including C-802 missiles that China promised the United States in 1997 would not be exported to Iran.
China also built an entire missile plant in Iran last year to produce the Nasr-1 anti-ship cruise missile.
While the article goes on to say that technically the sale isn’t a violation of the Iran, North Korea and Syria Nonproliferation Act of 2006 because the payload and range are below the specified minimums, what it doesn’t say is the value of the advanced technology such a sale brings a country like Iran. Obviously what they learn from the C-802 will be incorporated in their own types of missiles.
The report in which these findings were contained makes a valid conclusion based on them:
The report concludes: “Despite Beijing’s stated claim to be acting as a responsible major power, China continues to place its national interests ahead of regional stability by providing economic and diplomatic support to countries that undermine international security.”
Of course China waves it all away. I mean, what are we going to do about it?
Chinese Embassy spokesman Wang Baodong denied China violated U.N. sanctions.
“When it comes to the issue of nonproliferation, China has been strictly adhering to the relevant U.N. resolutions and faithfully carries out its international obligations while strictly implementing its relevant domestic policies and regulations in the field.”
He said the commission “should cast off its Cold War mentality, respect the facts and stop making unwarranted allegations against China.”
Of course what sales like the ones China has been making to Iran do indeed undermine international security, or, at least Middle East regional security. Iran now brags about missiles it has that can hit its avowed enemy, Israel, and most of the world believes they’re pursuing nuclear weapons. These sorts of sales only aggravate that situation.
Israel has to take them seriously and has:
Israel’s test launch of a ballistic missile at Palmachim Air Force Base on Wednesday, in an apparent show of military strength, has ensured the threat of Iran’s nuclear capabilities remains firmly on the public agenda.
International sources quoted in the Israeli media said the test appeared to have been conducted with a ”surface-to-surface” missile known as the Jericho 3, which has a range of between 3000 and 7000 kilometres and is capable of carrying a nuclear warhead.
Of course Israel has never publically admitted it has nuclear weapons (but most believe they do) and until this launch never publicly admitted it had a missile with this range. It was indeed a show of force to make it clear to the Iranians that they had best mind their p’s and q’s. But it certainly indicates in increase in tensions and a decrease in stability in a region already dangerously unstable.
So we have China ignoring or circumventing international sanctions to trade critical weaponry with a rogue nation with military and regional aspirations and essentially telling the rest of the world to bug off.
The question is “why?”
Is it because it perceives weakness in the US? Europe? The UN? All three? China has weathered the recession in relatively good shape. It’s economy is still doing well. It has been the recipient of a wealth transfer through trade that has enabled it to spend much more freely on its military and it seems to be recognizing a growing vacuum in the world power balance as the US is perceived to be withdrawing some from its position of dominance.
Is China just interested in a regional role, or does Iran signal that China hopes to expand into much more of an international power player? China watchers who’ve been claiming that it is only regional power which interests the country may have to recalibrate their thinking. It seems, at least to me, that China sees a much broader role for itself (and its self-interest) in the world and may be beginning to make moves internationally to fulfill that role.
Of course time will tell, but Iran (and some of its activities in Africa and the China sea) seems to be a good indicator of a larger desired international role for China than that which was previously assumed for the country.
Economic ignorance and the desire for “social justice” drives much of the left’s nonsensical arguments
I was reading something by Matt Welch at Reason and he inspired some thought about OWS and the left.
Welch takes a bit of nonsense in Salon.com called “The New Declaration of Independence” on and he cites a rather long passage from the article. In it are these few paragraphs:
For the young, higher education was said to be a ticket to class mobility, or at least a secure career. Instead, middle-class students have taken on billions of dollars of inescapable debt during a prolonged jobs crisis. Lower-income students are blatantly ripped off by usurious scam artists working for educationally dubious for-profit schools. Even those seeking to join the professional class, through medical school or law school, find themselves with mountains of debt and dwindling job prospects. The rapidly rising cost of higher education pushes bright students into lucrative but socially destructive fields, like finance. [...]
For millions of middle-class and striving blue-collar American families, the promise of homeownership as the world’s safest investment became another money-making bubble for Wall Street that remains Main Street’s intractable mess. Those members of the middle class unfortunate enough to do as an industry of wise men counseled them and invest in the stock market and real estate have seen the fruits of a lifetime’s worth of labor evaporate in multiple busts and crashes that the wise men always escape from economically intact. [...]
It is not in the national interest to force the impoverished to become wage slaves to pay off insurmountable debts owned to payday lenders and hugely profitable bankers. [...]
Every other rich nation on earth heavily subsidizes higher education. We force mere kids to mortgage their futures, then ensure that the debt follows them the rest of their lives, regardless of their living circumstances. [...]
Even millions of homeowners who "did everything right" find themselves underwater, or illegally foreclosed upon by banks running roughshod over the rights of homeowners by robo-signing fraudulent foreclosure documents by the thousands.
Welch does a very good job of firing with all guns on this nonsense.
Which is why phrases like "wage slaves," "inescapable debt," and "force" "force" "force" leave me feeling like a brother from another planet. Adult human beings have agency, the ability (even responsibility!) to run their own cost/benefit analyses and choose accordingly. You could go to a state school (or community college) instead of an over-inflated prestige mill. You could pay for a 10-year-old car in cash, instead of a new one on installments. You could try to make it in Minneapolis before living the dream in Williamsburg. You could stare into the face of a no-money-down, adjustable rate 30-year mortgage at the tail end of a housing-price run-up and conclude "Maybe that one’s not for me." You could even choose to turn down a bad if high-paying job when you’re living below the poverty line. If we indeed live in a "candid world," let us state bluntly that offloading 100% of the blame for your own mountain of debt on a group of Greedy McBanksters who "forced" you to "play by the rules" is more than a little pathetic.
Of course, he’s entirely correct as far as he goes. And, to his credit, he touches on the real problem. The “mountain of debt” chosen by those who have taken on such enormous debt in exchange for what many times turns out to be a useless degree costs so much because government subsidizes it through its loans.
While the choices Welch points to are an entirely reasonable response to the “woe is me, I made bad choices and want you to bail me out” crowd, that crowd still doesn’t understand that without the government, not the “greedy bankers”, higher education would be much more reasonable than it is. Right now, colleges and universities don’t have to compete for a student’s dollars. They simply state the price and you either pay or you don’t go. Imagine having to compete to get those hard earned or even borrowed dollars.
So the emphasis on banks and the greedy is misplaced in the case of college loans. If anyone is the greedy one’s it is schools. And they’re just naturally taking advantage of the results of the government distorting the market.
And that’s not the only protest that’s misplaced. Michael Bloomberg got in hot water yesterday for saying that the housing crisis was the fault of government. In fact it was.
Did bankers have something to do with it? Well yes, but it wasn’t their program and its enforcement that inspired the problem. Bloomberg points to the real problem:
"I hear your complaints," Bloomberg said. "Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.
"But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."
Investors Business Daily goes into some detail about all of that, pointing out that it was indeed government enforcing government policy that led to the housing bubble. But understanding that requires a little research:
Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.
At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.
The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.
The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.
"The agencies will not tolerate lending discrimination in any form," the document warned financial institutions.
Ludwig at the time stated the ruling would be used by the agencies as a fair-lending enforcement "tool," and would apply to "all lenders" — including banks and thrifts, credit unions, mortgage brokers and finance companies.
Again you have the government intruding in the market in the name of social justice and being threatened by that government to modify their practices and make bad loans. And that’s just what they did. The IBD chart in the article cited tells the story. Government policy required bad loan practices be used to comply with the law.
The point, of course, is that government has most of the blame for creating the two problems that Salon.com is going on about. And, one can only assume, it is ignorance of market dynamics or more broad ignorance of economics in general that has them using this nonsensical argument that ignores the real core of the problem. You have to do that if your intent is to use government as the instrument of “social justice”, even when it is government coming to the “rescue” of a problem government created.
But then, that shouldn’t really come as a surprise. What has become evident to me, in general as I watch most of the left, is that Econ 101 was never a subject that was required for a journalism degree or most other liberal arts degrees that are so favored on that side of the spectrum. And it is ignorance (or blatant disingenuousness, take your pick) that drives such clueless arguments as that which Salon (and OWS) is pushing. However, you have to do that if your intent is to use government as the instrument of “social justice”, even when it is government coming to the “rescue” of a problem government created.
Today’s economic statistical releases:
ADP estimates that October private payrolls rose 110,000, little changed from September’s revised 116,000.
Challenger’s layoff report shows that layoff announcements eased in October to 42,759.
The Mortgage Bankers’ Association reports that mortgage purchase applications rose by 0.2% last week. Mortgage rates for 30-year conforming loans fell 2 basis points to 4.31%.
A day after the White House said that the State Department would make the call, President Obama has decided he’ll make the ultimate decision on the Keystone XL pipeline which would bring petroleum product from the tar sands of Canada to the US.
This has become a cause the “climate change” crowd has embraced and have tried to paint as one which would supposedly increase “global warming”. Of course the actual science of “global warming” doesn’t support the contention that the earth is warming, however that is a part of the science that these folks have decided to ignore.
The fact that Obama has chosen to make the decision himself may confuse some – why not let the State Department, who makes decisions such as this when a foreign nation is involved? Well that’s what makes me uneasy. There’s an election coming and his environmental base has been very disappointed in him. Read between the lines of the statement he made and the answer he provided to a question:
“We need to encourage domestic oil and natural gas production,” Obama added. “We need to make sure that we have energy security and aren’t just relying on Middle East sources. But there’s a way of doing that and still making sure that the health and safety of the American people and folks in Nebraska are protected, and that’s how I’ll be measuring these recommendations when they come to me.”
The “but” is rather pregnant isn’t it?
Then the question concerning jobs and the promise of thousands of jobs if the pipeline is approved. Will that have an effect on his decision?
“It does, but I think folks in Nebraska like all across the country aren’t going to say to themselves, ‘We’ll take a few thousand jobs if it means that our kids are potentially drinking water that would damage their health or rich land that’s so important to agriculture in Nebraska are being adversely affected,’” Obama said, adding, “because those create jobs, and you know when somebody gets sick that’s a cost that the society has to bear as well. So these are all things that you have to take a look at when you make these decisions.”
For your information, petroleum pipelines crisscross this country. In fact, more than 168,000 miles of petroleum pipelines have been in operation, safely, for decades. 85% of all petroleum product is moved by pipeline.
So this isn’t about “safety” – the product has been moved in safety for years. It’s much like the fracking argument. It is unfounded and based in fear of something that isn’t true. And like the fracking argument, the opposition likes to try to frame the procedure as something new and dangerous. Well it isn’t new. Fracking has been in use since 1948 very safely and over a million wells have been developed using it.
The argument used by opponents of the Keystone XL pipeline is that the petroleum shipped in that pipeline is more corrosive and dangerous than regular petroleum product. The Association of Oil Pipelines answers that question:
Opponents have also wrongly suggested that crude from the Canadian oil sands is somehow more corrosive than other heavy crudes, which have been moved safely for decades. It is not. The oil sands may be produced differently, but the product readied for pipeline transportation will be behave like any other heavy crude oil. There is simply no evidence pipelines carrying diluted bitumen behave any differently than a pipeline carrying conventional crude oil, or that diluted bitumen is more corrosive than other crude oils. Pipeline operators don’t build multi-billion dollar assets to then destroy them with a corrosive product.
So Obama gets to decide between jobs and increased energy security and politics. We currently get 400,000 barrels a day from the oil sands in Alberta. This pipeline promises to add another 700,000 barrels a day from a secure source. Or will Canada be forced to build a pipeline to the west coast and ship it to China?
This should be a no brainer. Jobs along with safe transportation of a vital commodity which powers our economy is a winner for the nation. But this is a president in political trouble and desperately trying to shore up his eroding base.
Will he put the well being and energy security of America and Americans first?
Or will he play the politics card?
Unfortunately, the latter is much more probable than the former, given how political Obama is. Don’t be surprised if he turns down jobs and energy security for the promise of increased political support from his base.
Well it looks like the much touted Euro economic package for Greece may be coming apart more quickly than expected, thanks to the bombshell announcement by Greek PM George Papandreou. Papandreou has decided, apparently without consulting anyone else, that the package should be put up for a vote. As the Wall Street Journal points out, a no vote could be disastrous:
A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.
A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown.
Of course the country is already facing a financial meltdown, austerity measures have sparked violent protests for months and the purpose of the package agreed upon by European leaders was designed to help avert a meltdown and save both the Greek economy (as much of it as can be saved), while propping up the Euro.
As you might imagine, the surprise announcement was not favorably met by other European leaders. In fact, it wasn’t met favorably by a lot of Greek leaders who apparently had no idea that a referendum was in the offing.
Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, refused to rule out a Greek debt default.
"The Greek prime minister has taken this decision without talking it through with his European colleagues," he said in Luxembourg.
Asked whether a Greeks "no" vote would mean bankruptcy for Greece, Juncker responded: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on."
I think most understand that no matter how the “question is formulated”, a vote against the plan would most likely send Greece spiraling down the drain and the fear is it would take the Euro with it
Markets, which had calmed down after the plan was announced, have had the expected reaction to the Papandreou referendum plan. They’ve headed down:
Greek Premier George Papandreou said he will put the nation’s bailout deal through a referendum, potentially undoing a long-awaited agreement struck last week and sending European stocks down 3.3 percent. The region’s bank shares fell 6.4 percent.
"European leaders feel as if they’ve been blindsided by Papandreou," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.
He said the move underscored the current risk in Europe and threw a wrench into the region’s stability plan.
The Dow dropped 2% on the news.
While our attention is on the Palinization of Herman Cain, we need to really keep an eye on this impending crisis. If Greece has a referendum and the vote is “no”, what Cain did or didn’t do in the 1990s isn’t really going to matter much. We’ll have another financial tsunami headed our way and we’d better begin to batten down the hatches.
Today’s economic statistical releases:
Weekly retail sales: ICSC Goldman reports a 0.7% weekly rise in same-store sales and 3% year-on-year, while Redbook reports a year-on-year rate of 5.2%.
Despite some positive indicators, the ISM Manufacturing Index fell to a weaker than expected 50.8 from 51.6 last month. On the positive side, the key sub-index of new orders, which have been contracting for the last 3 months, show expansion in this report. The prices paid index also dropped substantially as prices for manufacturing inputs fell.
Construction spending in September gained 0.2% over the pervious month, which is still positive, but far slower than last month’s 1.4%. On a year over year basis, spending fell -1.3%.
Most intuitively know you can’t borrow your way out of debt, so it seems like a silly question on its face. But the theory is that government spending creates a simulative effect that gets the economy going and pays back the deficit spending in increased tax revenues. $14 trillion of debt argues strongly that the second part of that equation has never worked.
The current administration and any number of economists still believe that’s the answer to the debt crisis now and argue that deficit spending will indeed get us out of the economic doldrums we’re in. William Gross at PIMCO tells you why that’s not going to work:
Structural growth problems in developed economies cannot be solved by a magic penny or a magic trillion dollar bill, for that matter. If (1) globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries, then rock-bottom yields can do little to change the minds of corporate decision makers. If (2) technological innovation is destroying retail book and record stores, as well as theaters and retail shopping centers nationwide due to online retailers, then what do low cap rates matter to Macy’s or Walmart in terms of future store expansion? If (3) U.S. and Euroland boomers are beginning to retire or at least plan more seriously for retirement, why will lower interest rates cause them to spend more? As a matter of fact, savers will have to save more just to replicate their expected retirement income from bank CDs or Treasuries that used to yield 5% and now offer something close to nothing.
My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels.
Not good news, but certainly the reality of the situation. Deficit spending has been the panacea that has been attempted by government whenever there has been an economic downturn. Some will argue it has been effective in the past and some will argue otherwise. But if you read through the 3 points Gross makes, even if you are a believer in deficit spending in times of economic downturn, you have to realize that there are other reasons – important reasons – that argue such intervention will be both expensive and basically useless.
We are in the middle of a global economy resetting itself. Technology is one of the major drivers and its expansion is tearing apart traditional institutions in the favor of new ones that unfortunately don’t depend as heavily on workers.
Much of the public assumes we’ll return to the Old Normal. But one has to wonder, as Gross points out, whether we’re not going to stay at the New Normal for quite some time as economies adjust. And while it will be a short term negative, the Boomer retirements will actually end up being a good thing in the upcoming decades as there will be fewer workers competing for fewer jobs.
But what should be clear to all, without serious adjustments and changes, the welfare state, as we know it today, is over. Economies can’t support it anymore. That’s what you see going on in Europe today – its death throes. And it isn’t a pretty picture.
So? So increased government spending isn’t the answer. And the answer to Gross’s question, as he says, is “no”.
The next question is how do we get that across to the administration (and party) which seems to remain convinced that spending like a drunken sailor on shore leave in Hong Kong is the key to turning the economy around and to electoral salvation?
A pair of very interesting articles.
First come the Washington Post’s article on Sunday which discusses the problems with the Social Security program in very honest and stark terms.
For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.
Now, Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees. Replacing cash lost to a one-year payroll tax holiday will require an additional $105 billion. If the payroll tax break is expanded next year, as President Obama has proposed, Social Security will need an extra $267 billion to pay promised benefits.
Then comes Paul Krugman’s attempt to dismiss it. For his part, Krugman talks about a myth and presents it as fact:
You see, the WaPo makes a big deal of the fact that Social Security is currently taking in less in payroll taxes than it’s paying out in benefits. Yet this means nothing, except as a favorite point used to create confusion by those who want to kill the program.
I’ve written about this repeatedly in the past, but here it is again: Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.
In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.
Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.
It is the latter that is correct. There is no “dedicated source of revenue” per se. Hasn’t been for years. What exists instead is a pile of Treasury bonds … IOUs the government wrote itself. Congress, years ago, spent the money supposedly to be set aside for Social Security.
Krugman then tries to wave away the fact that even if the “dedicated source of revenue” doesn’t exist, heck, it’s a legal and untouchable (entitlement – must be paid, at least under the law as it exists now) part of the budget and the government will fund it.
That means that regardless of revenue, the government must pay.
So tell me again how, given the unfunded future obligations of Social Security, it matters if the money comes from the mythical “lockbox” that has never existed or the general fund? In either case, unless taxes are drastically increased, the money will have to be borrowed. In either case, Social Security is in the negative – paying out more than it is taking in. Nothing changes that.
Krugman’s last sentence is absolute hogwash. Of course it would have a “deficit” if it was a part of the federal budget. It has a set requirement to pay a certain amount out in benefits. It is a mandatory entitlement by law.
The defense budget is discretionary. There his postulation is correct. That budget is whatever Congress says it is each year.
For Social Security, the deficits would come from unmet and underfunded obligations – note the word: obligations- and it would require the federal government to either raise more revenue or borrow to meet those obligations. That is not true of the defense budget. Playing word games and false analogies to try and wave the truth away doesn’t change that.
But it does cement forever the fact that Paul Krugman has become much less of an economist and much more of a hack than I thought possible.