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Archive for the Economics Category

Economics and Economists (May 12, 2008)

Posted in Economics on May 12, 2008 by e-commentary.org

In the contemporary College of Arts and Crafts, the “Department of Economics” is the “Oakland Raiders” team. Most departments in America’s Colleges of Arts and Sciences want you to feel good. Economics should require one to think clearly. Even if you feel badly. Any question should be fair game.

The discipline today is premised on questionable assumptions that cannot be abandoned by the profession or most doctrine would need to be rejected. Or at least questioned. A person is greedy and self interested and all that, but that does not mean that she (or he) is even capable of acting in her (or his) own economic self interest. If individuals cannot or do not act in their own economic self interests, markets are not likely to behave properly or to reach equilibrium.

The area of economics known as “behavioral economics” ask how a person actually behaves. That should be the province of economics. How and why do people act or fail to act.

What could be more fun than playing with Lagrange multipliers and toying with the Slutsky equation and endeavoring to move others to a state of Pareto optimality? Economics is sexy. And economists?

Bumper sticker of the week:

An economist is someone who stands behind you in the bread line and tells you how it happened.

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The Economic Numbers Game (May 5, 2008)

Posted in Economics, Inflation, Unemployment on May 5, 2008 by e-commentary.org

“The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3 – 4 percent range).

. . .

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today’s U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession.

If what we have been sold in recent years has been delusional “Pollyanna Creep,” what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.”

Kevin Phillips

The CPI (Consumer Price Index), the benchmark for measuring inflation, underreports the actual prices for necessities such as food and energy. [See the e-ssay dated July 16, 2007 entitled “Back Door Inflation.”] The current CPI is “inflation sans inflation.” The U-3 unemployment figures underreport unemployment, whereas the U-6 figures are more accurate. The reporters should report the U-6 figures.

Perhaps the government should simply state and the media could mindlessly repeat that there is no inflation and are no unemployed citizens while the economy is growing ten percent every year. How much less true would these statements be than the current statistics?

“Transparency” is the rage in many disciplines today. Presenting accurate information and revising all the past information to conform to consistent and reliable benchmarks across time is a positive and long overdue start.

See www.shadowstats.com by John Williams and navigate from there.

Bumper stickers of the week:

73 percent of all statistics are made up on the fly.

Lies, Damn Lies, and Government Statistics.

Disraeli was 100 percent right.

U-6 Not U-3 Unemployment Figures.

[Mildred Loving, one of the plaintiffs who challenged the miscegenation law in Virginia, died today. See the e-ssay dated March 14, 2005 entitled “’Strict Construction’ Strictly Construed.”]

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Garbage In Garbage Out (March 24, 2008)

Posted in Economics, Housing, Society on March 24, 2008 by e-commentary.org

GIGO may be the only acronym one needs to know today. There are now daily cautionary tales about the CEOs and other ‘Os who created CDOs (collateralized debt obligations) while the OTC (Office of Thrift Supervision – one of the putative regulators) played dominoes. The details and new concoctions (CLOs, CDSs, ABSs, SIVs, etc.) are intriguing and revealing and depressing.

The simple truth is captured in the old expression: “Garbage In Garbage Out.” No alchemy can convert a bad loan into a good loan as it slithers through the economy. There is no way to “make a silk purse from a sow’s ear.” Putting “lipstick on a pig” does make the pig a swan. Rating something as “AAAAAAA” does not make it any safer than something rated “AAAAAA.”

This economic downturn is a small “d” democratic phenomenon. Many Americans (ordinary citizens; realtors; appraisers; loan officers; bundlers; butchers; bakers; candle stick makers, etc.) actively participated in the fraud in broad daylight with their eyes sufficiently open. Only those deluding themselves could have missed the inevitable Meltdown that is taking place and will get worse. Those on “Wall Street” not only should have known about the fraud they knew that everything was junk in gilded garb. Everything that glitters is not gold.

Bumper stickers of the week:

“Sir, ’Margin’ is holding on line 2”

Pigs get fed, hogs get slaughtered

[As many police as demonstrators took to the streets in DC on March 19. So few care or believe that anything can be done about the “Forgotten War.” The police did not don riot gear; a riot did not break out. The police let the demonstrators take over a few intersections without major incident. The demonstrators made a statement without making any major disruptions. A bad day for America and the world, yet a good day for the First Amendment.]

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The Economic Surge: Pushing On A Rope (February 11, 2008)

Posted in China, Debt/Deficits, Economics, Taxation on February 11, 2008 by e-commentary.org

The proposed “economic surge” seeks to inject about $150 billion into the economy. Some note that the $150 billion will be borrowed from China to buy toys and other goods from China. They give us the dollars and the goods. They have the goods on us. And the dollars. Business as usual.

Some observe that the recent rise in gasoline prices has increased the cost of living for citizens by about $150 billion. They say that the economic surge will offset that expenditure. However, the additional payment for gasoline should be seen as a direct payment–foreign aid–to many dangerous political regimes. The U.S. is directly funding terrorist activities rather than taxing gasoline and both keeping the additional taxes and reducing consumption of oil. [See the e-ssay dated December 18, 2006 entitled “Pass The ‘Terrorist Tax’”].

Few are saying that the $150 billion dollar economic surge is a tax. It is a tax. It is a tax on the kids. The “Kid Tax” is more important that the “Terrorist Tax.”

The problem with the economic surge is that it is a chimera. The Federal Reserve action may prevent a panic on Wall Street in the short term, yet it is creating a greater problem on Main Street now and in the intermediate run. The fundamental problem is not just the number of dollars available for circulation in the economy, it is the individual consumers who are the fuel of the economic engine. The public, like its government, is spent. All are in debt up to their tonsils. More debt, private and public, is not the intermediate run answer. The lowered interest rates are creating a disincentive for saving when everyone of every political strip states that we should be saving. The impact of lower interest rates is being felt again by the elderly who are now earning less. [See the e-ssay dated April 25, 2005 entitled “Our Friend The Fed”].

Bumper sticker of the week:

They matter (Budget Deficits, Personal Deficits, Trade Deficits)

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The Microeconomics of Suburban Subsistence: Three Years Later (February 4, 2008)

Posted in Economics, Housing, Society on February 4, 2008 by e-commentary.org

40 wasn’t a red letter year for them. They are deeply in the red this year. [See the e-ssay dated February 7, 2005 entitled “The Microeconomics of Suburban Subsistence” for background]. He can only find part-time work for a company that does not provide any health care or contribute to a pension fund. Their $175,000 house is now worth $150,000 even with all of the improvements financed with an equity line of credit and sweat. The City still appraises it at $200,000 because the polis wants its pound of flesh. The price of a pound of (bovine) flesh has risen about forty percent (40%); the meat may be tainted. The Fed’s reduction of the Federal Funds Rate has not been passed on or trickled down to them or to prospective buyers of their home. Interest rates to consumers are “sticky” and “ratcheted.”

The calls start like clockwork, because the callers start with the clock. He can set his watch by the first call. At eight o’clock, they start. They would start earlier except for . . . federal regulation. The Fair Debt Collection Practices Act, a federal regulation, sets limits on the amount of harassment that can be inflicted by a creditor on a debtor. And the wake-up calls continue unabated all day, even after the consumer is wide awake. From 0800 hours until 2100 hours. Caller id is now a necessity rather than a luxury. The credit card companies that cooed and wooed him are now cajoling and whining. The companies devised a Bankruptcy Code that is expensive and burdensome. The “Hope Now” program does not offer much hope now. Try it; call the number yourself. However, Congress now is considering a variety of legislation including a bill that allows the Bankruptcy Courts to adjust the amount owed on a home loan to reflect the current market value of the property. That approach has some possibility.

Not only is the value of the house down. Of note, the note for the car is now greater than the retail Blue Book value of the beast. Each 25 cent rise in the retail price for gasoline lowers the market value of the gas guzzler by about one thousand dollars. The rational course of action may be to give their car back to the bank and walk away from the house.

Bumper sticker of the week:

Greed isn’t always really good

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The “R” Word; The “D” Word or The “S” Word? (January 14, 2008)

Posted in Conflicts of Interest, Depression, Economics, Perjury, Rating Agencies, Recession on January 14, 2008 by e-commentary.org

“A recession occurs when your neighbor loses his job; a depression occurs when you lose your job.“ A recession is technically defined as two successive quarters of a downturn in the economy. The traditional definition of a recession is backward looking. Would you value being told that you were pregnant fifteen months ago? Policy planning requires a more forward-looking perspective. If you lose your job, is it a depression? If you have less earning capacity despite working overtime and pay more for goods and services, is it stagflation? (See the e-ssay dated August 7, 2006 entitled “The Fed: Deal With ‘Stag’; Deal With ‘Flation’?”).

The credit rating agencies such as Standard & Poor’s, Moody’s and Fitch suffered from the same grade inflation their employees suffered from in college. Everyone in college gets As; their parents are spending too much to bestow anything less. In the real world, the grade inflation is trebled. The credit rating agencies gave the insurers of bonds the “AAA” ratings. The insurers of bonds such as Ambac Financial Group and MBIA also suffered from grade inflation. The insurers of bonds then gave everyone the “AAA” ratings.

The downturns in foreign markets today are a more accurate verdict on the state of and prospects for the American Economy. In America, risk is not tied to reward whereas foreign investment professionals are more accountable for their performance. And while the foreign kids were in college, they did not get As just for showing up.

[The recent incident in the Strait of Hormuz: Gulf of Tonkin II or the USS Cole II? The statements in English (not translated from a foreign language) from someone expressed a clear present intent to do harm. The Navy responded in a professional and disciplined way and maintained their course and speed. Someone can be provocative without provoking a response that is not in the nation’s interest.]

Bumper sticker of the week:

The Mortgage Meltdown continues.

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Looking Back and Ahead (December 31, 2007)

Posted in Economics, Law, Politics, Society on December 31, 2007 by e-commentary.org

The Mortgage Meltdown continues unabated. Someone should collect a chronological list of the statements of the economists and businessmen in 2007 who predicted that the Mortgage Meltdown was “no big deal.”

The political pundits have voted. ________________ is the Republican nominee. ________________ is the Democratic nominee. No doubt about it, they proclaim. Someone should collect a chronological list of the prognosticators’ predictions in 2007 and those yet to be made in 2008. What do the tenth-graders say: Faze the Nation; Beat the Press; Almost Broadcasting Company; Faux News; Useless News and World Distort; The Compost, etc.; those crazy kids.

The Neo-Confidence Men (“Neo-Cons” in ordinary parlance) have once again declared “Mission Accomplished” in Iraq. The pundits seem to be bamboozled again. More Americans died in Iraq in 2007 than in any other year. World War III continues unabated. The escalation surge has not advanced any fundamental interests. The cauldron in Iraq and the Middle East continues to roil and boil and percolate. Afghanistan and Pakistan and ________stan are roiling and boiling and percolating.

Someone observed that “’experience’ is simply the name we give to our mistakes.” Now may be the time to call our recent experiences mistakes.

The sports pages are laced with steroids and punctuated with asterisks. Turn off the tv and go biking, hiking, running, living. The writing in the sports pages is still worth reading.

Global climate change/warming is heating up and is the subject of ordinary conversation. Embryonic stem cells may now be available without controversy.

Resolution for 2008. The Republic needs every citizen to commit to a private sector health care initiative. Eat less; exercise more. Exercise your mouth less and your feet more. At least in January.

Prediction for 2008. An ugly, vicious, amusing and expensive political campaign. Something big will happen abroad (Iraq, Iran, Afghanistan, Pakistan, ________stan, Yemen, etc.) in Aug. – Oct. and all bets will be off. Or what is happening at home in the economy will finally become clear to the electorate and command attention.

And Anna Nichole Smith, RIP.

Bumper stickers of the year:

If all economists were laid end to end, they would not reach a conclusion. GBS

If all political pundits were laid end to end, they would not reach a clue.

If all climatologists were laid end to end, they would ___ would not ___ reach a consensus.

Experience is simply the name we give to our mistakes. Oscar Wilde

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More Fun At The Fed (December 11, 2007)

Posted in Economics, Federal Reserve, Inflation on December 11, 2007 by e-commentary.org

On September 18, the Fed reduced the FFR (Federal Funds Rate) by .5 percent; on October 31, the Fed reduced the FFR by .25 percent. The pundits claim that the Fed will reduce the FFR by another .25 or .50 percent tomorrow.

Reducing the FFR results in the injection of even more paper money into the economy. There are already too many dollars chasing too few goods and services even if those dollars are being hoarded by some skeptical lenders at this time. The additional money is not going to spur the production of additional goods and services; the production of goods in China and the provision of services by India are responsive to other factors. The additional money in circulation will only drive up the cost of the available goods and services which means we suffer. . . inflation. “Price stability” (holding down inflation) was one of Ben Bernanke’s primary concerns in his previous academic writings. He also studied the relationship between a lack of liquidity and the Great Depression and is aware of the precarious national predicament.

The Economy is threatened. The decline in the dollar (in relation to the Canadian “Looney” and the Euro and beaver pelts) is having and will have deleterious impacts even though some American exporters benefit. The gradual transition from the Petrodollar to the PetroEuro is more than symbolic. The United States government is paying less interest for Treasury bills and bonds, but that may soon spawn less interest among potential investors in the bills and bonds. Then the United States will need to pay more interest to attract interest. The low interest rates also discourage what little savings there is in the United States today. Reducing the FFR is appearing to be a bailout for Wall Street at the expense of other individuals and policy concerns and objectives.

Bumper sticker of the week:

Stagflation Again?

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Greed on Steroids (October 22, 2007)

Posted in Bankruptcy, Economics, Society on October 22, 2007 by e-commentary.org

One score years ago, Greed was just good. Now Greed is God. God is Greed. Those who embrace one seem to embrace the other. Greed is now on steroids.

In theory, Chapter 11 of the Bankruptcy Code addressing business reorganization exists because of an assumption that a “going concern” business is synergistic and provides positive public externalities such as steady jobs, established customer networks, etc. In other words, the business provides some value beyond the price of the individual assets. Liquidating the business rather than rehabilitating it, the argument goes, expunges the possible public benefits. In practice, however, Chapter 11 often is like a second marriage, the triumph of hope over experience.

Today, the hedge fund managers and private equity boys pursue an opposite tack. They take a going concern, sell the assets and vaporize the “going concern” value. They finance the disintegration with OPM (Other People’s Money) and pay reduced taxes for their assault on the public weal. Instead of an “invisible hand” promoting the common weal, we are allowing others to cut off our hands.

America now rewards the destruction rather than the creation of wealth. Once upon a time, risk was the handmaiden of reward. Envy–the desire for something that someone else has–can be a positive incentive particularly if the owner of the coveted item seeks something owned by someone else. Markets develop. In a properly functioning capitalist system, an individual presses his nose against a showroom window and then goes out and puts the same nose to the grindstone to acquire the wherewithal to acquire the good. However, those accumulating money today are not taking any personal risk or making a sacrifice, although their actions risk the stability of a precarious Economy.

In a short time, the hedge fund managers and private equity boys also have managed a non-hostile takeover of both the Democratic and Republican Parties with little resistance. They own C. Schumer and H. Reid and H. Clinton. No one is protecting the public. The SEC (Securities and Exchange Commission) is now a wholly-owned subsidiary of the NYSE (New York Stock Exchange).

Bumper sticker of the week:

Feed The Homeless To The Hungry

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The Legacy Of “Easy Al” And Easy Money (October 15, 2007)

Posted in Economics, Federal Reserve, Gold Standard, Greenspan, Housing on October 15, 2007 by e-commentary.org

John and Johanna, Juan and Juanita, Ivan and Ivana, their story is archetypical in architecture today. They should have purchased a 1400 square foot starter apartment, but they were induced and seduced into purchasing a 2200 square foot single family two-story home. They could not afford much more than the down payment. They could not afford the subsequent 359 monthly payments. They are being evicted. They will have to live somewhere, someone observes. They need to find a 1400 square foot apartment, but there are few available and many other evictees and evacuees competing for them. And what about the 2200 square foot abode? It sits empty. (See the e-ssay dated April 24, 2006).

“Easy Al” Greenspan never met a problem he would not fix with a fix of easy money. The Fed is charged with addressing monetary policy not fiscal policy. He set fiscal policy without even acknowledging the need for safeguards against the irrationality his monetary policy unleashed. Be suspicious of someone who falls under the spell of one and only one cult commentator; someone should distill the thoughts of 371 (give or take) thinkers in developing a worldview. The Gold Standard crowd almost appears reasonable. At least a gold standard sets a standard for the money supply. Sound monetary policy requires a “goods and services” standard/benchmark. The amount of paper injected into the economy should be measured against the goods and services. Instead, more money than necessary was hurled at problems thereby begetting more problems.

Bumper sticker of the week:

“A cynic is a man who knows the price of everything and the value of nothing.” Oscar Wilde

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Archive for the Economics Category

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