blog of kaiyen

Last night, on the Daily Show with Jon Stewart, Peter Schiff was interviewed.  Schiff is an “economic commentator” (as compared to an economist?) and the head of a brokerage firm.  Stewart showed a number of clips of Schiff on CNBC prior to the current economic crisis warning of the dangers of the housing bubble, sub-prime mortgages, and over-leveraged companies and individuals.  These comments were made well in advance of the actual recognition of the situation and there is audio of people actually laughing while he is talking (I got the impression they were other guests of panel shows, not the moderators or CNBC folks themselves, but I cannot be sure).

At any rate, the gist of Schiff’s argument is that

1. The government should have let companies fail.  No company is too big to fail.
2. The market will dictate how things will fall out in the end, even if it means massive recession for now.  The market is strong.
3. This is all because of how messed up things were, so let’s let the bad die out
4. The government is just making things worse by intervening, and we might have hyperinflation.

In some ways, I find this very dangerous.  In others, thought-provoking.

Read the rest of this entry »

Japan’s Economy Shrinks A Record 15.2% – BusinessWeek.

On the one hand, a 15.2% annualized drop is…staggering.  Mind-blowing.  Mind-numbing.  On the other hand, the article makes a good point in that everyone expected a huge hit since the country has responded to expected decline in exports very aggressively.  They have closed plants, not just decreased production.  

Also, the current account, which is roughly defined as exports-imports, has dramatically shifted for Japan.  Before, they were likely running a CA surplus, since so many of their products are exported to the US, China, etc.  But suddenly those exports have dropped and while they still might be in surplus (I don’t know, to be honest) they might also be in a slight deficit now.  When a country is trying to balance its internal monetary and fiscal controls and its desired level of the current account (which of course impacts the internal economy, since a CA surplus means higher production and employment, etc), changes in the CA can be really devastating to a country that has relied upon a surplus for so long.

Still, 15.2% is crazy.

 BBC NEWS | Business | US economic outlook ‘improving’.

Some interesting bits here.  First, to quote:

“The Fed says it expects the economy will shrink between 1.3% and 2% this year. It had earlier said the economy could contract between 0.5% and 1.3%.”

So that’s…good news?  That we will contract more than what they said earlier?

“It also warned that US unemployment could reach 10%.”

Definitely not good news.  Especially since “real” unemployment, which would include discouraged workers and those who haven’t actively tried to find new jobs for more than 3 months (but of course are still unemployed) is always higher.  And forget about those with jobs that they are forced to take, at lower wages and worse hours, just to make ends meet.

“Participants agreed that the information received since the March meeting provided some tentative evidence that the pace of contraction in real economic activity was starting to diminish,” the minutes showed.

It is critical that this be interpreted correctly.  First, the observation is that the contraction is still going on, but is showing signs of slowing down.  That means we are still in actual recession (with negative GDP growth/GDP shrinkage) much less in an economic malaise (which will last longer than the actual recession, which is technically over after we hit bottom and start the slow climb up).  But the economy is still contracting, just not as badly as before.

Second, what this does mean is that most of the areas that have been battered lately have finished…being battered.  So the loss of construction work, for instance, is finally basically all gone and no longer contributes to negative GDP growth.  Now, that means that people don’t have jobs, but it means that they have already lost their jobs, not that they are still losing them.  

Finally, we must not take this as a sign that we can stop working hard to jump start the economy.  A second major stimulus is probably needed (the ARRA is pretty back-loaded as it is, though at 3% of GDP this year and next it’s not small, either) and we can’t lose sight of that just because our contraction is slowing down.

BBC NEWS | Business | Fiat denies 18,000 job cuts plan.

When exactly did Fiat become the American automotive industry’s savior?  Wow.

5.1 million jobs lost in this recession – MarketWatch .

That’s a big number.  And that’s two months in a row of 600,000+ job losses.

As I sit here getting ready to take my economics final exam, I am struck by a comment a friend of mine made the other day about our economy and our economic situation.  Essentially, his point was that what we needed to do was save more and spend less.  In other words, that it is our consumer-based economy that inevitably led us to at least some point of weakness.  His words were not that strong but I am distilling a bit here.

However, a consumption-based economy isn’t a bad thing unto  itself.  Yes, a low savings rate must be bolstered by some kind of government-based welfare system (Social Security) which does put a strain on earnings, but consumption can help fight off disinflation (which actually is an okay thing) but also certainly helps fight deflation or the threat thereof.  Even when our rate of consumption is low, we can still fight deflation (now, massive recession on top of low consumption is a different matter).  And high consumption also means payment of taxes, which means money to the government and local municipalities, and a stabilizing effect on the economy (it prevents it from overheating or going into recession for the most part).

The problem is how we fund this consumption.  For each person, it’s about whether we are borrowing in order to consume.  Are we using all credit card debt?  Taking out lines of credit on houses for which we already still have mortgages (and whose value then suddenly drops)?  For the government, the same applies – if we have a huge debt to foreign countries by selling bonds to them to fuel our economy, then we have ourselves in a precarious situation.

Selling bonds is a common way of funding deficit spending.  Because we have a current and potentially more big stimulus packages coming up (and the future ones will be all government spending, I bet, with little to no tax cuts (which is a good thing for stimulus, actually)), that means we are selling a lot of bonds.  When we sell bonds, we go into debt.  The biggest buyer of our bonds right now is China.  China has sent a “shot across our bow” about devaluing the dollar through the Fed “printing money” by selling even more bonds.  This dilutes the market, lowers the price of the bonds, we then have to sell more bonds to get the same amount of money, etc.

So the government is fueling its consumption – which we need – through debt as well.  But it was already deep in debt.  And just like a person who consumes through debt, already being in debt to start with just makes everything worse.  

But…a consumption-based economy isn’t bad unto itself…

Japans economy shrank an annualized 12.1% in the fourth quarter – MarketWatch .

A 12.1% contraction of one of the world’s largest economies is absurd and frightening.  In comparison, our Q4 contraction was about 6%.  Wow.

Japan reconsidered – Paul Krugman Blog – NYTimes.com.

Last night, I did a presentation on part of a case I did in my macroeconomics class about the current economic crisis.  My team’s part was comparing the Great Depression and Japan’s “Lost Decade” with the current situation.  A rather big topic.  

Japan’s crisis is remarkably similar on a number of fronts to our current situation.  One notable aspect, touched slightly upon by Krugman in the linked post, is that of sluggish response.  In particular, it took the whole decade before someone said “let’s just admit the banks are in trouble and do a massive recapitalization.  That was a big move.  

Krugman is concerned that our situation might end up a lot worse than a decade that many economists consider “lost.”  That’s a bad thing to be thinking.  Someone in class last night asked me whether I thought, considering all of the new things the Fed is doing (credit easing, etc) under Bernanke and the stimulus package and possible additional efforts, we were going to get out of this.

Honestly?  If we don’t address the bank issue, I am not sure we’ll see the trough of this recession this year.  Yes, this entire year.  At best, I’m thinking mid-year before we see something.  That’s a while from now…

Fed assets total $1.89 trillion in latest week – MarketWatch .

This is kind of cool, because it really reveals some interesting stuff about the economic crisis and how the Fed has been trying to deal with it.  

Traditionally, the Federal Reserve Bank controls money supply in the market.  It does this by “targeting” interest rates and literally putting money in or taking money out of the market by buying or selling bonds.  When it raises interest rates, people save more and spend less, prices drop and inflation goes down.  When it lowers rates, people spend more and inflation goes up.  Throw in some changes in the supply of money and the GDP moves around in desirable ways.  

For…a very long time, what is called the “monetary base” of the Fed – the money which it controls and regulates, which it utilizes to fuel the economy – has been relatively stable.  However, because even a target 0% interest rate (it’s literally set to 0-.25% right now) has had almost no effect on spending (some thoughts on this later…) and therefore GDP won’t budge, the Fed has had to change the way it has gone about business.

First, it started bailing out AIG, Fannie Mae, Freddie Mac, etc.  This meant that they basically started owning these institutions, and now the monetary base went up.  They then started a process of injecting money into other institutions through TARP and other tools and the base got even bigger.

And, as one can see right at the beginning of the article, what was $870 billion in December 2007 is now $1.89 TRILLION.  That’s how much the Fed has in assets.  

Bernanke, the Fed Chairman, has some good stuff…somewhere, about how this dollar amount will shrink naturally as certain items fall off the balance sheet, but the monetary base for the Fed will be higher moving forward.

Continental, AMR soar with falling oil prices – MarketWatch

This makes no sense.  Continental was leading the pack on declining revenues, helping to cause a market-wide drop just a week ago, perhaps less (will look up those links in a bit).  Now, just because oil prices are dropping, the hope for increased profits (or…maybe just decreased losses?) has everyone feeling good about airlines again. 

Perhaps the least examined aspect of this entire crisis is the psychological effect.  Massive volatility like this and the impact market-wide points towards the lack of confidence, the over-emphasis on even small points of positive activity, etc.