It's Still The Economy, Stupid

Friday, December 05, 2003  

Issues 2003, the election

With his popularity fading, George Bush has to promise the moon next year. There will be no spending cuts but possibly another tax cut, if the economy needs it and if the budget can handle it, but the economy would have to slow down considerably. Alan Greenspan isn't raising interest rates anytime soon, so he is on board. $300 million in the campaign fund? Check. Bush is assured to focus on his strengths and what he can control, which is anything but the economy. Economy-wise, we won't see much except a lot of PR from the Bush camp on any good number (and even if the numbers are bad, they'll still point out it could be worse).

The Democrats are really about four candidates: Dean has the money and the momentum, Clark has the DLC, Gephardt has Iowa and an apparently recently located attitude, and Lieberman has the legacy. Kucinich, Moseley-Braun, and Sharpton don't look to be anything more than marginal. Edwards and Kerry look totally lost. Graham is gone. My guess is it will come down to Dean and Clark. And don't worry about the Greens. While Nader may run, despite the screeching and howling of "Officious Liberal Democrats", he won't get more than 1%. The issue for Democrats is whether "Anyone but Bush" is enough of a recruiting tool or Republicans will steal another election. We know the Rs will try and the spectacle will be quite entertaining.

However the election turns out, there will be two issues for the President-elect to confront. First is the draft. It has been well established that we do not have enough troops in Iraq (Neocon delusions aside). We certainly do not have enough troops to invade Iran, North Korea or Syria (though Israel could help us with the latter). The statement by Bush is that they are "not considering" a draft now, but you'd be surprised how fast they'll consider it on the day after the election if they need it. Dean and Clark, who both have made statements that we are not doing enough to pacify and rebuild Iraq will certainly need more troops to do so. Justin Raimondo has a very good analysis of this dilemma today. Like me, he feels the draft is a done deal - the only remaining thing is the justification. I'd add that Bush can even reinstate the draft faster if the economy recovers. The negative PR from conscription will have something to balance it out.

This leads to the bigger issue, the resources we are devoting to "wars on terror"TM and rebuilding Iraq. While the monetary resources devoted to Iraq are quite small ($87 billion is only 0.4% of our $2 trillion federal budget), the "war on terror"TM is a much greater drain: $400 billion on defense plus $200 billion or so from related non-defense programs. Then there is the labor expenditure. Thousands of reservists away from their jobs on extended tours of duty. Labor diverted from productive pursuits to destructive ones. How can any level of social spending, particularly of the discretionary variety, survive?

A Bush re-election would lead to an immediate attack on these programs. He won't need to worry about re-election so we'll be told that these are the "tough choices" that have to be made. A Dean or Clark presidency would also require tough choices. Which of them would want to roll back the tax cuts, or cut the defense budget, or withdraw from Iraq in their first term? At best, we'd see a turnover of leadership to the United Nations in Iraq, but again that's only a minor part of the resources that have been allocated.

While Democrats can rightly assert that a Bush re-election would begin a full-frontal assault on government employees, Medicare, Social Security, and all social spending programs (i.e. more of the same, amped up a few more notches), the really need to stop deluding themselves that a Democratic President in 2004 will have many options at their disposal. Reversing the tax cut and spending programs will be contractionary, and if the economy continues to struggle, will be untenable. Commitments to Iraq, Afghanistan, "the war on terror"TM, and who knows what else by next November have already been made. The crisis in medical care will only get worse. While a huge stock market rally, a quick and thorough economic recovery, and maybe a major oil discovery or two would significantly lessen the pressure on their finances, Americans have to realize that from here on out, they're on their own.

There's very little out there to suggest that gains will eradicate the losses from the last three years anytime soon. We need 2000 Dow points just to get even with March 2000. Corporate earnings would have to rise another 40%. We need two and a half million jobs to get back to February 2001. Pension and state government "rainy day" reserves are exhausted. The same can go for the savings accounts of seniors and the underemployed. When we get back there, the optimists can check back in with me. Until then, rather than hope we need action.

Part Four - what is to be done - later

posted by Teddy | 9:23 AM |

Issues 2004, part 2

Concerns for 2004:

We're at the limit of fiscal and monetary stimulus.
The 2004 federal deficit is estimated to be between $500 billion and $550 billion. Most state governments are faced with revenue shortfalls which by law must be balanced with tax increases or cuts in spending. The Federal Funds rate is currently at a fifty year low of 1%. Speculators are lining up to bet against the dollar. There is very little room to stimulate the economy if things get worse. Relative to history, GDP growth can only get worse. Third quarter GDP was a multi-decade high and even the most optimistic economists aren't expecting anything close to that in the fourth quarter. Meanwhile, the economy only recently started generating a mediocre amount of employment. If 8.2% growth only generates 300,000 jobs, what happens when growth falls again? Are businesses willing to hire more employees if growth rates dip again, particularly when they have just about exhausted the profitability of cutting costs. Consumers have regained confidence somewhat, but that confidence is muted by the employment situation. Those that have desired to keep spending have had to borrow more and hope for employment later. The economy had better start generating jobs soon, because both business and consumer expectations demand nothing less, and there is very little left in the policy gas tank.

The dollar in the crosshairs.
Speculators, from George Soros to Warren Buffet, have become nearly unanimous in their opinion that the dollar will continue to fall. The textbook economics requirements have been in place for some time now: massive trade deficit, relatively low interest rates, and relatively high inflation rates. Now that the speculators are saying the dollar must fall, it's a slam dunk that the dollar is toast unless foreign central banks step in to prevent this. They can do this because if they lose money on their dollar assets through devaluation, then they print more domestic currency (and use it to buy more dollar assets). The effect on foreign money supply and inflation will depend how zealously the speculators will want to attack the currency the central bank is acquiring. Hence, as Japan was forced to spend record amounts to defend the Yen, deflation started to disappear, the Nikkei Dow jumped 25%, and Japanese bond rates jumped off the zero line. China too, is witnessing 20 percent plus money growth and the flipping of Shanghai apartments like so many pancakes. With so much smart money against the greenback, one would think that the world's reserve currency would be jettisoned as fast as Phil Donohue on MSNBC. When that happens, U.S. interest rates and inflation spike upward, and borrowers exposed to higher interest rates get wiped out.

But not so fast: central banks have really deep pockets. There's no limit to how far central banks will go to protect their country's trade position with the importer of last resort. It is far more likely that at best, the dollar will face an orderly decline, and may even rally against currencies (like the Euro), which have seen outsized gains. It's much more probable that all other countries will rush to devalue their currency just as fast as the greenback, particularly when they see the recent success of formerly sad-sack countries like Argentina and Japan. Instead, the threat once again comes from the United States itself. If U.S. growth slows down, then all countries will feel the pinch immediately. Rather than wean themselves off U.S. led growth, they've let themselves become even more dependent on it. And as they've done this, the recent burst of U.S. expansion is leading to significant inflation in all the raw materials non-post industrial countries need at the same time more and more of their capital has been diverted to owning rather precariously valued U.S. debt assets. A U.S. slowdown that quickly went overseas might blow up Brazil and South Korea, as well as debt spreads for all risky borrowers, such as GM and Ford. This also goes for risky consumer borrowers, who have done little over the past three years to climb of a similarly dangerous debt situation. It is one thing to have a "strong dollar" policy, but another that those dollars are actually doint something. As more dollars are going in central bank vaults, they might as well go under the mattress. Deflation is still lurking out there, but as usual it's only as the equal and opposite reaction to extreme inflationary stimulus across the globe. I'm less worried about the dollar than a global increase in risk premiums, particularly with all the new and refinanced debt sloshing around.

Whither Refinancing?

The homeowner today is only able to refinance by converting fixed rate mortgages into some sort of ARM. This puts them at risk to any future increase in rates. At 4%, a 1% increase in interest rates boosts a monthly mortgage payment by 12.5%. Another rate increase to 6% boosts the payment 13.2%. In our monthly payment society, this would cripple consumer spending for those who have already bought the maximum home they could afford. The refinancing bug has been endemic. Corporations will issue around $500 billion of debt this year. Most of that will be refinanced. But that debt is another person's asset. Senior citizens are already aware what happens to incomes when interest rates are pushed down to nearly nothing. Likewise, lenders are well aware the perils of lending long and borrowing short. Is there any wonder there are $100s of trillions in notational derivatives out there? The big question is has everyone refinanced and what happens when we can't reduce our payments any more. We already see the movement to 6-year auto loans, 40-year mortgages, instant home equity loans, reverse mortgages, ARMs and so forth in the consumer sector. Lenders absolutely do not want this bubble to end. They cannot afford it to. Delinquency and default levels continue to rise, and only generating more volume can keep the rates stable or declining. The big danger is a shock: either higher rates or a "double-dip" recession. While both seem slight today, the level of exposure throughout the economy is frightning.

What else is lurking out there?

Enron and WorldCom are ancient history. Fannie and Freddie have just about corrected all their accounting irregularities. The demise of National Century Financial crippled many hospitals, but the economy recovered in time to prevent the coup de grace. The problem is both volatility and the duration of the slowdown. The stock market has rallied, but is still well below the level of early 2000. Debt levels have continued to rise at an increasing rate. Interest rates don't seem to want to go lower. Gold prices are testing $400 an ounce, and there is still a whole lot of short-interest out there. Derivatives are a riddle wrapped in an enigma wrapped in a black hole. A fragile recovery like this is not going to be very responsive to disappointment, especially since we've already pretty much discounted it. Republicans were crowing about job gains the last two months, and this months report should lead to a few murmurs. The deficit cannot continue to grow exponentially, or can it? Uncertainty is starting to creep back in - it's not getting worse, but it's not getting better. How long can we wait? What happens if the recovery is out drinking with Godot?

Part 3 - on the election - will be posted shortly

posted by Teddy | 7:49 AM |

November Employment Situation

November employment was up 57,000 - worse than expected, but in line with weekly claims numbers which appear to have stabilized around 350,000. If claims can edge down to 300,000 a week, we should see employment growth move up to the 200,000 a month we desperately need right now. October employment was revised upward to +137,000 from +125,000. There's not really much that can isolate that outside of seasonal adjustment. Concurrent seasonal adjustment means that adjusted data will change a little every month. While manufacturing production indexes are showing gains, manufacturing employment fell 17,000 in November and is down 549,000 over the year. Manufacturers seem to be expanding hours rather than employment. Average weekly hours in manufacturing rose to 40.8 and overtime hours rose to 4.4 per week. In July those two indicators were 40.1 and 4.1, respectively. This has been consistent with employer surveys like Manpower, which have reported this behavior not just in manufacturing but across all private industry.

The unemployment rate fell to 5.9% while the number of unemployed declined slightly to 8.674 million from 8.779 million. The labor force increased 484,000, which is an indication that many of the people who have been leaving the labor force are coming back to try and find part-time work at Christmas. Normally, the labor force drops (not seasonally adjusted) by 300,000 in November. This year it increased by 200,000. The unemployed that are "re-entrants" to the labor force fell by 119,000 in November. That marginal workers are finding work is a good sign, but these are seasonal, temporary jobs.

This months data is discouraging. The large amount of growth we've seen the last three months has done little to revive employment. By this time in the "jobless" recovery of 1991-2, the economy had added over 1.4 million jobs, while the "job-loss recovery" of 2002-3 has lost over 700,000. Employers seem content to hold off hiring decisions despite rapid economic growth.

Most economists expect economic growth to be much less in the fourth quarter, though still relatively strong at around a 4% annual rate. Unfortunately, the tailwinds of the tax cut and early 2003 refinancing boom are fading rapidly. The only gain in "investment" we've seen is from the hedonic adjustment made to computer and technology spending and real estate investment. While retail spending is up at the cheaper end of the spectrum, it has come at the expense of the more expensive, retail end. Consumers don't have enough money to go to Neiman-Marcus, so instead they're buying their presents at Wal-Mart. Very little in this recovery looks sustainable on the surface.

After Christmas, consumers will tally up their credit card bills and also start estimating their tax bill for 2003. The size of refund checks is going to determine how much follow through we get in spending. From my experience, I saw the tax cut immediately in terms of a payroll tax cut, so that will not result in a bigger refund. State and local tax increases will also be in effect. It's already snowing out East. Republican leadership in Congress looks ready to let the let the funding for extended unemployment benefits expire. Christmas might be survivable, but the New Year is not going to be very happy unless employment gains quickly improve and last into 2004. There is little relief elsewhere.

posted by Teddy | 7:22 AM |

Wednesday, December 03, 2003  

Still off-topic

Matt Taibbi continues to put out fantastic work. If there is one journalist that can wear Hunter Thompson's shoes (the not-yet-drugged-out Thompson, pre-Nixon ), this is the guy. He's getting a lot of buzz - this time in cursor, which links to his Cage Match column at the NY Press as well as his fantastic series on the Democratic candidates over at The Nation. Particularly good is his Dennis Kucinich column (full disclosure: I will vote for Kucinich if the Democratic Party nominates him. Which, of course, they will not.)

Welcome to the Dennis Kucinich paradox. The congressman is not serious precisely because he is serious. Because he wants his victory to mean something, he is said to not really want to win. Pundits and journalists talk a lot about Kucinich's height and his decidedly non-Hollywood looks as the main reasons he cannot be considered a contender, but on the campaign trail, it sure looks like Kucinich's chief "problem" is that when he talks, he means it.

It does not take much exposure to Dennis Kucinich to realize just how serious he really is. He says things that could never even occur to a phony. This was most forcefully demonstrated to me right at the start of an hourlong interview in a minivan on the road back to Bangor, Maine, after the candidate's appearance at an organic farmers' fair in rural Unity.

We had been talking about corporate crime, and at first Kucinich said some things that sounded very much like Howard Dean--that he was going to make prosecuting irresponsible CEOs more of a priority, etc. But then, as he sat there loudly munching Udon noodles (bought at the fair: Kucinich is a devout vegan), he suddenly stared off into the distance and added something else.

"I think rehabilitation should be part of it," he said. "We ought to rehabilitate the guy who steals his company's pension."

I looked up, surprised. "You mean like drug court?" I said. "Rehab programs after sentence? Re-education?"

He nodded. "Why not? You have to go to rehab for traffic court. Treatment for these people should be made available, if circumstances dictate that they need it." He smiled. "After, of course, an appropriate term of service to society."

I laughed. Well, that makes sense, I thought. Why does a serial speeder have to seek treatment, while the person who liquidates thousands of jobs and imperils whole economies does not? Why is a drug problem considered treatable, while a greed problem isn't? The question gets right to the heart of the fundamental prejudices of our society: You have a problem if you use drugs to dull your misery, but you don't have a problem if you're just trying to get rich by any means, legal or otherwise.

The politics of Dennis Kucinich are easy to see but hard to describe, which is why conventional journalism, comfortable only with crass idiocies, has settled on calling him a leftist and burying him in the thirteenth paragraph. But to me the best way to describe Kucinich is to say that he seems to be the only candidate who responds as an intellectually ambitious human being would to the problem of the presidency.

Someday I hope to write like that, but I'm not holding my breath. Until then, I highly recommend any work by Taibbi there is out there. You may not agree with it, but it's breathtakingly honest, which is a breath of fresh air in an atmosphere filled with fakery.

posted by Teddy | 8:30 AM |

Monday, December 01, 2003  

Mixed reactions to consumer spending

Consumer spending is improving this holiday season. Or is it? The NY Times thinks 3-4% growth look "modest", while Visa thinks things are much better than that. The LA Times cites Wal-mart and Visa in their upbeat article, while the Dallas Morning news thinks the best is yet to come.

posted by Teddy | 2:04 PM |

Consumer frenzy

Another good commentary by Steve Perry in the Minneapolis City Pages. It's more depressing than anything I can think of right now.

As if Wal-mart isn't toxic enough to our society already, a woman nearly got trampled to death over $29 DVD. Strangely, this is in the Globe and Mail's "Science and Technology" section. I don't know what that is supposed to mean.

I'm not a terribly pessimistic person when it involves the microeconomy. Last time I checked, I had 100% control over where I spent my money. I do need food to survive, but I don't have to support supermarket chains that raise profits by exploiting their workers. By supporting businesses that value their customers and employees, we end up with a much friendlier form of capitalism.

It doesn't even have to cost more. I, for one, would gladly like to see a coffee shop that sells a latte for less than three bucks. I know how much those beans cost, and you can roast them in a $2 popcorn popper. We're an entrepreneurial society. If you can't join em, beat em.

But those $29 DVDs? Piece of crap. And I'm not talking about just the quality of the product.

posted by Teddy | 1:48 PM |

Still working on Part 2

Meanwhile, here's Nathan Newman with his inadvertant examination of GDP growth.

posted by Teddy | 9:26 AM |