XGOP4Hillary

(http://www.bloomberg.com/apps/news?pid=20601087&sid=aur2QcWbKf2U&refer=home)

Forget the happy pabulum the daily media feed us. Welcome to reality. Our financial sector has pulled in half a trillion between the Feds and outside capital. No one can find a bottom. At the same time they are refusing to lend to each other or to consumers/small business. They are readjusting their balance sheets. This is all necessary. It is also quite painful and shows no sign of ending. The ripples from the credit crunch are working their way through the economy with no end in sight. To them must be added the inflationary pressures from the commodity explosion. Now none of this is per se inflationary. To build an inflationary cycle the higher prices must lead to higher wages as more money is used to maintain consumption. We are not doing that beyond some silly symbolic USG checks. So what will happen is obvious. If people must spend more for gas, heating oil and the groceries they will spend less for everything else. That everything else will include debt. Faced with feeding the family or letting the credit card default and the answer is obvious. They will also walk away from homes with negative equity. These are the ripples to fear, not inflation. We will go through a period of reduced expenditure, massive debt default/mortgage default and a nasty populace that will figure out that a small segment of the population in the big cities creamed up all the gains on the upside of the last two bubbles and then handed off the debts to be nationalized on the downside. The deregulation/lower taxes/markets uber alles orthodoxy as about run its course. By refusing in the name of ideological purity and naked greed to discipline the financial industry they will trigger a new round of statist populism. Now the normal response to this would be to argue for good Republican administrators who at least can run a welfare state prudently. After W selling governance as a Republican virtue is a joke. What does this mean?
1. The next four years will be worse than Carter's four regardless of who wins in November
2. They will be worse in different ways depending on whether McCain or Obama wins. If McCain the stalemate will be over the blame. If Obama wins [the more probable outcome] expect an explosion when fiscal and financial realities show that the unmet spending wishes of the traditional liberals collide with the economic mess W leaves behind. The economic mess is worse than Iraq. We can run away from Iraq. There are huge costs in doing so but we can. We cannot run away from the US. The trigger to all this is going to be health care. Obama and the national Dems are mostly running an empty slogan campaign of just saying they will change everything W did. Should work. However one of the few firm markers they have put down is on healthcare. The fantasy is that they can cover the cost by a mix of repealing the Bush tax cuts and ending the Iraq war. When that money proves to be needed just to stem the collapsing Federal deficit the war within the Democratic caucus should be nuclear.

(http://www.ibdeditorial.com/IBDArticles.aspx?id=295225814367283)

If this weren't so sad it would be pathetically funny. IBD is supposed to be part of our professional business press. This is supposed to be an intelligent analysis. It is actually what I will scoop out of my feline overlord's box in a day or two. It is feces.

Mercantilist states buying Treasury bills is NOT investment in the US. It is a place to park surplus dollars. Japan does not grow slowly because it has a trade surplus. It grew extremely rapidly in the 70's and 80's and also had a trade surplus. It created an asset bubble when it revalued the yen in 85 and created a deflationary disaster when it blew up the bubble. A mixture of structural problems, demographics and bad policy decisions have kept it in a two decade long depression.

Germany also had large surpluses with giant growth, medium growth and no growth. Germany also has structural problems. They are less severe than Japan's and the German demographic trap isn't as severe but they are also a more open market than Japan and feel the effects of structurally high wage and business operation costs more than Japan does.

Foreign investment is a GOOD thing when it is actual investement in new plant, equipment etc. It can be good when it is portfolio investemnt [there are too many variables to do a definite yes or no - this is one of those questions that require a multihanded economist and a lot of quite specific detail]. Just having foreigners pile up T-bills is a sign of weakness and is not sustainable. The economic problems of this decade stem from the US living beyond its means and from Asia Inc. practicing mercantilism.

The world has no net wish for more dollars. The world needs for the giant pool of surplus dollars to be reduced. Both need a US trade surplus. Absent this we are adding fuel to a forrest fire.

(http://www.realclearpolitics.com/articles/2008/04/the_great_shopping_spree.html)

Samuelson is understating the problem. US consumer spending was the economic motor of the world. If the US consumes less and exports more what will the motor be? We have been avoiding facing up to this one since the 70's. World may need to find a new pattern.

Now one can make arguments that there is vast unmet consumer demand in Asia, Russia, Brazil etc. All true. Issues there are distributional. Will Russia Inc share the wealth far enough down the pyramid for a consumer boom. Will there be enough live Russians to do this? Ditto Brazil and India. China like much of East Asia seems better on distributional issues but East Asia is already starting to get old fast. Their demographic issues are totally unfunded. No one knows [including them] how this will all play out. Interesting times we will all be living in.

(http://www.ft.com/cms/s/0/2ef9698e-0fbf-11dd-8871-0000779fd2ac.html)

The saddest thing that ever happened to economics [and by derivation business reporting] was teaching the idiots algebra. They fell in love with equations and lost sight of the economic realities they were supposed to convey.

US has been living beyond its means since the late 50's. A half century of a world economy has at its base US over consumption and under production. We are now reaching the end of the cycle. The various major players are trying to find a way not to accumulate mountains of dollars while still keeping the US as the consumer of last resort. It doesn't work. The dollars have to go someplace. We have had going on two decades of rolling asset bubbles as those surplus dollars try to find a home. Japanese real estate, US dot com stocks, exotic financial instruments...at core the problem is the US balance of payments. To make this flood of hot money go away US has to be allowed to run a surplus. The problem is that no one wants to take the hit on employment and production.

Now a smarter world leadership cadre could cushion the fall. Our leader cadre worldwide is orders of magnitude dumber than the 70's when the WW2 generation [who still remembered from WW2 and the Depression just how far wrong it could all go] were running things. The current Boomer Yuppies are near clueless. We are rolling REALLY big dice here folks and the fools in charge haven't a clue. I had someone explain the current commodity boom as a peak oil thing. Uh huh. It had nothing to do with National Oil Companies, NIMBY greens in the US or two decades of lack of investment. This was an intelligent person who lives in the energy biz. Clueless.

Scott

(http://www.msnbc.msn.com/id/24129957/)

We are in for a flood of 1970's rerun stories, all claiming that we are back in the stagflation game. All it proves is that they assign to the business desk people too stupid to be wine critics. The 70's stagflation was from a different universe. Strong unions kept jacking up wages. An economy dominated by big oligopic companies then jacked by prices to compensate. It was a mad hatter's race of higher wages, higher prices, higher wages. All this was agrivated by a monetary policy that simply didn't grok what happened and attempted to provide sufficient money to maintain demand with the result of too much money chasing too few goods.

Today unions outside the public sector are weak. A globalized world is awash in excess productive capacity for near anything except base commodities. [more on that below]. Wages in the First World have been stagnant for two decades and show no sign of the sort of generalized surge that made the 70's a kidney stone of a decade. Similarly the bubble in housing prices that enabled many in the First World to treat their houses as ATM machines and live beyond their means is over. We are living in the wreckage of an asset and borrowing bubble.

So what we are seeing is a commodity boom. Partly this is driven by speculative money, the same flood of excess dollars from the US one way trade with Asia that previously fueled the stock market and housing bubbles. Partly we are seeing the effects of India and China entering the outer stages of a takeoff to being First World economies with First World level of consumption. The bulk of the populations of India and China are still dirt poor but no longer starving peasant poor. Some hundred million and going up are First World middle class if you figure their purchasing power at PPP. In reverse there has been little net investment in most commodity production in the 20th century [except for oil where the last major round of investment was the North Slope and North Sea]. As late as a few years ago the problem was low rates of return and excess capacity. So demand is now outstripping production, the more so as much of the world's productive capacity is in regions [Africa, South America, Russia etc.] where the locals don't invest and political risk / nationalization makes outside investment near insane.

So there is cost push inflation of materials, food and energy. The solution is to do precisely nothing. The higher prices will lead to lower consumption and equilibrium will be reached. People in the First World will eat, drive [somewhat less and over time smaller vehicles - it takes over a decade to turn over national auto fleets] and heat their buildings. They will do this at the expense of buying 'stuff'. Retailing will decline and this will hit Asia which makes most of the 'stuff'. As the Asian 'miracles' are driven by exports this will moderate their demand. Price signals are supposed to move people to change behavior. Given stagnant incomes plus ever growing expenditures for government, medicine and social transfers this is all quite natural and inevitable.

Enter the usual idiots who propose raising interest rates to fight inflation. How do higher interest rates slow down the commodity price rises? Getting people to borrow less is fine except no one is borrowing in a major way anyway. Finance is refusing to lend, having rediscovered that risk means you may not get paid back. Most financial institutions have lost much of their capital in the implosion. The easy way out is to shrink the loans outstanding to what the remaining capital can support. Raising the price of money will accelerate this but is this what we really want? Deleveraging is tricky and has many ways to go wrong. Higher prices for credit at the same time availability is cut is the road to a real risk of a 30's type deflationary Depression. So why are the usual pundits calling for it? Because they react on tropisms. They dimly remember an undergrad lecture where they were told rising interest rates was the answer to inflation. Which it was in 1970 or even 1980 but has nothing to do with 2008. We are governed by fools. So far the Fed is ignoring them but the Fed reads the financial press as well as the election returns. Be afraid. Be VERY afraid.