from Mikenormaneconomics.org


[Skip to the end]

Mike Norman Economics

Some thoughts

If we ever enact a balanced budget amendment, take yourself and your family and move to Canada or China.

Obama believes the U.S. has “run out of money.” Scary. Our president doesn’t understand our own monetary system. Even George Bush understood this.

Any country that spends in its own currency, where that currency is not backed by gold or bound by some fixed exchange can NEVER run out of money!

We are ceding our position as the world’s largest economy to China because of stupid policies that are based on myth and fallacy.

The demise of GM was not due to putting workers’ interests over the company and shareholders. It was precisely the opposite!

The easiest way to lower “debt” (if that’s what you want to do) is to sustain full output and employment.

If the private sector can’t sustain full output and employment for whatever reason, then gov’t should!

Here in America we mock the Europeans as being, “Socialist.” Did anyone notice that Europe’s economy is larger than ours and adding size?

By definition, those Socialist Europeans are richer than us! And they have free health care, education, 6-weeks paid vacations, new cars, homes, movies, culture and all the consumer items that we have, in abundance. Not bad for a bunch of commies!

Our leadership is destroying America’s real terms of trade because of irrational sensitivity to perceived “imbalances.”

We care more about the Chinese standard of living than our own, apparently!

For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver. This is all definitional. It’s double entry accounting! Did anyone in Obama’s administration take an accounting course? Has any Republican taken one? Has any Democrat taken one?


[top]

ISM/Fed


[Skip to the end]


Karim writes:

Overall, manufacturing still contracting, but at a slower rate. Rebound in orders likely due to credit supply not being as sharp a constraint as it was in Q4 and inventory drawdown. Increase in backlogs suggests production may actually stop contracting in next couple of months. But with employment basically unchanged, it seems that this relative improvement is viewed by manufacturers as unrelated to longer-term timing and scope of recovery. Anecdotes below all over the place.

Looks to me like evidence the deficit spending is doing its job of relieving fiscal drag.

  • “Some amount of havoc is about to erupt, with companies pushing for increased capacity when suppliers have taken capacity offline.” (Computer & Electronic Products)
  • “Business is actually better than plan.” (Food, Beverage & Tobacco Products)
  • “Realistically, we don’t see any of our major customers looking to place business until mid-2010 at the earliest.” (Machinery)
  • “April was flat on sales. May looking better.” (Primary Metals)
  • “Business still trending downward, but not as fast.” (Chemical Products)



May April
Prices paid 43.5 32.0

Moving up with crude prices as reluctantly anticipated.



Production 46.0 40.4

Back towards ‘nuetral’ levels for flat GDP



New orders 51.1 47.2

Orders expanding some from a low base as expected.

This is enough for GDP to muddle through at modest positive levels



Backlog of Oders 48.0 40.5

Same



Employment 34.3 34.4

This will continue to stagnate as productivity gains will be sufficient to meet output demands



Export orders 48.0 44.0

Will move back up from depressed levels



Imports 42.5 42.0

Will move up with prices

This is good for financial markers/bad for obama vision — modest growth with continuing downward pressure on wages


[top]

Incomes up .5%


[Skip to the end]

U.S. Consumer Spending in April Decreases 0.1%; Incomes Gain

By Courtney Schlisserman

June 1 (Bloomberg) — U.S. consumer spending fell in April for a second straight month as concern over rising unemployment prompted consumers to save.

The 0.1 percent drop in purchases was smaller than forecast and followed a 0.3 percent decrease in March that was larger than previously estimated, the Commerce Department said today in Washington. The savings rate jumped to the highest level in 14 years.

Economists forecast spending would fall 0.2 percent, according to the median of 63 projections in a Bloomberg News survey. Estimates ranged from a drop of 0.3 percent to a gain of 0.2 percent.

Incomes climbed 0.5 percent, the biggest gain in almost a year, reflecting increases in unemployment insurance benefits and social security payments associated with the Obama administration’s stimulus plan. Income was projected to also fall 0.2 percent, matching the March decrease.


[top]

China not backing down on the push to export


[Skip to the end]

This is a few days old but shows all the talk about domestic demand isn’t taking anything away from the desire to export:

China to Take Steps to Boost Exports; Will Keep Currency Stable

May 27 (Bloomberg) — China’s State Council, or Cabinet, said the government will take steps to boost exports while keeping the country’s currency “basically stable,” the state television reported today.

Falling exports are the biggest challenge for the world’s third-largest economy, the council said.

China introduced a 4 trillion-yuan ($586 billion) stimulus package last year as exports slumped and economic growth slowed. Maintaining external demand can create favorable conditions for employment, businesses and domestic consumption, China Central Television said today, citing a council meeting headed by Premier Wen Jiabao.

The nation will keep its currency “basically stable at a reasonable and balanced level,” the council said, without elaborating.

China will take all measures to stabilize overseas demand as shrinking exports are the nation’s biggest challenge, “currently and for some period of time in the future,” the council said.

The government will focus on exports involving intensive labor and advanced technology, according to the report.

The government will arrange $84 billion in short-term export credit insurance for 2009, the council said. The coverage of export credit insurance will also be expanded, it said.

China will allocate additional funds to support exporter guarantees, according to the report. About $10 billion will be set aside as credit for the export industry in 2009, the state television said, without elaborating.


[top]

Professor John Taylor on the exploding debt


[Skip to the end]

From the good professor who brought us the ‘Taylor Rule’ for Fed funds:

Exploding debt threatens America

by John Taylor

May 26 — Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up.

And yet another black mark on the ratings agencies.

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it.

Gdp is a measure of our ability to change numbers on our own spread sheet?

The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

Almost as high as Italy and Italy does not even have its own currency.

“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.

Now there’s quality support for an academic position…

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis.

‘Believe’? Without even anecdotal support? Is that the best he can do? This is very poor scholarship at best.

To understand the size of the risk,

I think he means the size of the deficit, but is loading the language for effect.

Is that what serious academics do?

take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

This presumes an unspoken imperative to bring them down. Again poor scholarship.

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

Ok. Inflation, if it happens as above, can bring down the debt ratio. How does this tie to his initial concern over solvency implied in his reference to the AAA rating being a risk for our ‘ability to service it?’

And still no reason is presented that 41% is somehow ‘better’ than 82%.

Nor any analysis of aggregate demand, and how the demand adds and demand leakages interact. Just an ungrounded presumption that a lower debt to GDP ratio is somehow superior in some unrevealed sense.

The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised.

So what does ‘monetised’ mean? I submit it means absolutely nothing with non convertible currency and a floating fx policy.

That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably.

And the presumption that the Fed’s balance sheet per se with a non convertible currency and floating exchange rate policy is ludicrous. All central bankers worth any salt know that causation runs from loans to deposits and reserves, and never from reserves to anything.

And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar.

He’s got that math right- if prices remain where they are today in the other currencies and purchasing power parity holds. And he also knows both of those are, for all practical purposes, never the case.

Why has he turned from academic to propagandist? Krugman envy???

Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change;

And it assumes the above, Professor Taylor

rather it is an indication of how much systemic risk the government is now creating.

So currency depreciation is systemic risk?

Why might Washington sleep through this wake-up call? You can already hear the excuses.

“We have an unprecedented financial crisis and we must run unprecedented deficits.” While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession.

Huh? None??? What’s he been reading other than his own writings and the mainstream tagalongs?

Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times.

Ahah, a logic expert!!! That makes no sense at all.

The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits.

‘Responsible’??? As if there is a morality issue regarding the budget deficit per se???

“But we will cut the deficit in half.” CBO analysts project that the deficit will be the same in 2019 as the administration estimates for 2010, a zero per cent cut.

“We inherited this mess.” The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?

The biggest economic mistake of our life time might have been not immediately reversing the Clinton surpluses when demand fell apart right after 2000. And, worse, spinning those years to convince Americans that the surpluses were responsible for sustaining the good times, when in fact they ended them, as they always do. Bloomberg reported the surplus that ended in 2001 was the longest since 1927-1930. Do those dates ring a bell???

The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis.

Lack of a fiscal adjustment last July is what allowed the subsequent collapse

The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.

Finally something I agree with. Our biggest risk is that government starts reigning in the deficits or fails to further expand them should the output and employment remain sub trend.

The good news is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one.

The writer, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of ‘Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis’

It’s not too late for a payroll tax holiday, revenue sharing with the states on a per capita basis, and federal funding of an $8 hr job for anyone willing and able to work that includes federal health care, to restore agg demand from the bottom up, restoring output, employment, and ending the financial crisis as credit quality improves.


[top]

Niall Ferguson: No One Has The Faintest Idea When The Economy Will Recover


[Skip to the end]

Harvard AND Oxford Professor, thank you!

Niall Ferguson: No One Has The Faintest Idea When The Economy Will Recover

by Niall Ferguson

May 29 (FT) —He thinks Obama’s economic forecasts are as much of an outlier possibility as another Great Depression. He’s also concerned, as we are, that there’s just not enough money in the world to finance all the borrowing the U.S. and other big countries will be doing over the next few years.

Barron’s: Is the worst over for the global stock markets and the economy?

Ferguson: It may look that way, but appearances can be deceptive. The stock market has actually tracked almost perfectly its downward movements between 1929 and 1931. Now that doesn’t mean that we are going to repeat the Great Depression. I don’t think we will, because the policy responses have been different. It would be excessively optimistic, however, to conclude from a relatively small set of green shoots in the economic data that we are all going to live happily ever after. It is certainly way too early to say the Obama administration is right that the economy is going to grow at 3% next year and 4% in 2011. I find that scenario as implausible as a rerun of the Great Depression…

When will the recovery come?

Nobody has the faintest idea what next year is going to look like. It isn’t clear yet that this is just a common recession. This is probably more like a slight depression. We won’t see a big V-shaped bounce. Much of the consumption growth in the decade up to 2007 was fueled by things like mortgage-equity withdrawal. That game is clearly over. Strip that out, and you are looking at an annual economic-growth rate in the U.S. closer to 1½% to 2% than 4%.

What is your disagreement with New York Times columnist and Princeton professor Paul Krugman about massive government borrowing?

This is one of the most interesting questions of the moment. The view of Keynesians, their Econ. 101 textbooks and the Nobel laureate at Princeton is that the world has an excess of savings over investments and therefore the deficit can be almost any size and it will be financed.

That is the problem with violating ‘Lerner’s Law’ and making the argument in the wrong paradigm. It invariably gets shot down like this:

My sense is that if the U.S. government tries to borrow $1.8 trillion in a year, that is an awful lot of bonds to sell at the same time [as] all the other major governments. It looks to me like a supply-and-demand story, and what tends to happen in those stories, regardless of the macro environment, is that the price of bonds tends to fall. The U.S. 10-year Treasury rate has moved up more than 100 basis points [one percentage point] since January. There is a problem in Britain, where the Bank of England had to protest about fiscal stimulus because it was causing a huge interest-rate problem. It is also happening here.

It is the blind arguing with the blind.

With this attitude it very well may take a world war to generate enough deficit spending to restore output and employment.


[top]

Berlin vote heralds big spending cuts


[Skip to the end]

More evidence the Eurozone economy will lag the rest of the world

Berlin vote heralds big spending cuts

by Bertrand Benoit

May 29 (FT) —The next German government is almost certain to crack down on spending and drastically raise taxes after the lower house of parliament yesterday adopted measures that come close to banning budget deficits beyond 2016.

The controversial constitutional amendment, part of a reform of federal institutions, will prohibit Germany’s 16 regional governments from running fiscal deficits and limit the structural deficit of the federal government to 0.35 per cent of gross domestic product.

The amendment still requires approval by a two-thirds majority of the upper house of parliament which represents the regions. The vote is scheduled to take place on July 12 and is expected to be approved.

The most sweeping reform of public finances in 40 years was an “economic policy decision of historic proportions”, Peer Steinbrück, finance minister, told parliament shortly before MPs endorsed the amendment with the required two-thirds majority.

The vote underlines Berlin’s determination quickly to plug the holes that the economic crisis, two fiscal stimulus packages and a €500bn ($706bn, £437bn) rescue operation for German banks are expected to blow in the public coffers this year and next.

In 2009 alone, legislators from the ruling coalition expect the federal budget to show a deficit of more than €80bn, twice the current all-time record of €40bn reached in 1996 as Germany was absorbing the formidable costs of its reunification.

This figure does not include the deficit of the social security system, which is expected to rocket too, as unemployment rises to an expected 5m next year.

The constitutional amendment, popularly known as the “debt brake”, allows a degree of flexibility in tough economic times, just as it encourages governments to build cash reserves in good times.

Yet economists have warned the new rules could force the next government to implement a ruthless fiscal crackdown as soon as it takes office after the general election of September 27 if it is serous about hitting the 2016 deficit target.

“Given the massive fiscal expansion we are currently seeing, the ‘debt brake’ will lead to a significant tightening of fiscal policy in the coming years,” Dirk Schumacher, economist at Goldman Sachs, wrote in a note.

In a separate assessment, the Cologne-based IfW economic institute said the federal government would need to save €10bn a year until 2015 through a mixture of tax rises and spending cuts.

Klaus Zimmermann, president of the DIW economic institute in Berlin, said the next government might have to increase value added tax by six points to 25 per cent. This would be the biggest tax rise in German history.

The “debt brake” could complicate Angela Merkel’s re-election bid. Under pressure from parts of her Christian Democratic Union, the chancellor recently pledged to cut taxes if returned to office in September, though she pointedly failed to put a date on her promise.

The Free Democratic party, the CDU’s traditional ally, has made hefty income tax cuts a key condition for forming a coalition with Ms Merkel’s party should the two jointly obtain more than 50 per cent of the votes.

The debate has cut a deep rift within the CDU, which was threatening to deepen further yesterday as opponents of tax cuts seized on the constitutional change to back their arguments.

Günther Oettinger, the CDU state premier of Baden Wurttemberg, said “promises of broad tax cuts are unrealistic… First we must overcome the crisis, then we need more robust growth, and when we finally get more tax revenues, we should use them to repay debt, finance core state activities and for limited, very targeted tax cuts.”


[top]