30 July 2008
"The huge spike in global commodity price inflation is prima facie evidence that the global economy is still growing too fast...The world has just experienced perhaps the most remarkable boom in modern history."
"...Absent a significant global recession (which will almost certainly lead to a commodity price crash), it will probably take a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels...In the meantime, if all regions attempt to maintain high growth through macroeconomic stimulus, the main result is going to be higher commodity prices and ultimately a bigger crash in the not-too-distant future."
"...In the light of the experience of the 1970's, it is surprising how many leading policymakers and economic pundits believe that policy should aim to keep pushing demand up. In the US, the growth imperative has rationalised aggressive tax rebates, steep interest rate cuts and an ever-widening bail-out net for financial institutions."
Some are arguing that we don't have much to worry about; that we're out of the woods now. But a depreciating dollar and continued growth in demand for basic commodities and essential goods as a result of both real supply shock and misguided macroeconomic policy will only make the inflation that ensues that much harder and longer. Stabilizing inflation expectations after such unscrupulous policy decisions will take years, if not up to a decade, making it much harder for the economy to expand when uncertainty about price stability is high. One of the things necessary for the U.S. economy to expand and stay strong is stable prices. But policymakers seem to be abandoning their caution when it comes to inflation these days (except for Dallas Fed President Richard Fisher, as evidenced in his vote to increase the federal funds rate in the June 25 meeting of the FOMC), something that will most likely come back to bite us in the ass. As Mr. Rogoff points out:
"...as goods prices rise, wage pressures will eventually follow. As Carmen Reinhart and I have shown in our research on the history of international financial crises, government in every corner of the world showed themselves perfectly capable of achieving very high rates of inflation long before they had the assistance of modern unions*." (*:See end of post for the research cited)
"...Inflation stabilisation cannot be indefinitely compromised to support bail-out activities. However convenient it may be to have several years of elevated inflation to help bail out homeowners and financial institutions, the gain has to be weighed against the long-run cost of re-anchoring inflation expectations later on."
We had a good run for a while, but now it's time to let things cool and restructure while we await the next economic boom. But let's not try to keep this thing going forever. It's time to buckle down and deal with reality. Instead of keeping lackluster business' alive and breathing by letting the federal government bail them out, we should let them fail, allowing the lesson to sink in that excessive risk has a cost that eventually gets paid. And instead of maintaining lax regulation on the financial industry, we should beef up oversight and regulations to prevent future occurrences of excessive risk tolerance in exchange for fat profits (and to prevent another future financial crisis). Continued bail outs will increase the federal governments liabilties and drive further devaluation of the dollar. Instead of trying to keep interest rates low (I say trying because that's exactly what is happening; real interest rates aren't responding like they used to with changes in the federal funds rate--> See Paul Krugman's post on this), let's start slowly bringing them back up to encourage less spending, thus reducing pressure on demand for resources and give the world some time to increase supply for essential commodities. I like that way Mr. Rogoff says it:
"For a myriad reasons, both technical and political, financial market regulation is never going to be stringent enough in booms. That is why it is important to be tougher in busts, so that investors and company executives have cause to pay serious attention to risks. If poorly run financial institutions are not allowed to close their doors during recessions, when exactly are they going to be allowed to fail?"
And it's a bit resonant of one of my previous posts, in the sense that he points out that U.S. has a "growth imperative" that leads to a rationalization of actions like tax rebates, dramatic interest rate cuts and financial institution bail-outs to stimulate demand and growth. He also thinks, as I do, that the good times must end for a while: "...policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom."
To bring everything to a close, the continued attempts to prevent growth from slowing are utlimately going to make the inevitable crash much worse than it could have been. Mr. Rogoff agrees:
"In policymaker's zealous attempts to avoid a plain vanilla supply shock recession, they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn."
* This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper 13882, March 2008
28 July 2008
"We are relearning an old lesson: The business cycle isn't dead. Prosperity's pleasures breed complacency and inspire mistakes that, in time, boomerang on financial markets, job creation and production. Just as expansions ultimately tend to self-destruct, so downswings tend to generate self-correcting forces. People pay down debts; pent-up demand develops; surviving companies expand."
24 July 2008
"Most people, the government assumes, ultimately put profit before principle."
It's ironic; a communist government operating like a capitalist firm.
22 July 2008
"These prolonged recession-like episodes probably reflect the changing nature of the business cycle. Earlier recessions were more or less deliberately engineered by the Federal Reserve, which raised interest rates to control inflation. Modern slumps, by contrast, have been hangovers from bouts of irrational exuberance — the savings and loan free-for all of the 1980s, the technology bubble of the 1990s and now the housing bubble."
"Ending those old-fashioned recessions was easy because all the Fed had to do was relent. Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble."
Hopefully that something isn't another bubble. My previous post touches on unsustainable growth and the inevitable consequenses of it. Instead of having more frequent mild recessions we try to to stay pain free for as long as possible (doing anything necessary to achieve this goal) in the present even though ultimately we must come crashing down to reality. It just doesn't make sense to me.
21 July 2008
"...ours is a free-market system. More and more, our version of free markets holds that they are free only when asset values rise. When they fall, the markets must be managed." [From NY Times]and from The American Prospect (thanks to a post at Marginal Revolution)...
"The decision to intervene against short-selling is completely inconsistent with the belief in the wisdom of the markets. Of course short-sellers can be wrong and depress stock prices more than is justified by fundamentals, but so what? The government doesn't intervene when it thinks investors have exaggerated the true value of a stock. The public has no more reason to fear under-valued stock prices than over-valued stock prices."Growth, growth, growth. The government, business people, nearly everybody wants everything to be good all the time. But it just cannot be so. It seems like nearly everybody has forgotten about the fact that there is absolutely a business cycle that brings good times and bad times. And although we don't have to accept the bad times with no resistance or efforts to minimize the negative effects, we do need to accept the reality of the situation. Things will be tough for a while. Tough shit. Deal with it. Bailouts of Bear Stearns and potentially FannieMae and FreddieMac. Limiting short-selling by the SEC. Cutting the Federal Funds Rate drastically. We're doing everything we can to keep from hurting now. But eventually we will have to hurt. People either don't realize this or are very good at suppressing it...and it's just flat out amazing.
17 July 2008
"Pools of mortgages, for example, could be structured so that all the loans
in them share many of the same traits. One pool might only contain loans from
prime borrowers who have fully documented their income and their assets, put
down a down payment of at least 20% and have credit scores of 720 or
"On the other hand, more risk-tolerant investors might prefer a piece of a pool featuring all subprime borrowers with low credit scores that would offer a higher rate of return. The key is that each of these investors would know what they are buying."Why didn't they think of this years ago?
16 July 2008
Here is the full piece.
"On Tuesday, Nancy Pelosi of California, the speaker of the House, and other House Democrats met with economists to draft another stimulus package, saying it was likely to include spending for roads, bridges, schools and other public facilities, as well as aid for states confronting smaller tax revenues in the face of the housing downturn."
"The White House and Congressional Republicans maintain that the best way to reinvigorate the economy is to adopt legislation to limit home foreclosures and expand domestic production of oil."
More spending seems to be the wrong solution to me. Continued dollar depreciation isn't going to slow inflation. I'm not quite sure what "expand domestic production of oil" means. I will assume the repeal of off-shore drilling bans, as curtailing additions to the strategic reserves seems to be neither a viable long-term solution nor a solution that has significant impact on oil prices given that only about 3 million barrels per month could be diverted to the market (in a very good month) [DOE SPR Data]. The United States consumes over 20 million barrels per day. Limiting home foreclosures might slow declining home prices, but they will still fall nonetheless and continue to cause problems for the financial markets. We're just going to have to ride this thing out.
15 July 2008
"...the Labor Department reported that wholesale prices had risen 1.8 percent in June, meaning that inflation rose in the 12 months at its fastest pace in more than a quarter-century."
More on stagflation: here and here
10 July 2008
09 July 2008
08 July 2008
“We take it very seriously. Fundamentally, we believe it is wrong to sell your
vote,” said John Aiken, a spokesman for the office. “There are people that have
died for this country for our right to vote, and to take something that lightly,
to say, ‘I can be bought.’
I didn't know it was against the law to sell your vote. What's so wrong about that. I can sell my labor and my personal property, why can't I sell my vote? Can somebody elucidate on why selling your vote is considered such a heinous thing?