Saturday, May 26, 2012

Economic Post Mortem


My background is business and I get a bit ticked when I read something like this:

And that's what business types have a hard time understanding because in the business world money equals income. If those failed green projects that Obama tried had not been attempted and if we had simply decided to not increase the deficit, that would not have been a savings for the macro economy. Those saved dollars would have leaked from the income flow. 
Way back in college I noticed that business majors did fine in micro, but they seemed to have a hell of a time getting macro. Business types just don't have the intuition for macro because they tend to think in terms of stock variables...that might be why so many of them also had problems with calculus. Anyway, I see this same confusion with Romney. I'm sure he's a smart and sharp businessman. And he might have excellent CEO skils (and that's important in a President); but the guy is clearly at sea when it comes to macroeconomics. Clueless beyond belief.
Back awhile, I wrote this:

THURSDAY, OCTOBER 13, 2005Excessive Spending - The Next RecessionI'm going out on a limb now, but I think the 4th Quarter of 2005 will be viewed, retrospectively, as the beginning of a new recession in the U.S. 
For those of you who did not read my post of September 16, check it out.
Here are some economic stories from Reuters:

The Fed is getting ready to pounce on the economy. Why? Well, apparently it sees that the economy is running out of energy (pun intended), so it is time to put on the economic brakes by raising interests rates further. For those of you with short-term memory loss, go back to 2000 when the Fed raised the prime to 8.5% for our own good. Alan G. did admit to a slight error in judgment on that action. Unfortunately, the Fed seems to have a short-term memory loss, but the logic is still consistent: when the economy is hit with natural disasters, energy market aberrations, job losses and currency manipulation by competitors, then it is time to cripple the economy by tightening the money supply and raising interest rates.

The official recognition of the "recession" was about 3 years later... well after the malaise hit the economy.  The "macro" numbers showed things were pretty good. The "macro" numbers failed to recognize what millions of businesses and individuals were seeing... the U.S. was in big trouble.  I'll admit that I used the term "recession" in a way that would make a macro-economist cringe... but in a way that most individuals and businessmen would understand.

Macroeconomics is the belief that looking at large amounts of aggregated data can tell you what you need to know about the economy... like this:
February 27, 2008 
Federal Reserve Chairman Ben Bernanke went to Capitol Hill today to provide Congress with an update on the struggling US economy. The Fed forecast he summarized called for very slow growth in 2008, but no recession; and that was the good news. 
The Feds forecast says that growth could be as low a 1.3 percent for all of 2008, down sharply from its July forecast. And with the economy expected to pick up only in the second half of the year, that could mean almost no growth at all in the first six months. 
Chairman Bernanke acknowledged the problem in the second paragraph of his testimony. "The economic situation has become distinctly less favorable since our July report," said the chairman. 
Now the song, 4 years later, is that all we have to do is spend money on green projects to make sure "income" doesn't fall.  My thoughts:
So, you say that it doesn't matter that the government dumped money into "investments" that had no real business cases. What was the opportunity cost? Come on, don't tell me there was no opportunity cost because the government can spend as much as it wants. Chickens come home to roost. 
At the same time that the "don't need no business case" geniuses [like Frank and Dodds who liked the idea of everyone owning a home even if they couldn't afford it because all that spending was good stuff] were dumping money down a series of black holes, the government was waging its own Don Quixote wars on carbon vapor. The goal? Why to protect us from plant food, of course. Better to kill the most efficient sources of energy and thousands of jobs along with it than to risk having to run the air conditioners a few more days. 
So, our macro data experts have urged spending and our macro data bureaucrats have responded with policies and investments that have guaranteed a far less cost effective source of energy. Gee, if you pay more per KW, that means the economy will be booming. Think of all of that spending. 
If Ben [big economics] Bernanke couldn't see the writing on the wall and all of that recent government spending has simply increased government debt with very little to show for it, why it's just those stupid business types who don't understand how good things are? ...
Tell me, what besides the imaginary 4.2 million jobs saved has all of that spending achieved? Housing is still a mess, unemployment is still over 8% and millions have stopped being counted because they are discouraged, and government debt will soon be beyond servicing when interest rates do increase... the time implication of current spending.
Government spending that simply expands dependency on government [Nancy Pelosi's more people on unemployment is good for the economy] while the government attacks those who create jobs and incomes is a recipe for... well, the Obama administration and Keynesian economics. In your words: "clueless beyond belief." 

With regard to the impact of government spending, three professions from the Harvard Business School [uh, oh... not economists] came to the following conclusion [click on image for larger view]:

2012 IS HERE


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)