Tuesday, May 30, 2006

Excessive Spending - What Always Works

Oil prices continue to remain high despite slowing consumption and rising interest rates in the U.S.

In previous posts, I have voiced the opinion that the Fed's action to fight oil-price based inflation with higher interest rates will slow the U.S. economy... which has always worked..., but not much else. The latest data showing China's demand for oil rising almost 11% over prior year is an example of how forces outside of the Federal Reserve's control are nullifying the global effect of U.S. interest rates and driving the U.S. economy toward another downturn... in areas other than where recession level unemployment already exists.

Meanwhile, actions that could lead to less reliance on oil are being ignored or fought:

  • Building new nuclear power facilities
  • Developing non-fossil fuel alternatives that can be generated from power supplied by nuclear energy:
    • Hydrogen gas fuels
    • Battery-only vehicles
    • Fuel cells
I learned a long time ago in business not to leave key decisions to finance staff. They tend to focus too tightly on the immediate rather than the long term and that can and does lead to really bad strategic decisions.

Monday, May 29, 2006


Life after death. Heaven. Hell. Unknowns.

Those who lived, fought, protected, and died before us are the only ones who can answer the really big questions. The rest of us are left with the memories of who they were or what they did. It is our ability to document our histories as a species that give us a chance to progress as a species.

Today we honor those who served in our armed forces; especially those who gave their lives to allow us to go forward under the laws and traditions of free people. We preserve their histories because they protected ours.

Friday, May 19, 2006

A New World Order?

The Detroit Red Wings had the best regular season record and lost in the first round of the playoffs.

The Detroit Pistons had the best regular season record and are losing in the second round of the playoffs.

The Detroit Tigers have the best regular season records and ... what am I saying... have the best regular season record??? The Detroit Tigers???

Where was I?

Thursday, May 18, 2006

Open Letter to the Federal Reserve Board

CHICAGO, May 18 (Reuters) - It is "pretty clear" that the U.S. housing market is cooling off but it looks poised for a soft landing given overall strength in the economy, U.S. Federal Reserve Chairman Ben Bernanke said on Thursday.

"Pretty clear" and "cooling" are dramatic understatements for Michigan. Actions by the Federal Reserve are causing severe economic problems for this state which "clearly" never recovered from the previous recession. A 7.2% unemployment rate and a housing market that has collapsed are viewed only within the context of the "national average".

That's like treating a broken neck with message therapy. On average, the rest of the body isn't in bad shape... just needs some adjustments.

Wednesday, May 17, 2006

Excessive Spending - The Fed: Misery Loves Company

Soooo... the Fed will make sure that more people share the inflationary pain of having things less affordable by making more things less affordable.

Quick doctor, the patient is bleeding profusely so we must draw out some blood so that he won't have as much to bleed out. Well, you have to admit that there is a certain logic to that.


Oh, and one piece of evidence that the Federal Reserve is VERY EFFECTIVE at whatever it tries:

Michigan Unemployment Rate
(Seasonally Adjusted)

April 2006
Change Over Month

7.2 %
+ 0.4

Saturday, May 13, 2006

Excessive Spending - Current Account

The question keeps coming back: is the current account deficit (balance of trade) good or bad for the U.S.? Apparantly, the answer is yes, no, maybe... depending on which expert you read.

From Reuters:

Following are data on
official dollar holdings worldwide,
ranking reserve totals by country and size
and compared with
the size of U.S. fiscal deficits
and bond markets.

Latest End-2005 End-2000

China# $875 (Mar) $819 $166
Japan* $839 (Apr) $829 $347
Taiwan $259 (Apr) $253 $107
SKorea $223 (Apr) $210 $ 96
Euro zone* $200 (Apr) $196 $240
India* $154 (Apr) $131 $ 40
Russia* $153 (Apr) $137 $ 28
Hong Kong* $127 (Apr) $124 $108
Singapore* $128 (Apr) $117 $ 80
Malaysia $ 76 (Apr) $ 71 $ 26
* = excluding gold, SDRs, other assets
- Total rise of these 10 in April, ex China = $40 bln
- Total rise of these 10 in 2006 = $147 bln, or 5.1 percent
- Total rise in 2005 = $277 bln, or 8.7 percent
- Total rise since 2000 = $1,796 bln

What is obvious is a remarkable increase in the current account deficit - to 7% of the GDP. Wha t is not obvious is whether that is a problem or not.

Dr. Don Boudreaux, Chairman of the George Mason Economic Department, is adamant that this is not a problem... rather it is a sign of exceptional strength in the U.S. economy.

Others are not so sure:
US current account deficit 'unsustainable' – NY Fed chief
By Christopher Swann in Washington
Published: January 23 2006 19:29 | Last updated: January 23 2006 19:29

Timothy Geithner, president of the New York Federal Reserve, on Monday dismissed the view that the US current account deficit was sustainable, suggesting the risk of a sudden fall in the dollar would grow the longer the trade gap widened.

Still others are certain it is a problem:
The current account deficit indicates that the United States is purchasing about 7% more than it is producing. It needs to import about $2.5 billion per day in foreign capital to finance this deficit. As a result, the net U.S. international investment deficit reached $2.5 trillion in 2004 and likely exceeded $3 trillion at the end of 2005 (net international investment data for 2005 will be released on June 29). Foreign central banks and other private investors held $2.2 trillion in U.S. treasury securities at the end of the fourth quarter of 2005; foreign central banks held the sizeable majority (63%) of that government debt.

As long as the U.S. maintains sizeable current account deficits, net borrowing and payments to foreign investors will continue to grow. The standard of living of future generations will be depressed by the need to pay for today's heavy borrowing from abroad.

But then others say it is just the way it should be... neither good or bad:

International Finance Discussion Papers

The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page
The U.S. Current Account Deficit and the Expected Share of World Output
Charles Engel; John H. Rogers
Abstract: We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries -- more modest than the growth over the past 20 years -- the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account -- the increasing deficits over the past decade -- are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender -- though not the only legitimate contender -- for explaining the U.S. current account deficit.

Friday, May 12, 2006

Excessive Spending - Rose-Colored Glasses

The government proclaims a robust economy. The Fed raises the prime rate to keep things under control. Meanwhile, in the real world:

The Current Account Deficit and the extreme shift to imported goods has weakened the U.S. currency and the effects are being exacerbated by the Fed's actions -

May 12 (Bloomberg) -- U.S. stocks fell as a jump in prices for imported goods and a drop in the dollar raised concern inflation will accelerate. The Standard & Poor's 500 Index headed for its biggest weekly loss since October.

The government report showing April import prices rose the most in seven months followed a surge in oil and metals prices this week and the 16th straight interest-rate increase by the Federal Reserve.

Remember, if it costs more because we have a stupid approach to imports, it will cost even more because we have an illogical approach to interest rates.

Well, think about it. All of the "market force" experts say let the marketplace handle itself. They don't say, "Let the marketplace be dominated by guesses from the Federal Reserve about what the marketplace is doing."

The Federal Reserve seemed content with the situation as long as cheap imports (supported by manipulated Chinese currency) kept prices artificially low, but the threat of a market correction to reflect untenable imbalances send the Fed into spasms of reactive rate hikes... a double blow to the economy. If imports and oil prices are going up too fast, let the consumers fix it by buying less (which they are) or manufacturers fix it by not buying imports (which they can).

No, the Fed needs to "fix" things by itself... like drawing blood from a bleeding man.

Thursday, May 11, 2006

Excessive Spending - Global Inflation; National Response

50 years ago, when the U.S. sneezed the rest of the world caught pneumonia.

The Federal Reserve still lives in that world. Apparently, it sees the potential inflationary impact of oil prices as a problem that the U.S. can solve by raising interest rates... even though the marketplace has pretty well reflected the dampening effect that oil prices have had on our spending habits.

Consequently, in the U.S. we can expect the following:

  • Higher interest rates will slow the U.S. economy... housing starts are way down already and people are dipping into savings to fund their normal living needs
  • Demand for gasoline has already dropped because of the price of gasoline; the sale of new vehicles will drop significantly due to interest rates
  • Unemployment will rise as the cost of doing business in the U.S. rises
  • Areas of the country that have already been impacted by manufacturing downturn and low growth will have declining economies
But the problem is that will not cause pneumonia in the rest of the world:
  • Political unrest in oil producing countries, plus China and India have a growing need for oil products because the U.S. has jump-started their economies and they can now grow internally rather than be dependent on exports are external factors independent of U.S. demand for oil... and the U.S. will discover that raising our interest rates does not reduce oil prices - U.S. Federal Reserve - strike one!
  • To remain competitive, U.S. manufacturers will be forced to export more jobs and production to China and India in order to further reduce their costs to offset the higher costs from interest rates thereby exacerbating economic decline - U.S. Federal Reserve - strike two!
  • U.S. citizens will dramatically reduce their savings or further increase their debt levels to offset inflation from oil prices and lower incomes, thereby weakening the U.S. economic base - U.S. Federal Reserve - strike three!
We're out!

The Federal Reserve overreacted in the first years of the decade and is overreacting again.

Wednesday, May 10, 2006

Excessive Spending - Crash... Tinkle

The Fed struck again and indicated that it felt so good it probably will do it again in June.

After the Fed on Wednesday raised its target for the federal funds rate to 5 percent, most banks began boosting the prime rate they charge their best customers to 8 percent from 7.75 percent.

The prime rate has risen from 4 percent in June 2004, and is at its highest level since April 2001.

Yup, that's about when the economy started going sour the last time. Are there really economic cycles or is it just the Fed trying too hard? Maybe last time and this time the answer is the latter?

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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
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

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

My photo
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)