Latest on Economy 05/28/2008 04:05:47 pm by Dan Krohn

	The numbers continue to arrive in confusing ways, and the pundits continue to be confused. We are entering into a recession, but it does not look like the others of recent memory and the prior definitions are not fitting very well. The signals are mixed. Part of the confusion arises from the fact that this time we are on a slow path. We are not seeing a quick downturn which is reflected in all economic indicators. We are seeing a slower downturn which is being reflected in the indicators in a confusing way. But the result is that U.S. consumers, and soon many other parts of the economy, are being caught in an economic pincer movement. First we must consider inflation. Fuel and food and increasingly other things are costing more, in some cases much more. And the falling dollar, which helps U.S. manufacturers sell more abroad, also makes all imports more expensive for U.S. buyers. U.S. consumers have for quite some time been enjoying a steady supply of cheaper goods from overseas, but those goods are no longer getting cheaper. One thing which is costing much more is money, as banks and other lenders have continued to increase interest rates. Forget the Fed's lowering the discount rate to 2%. The lenders are looking longer term and they are not sanguine. Add to that the fact that they own buckets full of questionable loans, and the need for liquidity is continuing the credit crunch. We are used to seeing inflation in good, even over-heated, economic times. And we are used to seeing the Fed increase interest rates to combat inflation. This blog has predicted that this will indeed come to pass; and in other places such as Europe, the central banks are already addressing inflation more vigorously. But from the consumer's point of view, everything is looking as if it costs more, including the cost of borrowing. There are exceptions. As this blog has previously pointed out, those same consumers are watching wealth evaporate with the value of their houses. Housing prices are falling rapidly on a nationwide basis, and there is yet no sign of a bottom. Here in Houston, thanks to a booming energy industry, things are better at least for now. The other exception that bears watching is income. Classic inflation is often described as a wage-price spiral. But this time wages are not part of the game. Real income in the U.S. has been roughly steady for several years. That should come as no surprise as increasingly U.S. labor has been competing with cheaper labor overseas. So the price of labor is not increasing and is not keeping pace with the rising price of most commodities. Less income and higher prices - does that make for a recession? So the classical economic indicators of the last few decades are not fitting. This economic story is still being written, and this blogger thinks we are still in the early chapters with too much excitement yet to come.

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Time for Mass Transit? 05/22/2008 05:22:53 pm by Dan Krohn

	This blogger resides in Houston, Texas, a city which has traditionally been hostile to the concept of mass transit in a state which has been similarly hostile. After all, this is the land of oil, and we like to drive. Houston has also been dominated by real estate developers who have lobbied consistently and successfully for roads to their developments to take priority over mass transit. But now with gasoline at $4.00 per gallon and rising, perhaps the culture needs to change. Houston has one rail route in place, whcih was conceived as the spine for a reasonably thorough light rail system. But the ribs remain unbuilt. There is a bus system, but it has not been conceived as a full mass transit system for the majority of Houstonians. In the words of Houston's mayor's campaign, it's time to get Houston moving. With fuel prices at current levels, businesses might be hesistant to move to Houston or expand in Houston when their employees might not be able to afford transportation to work. The same can be said of Texas as a whole. There has been talk of a passenger rail system connecting the major Texas cities -- but it has never been serious. Efficient passenger service connecting Dallas/Ft. Worth, Austin, San Antonio, and Houston would be a boon to the Texas economy.

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This Blogger Is Not Alone 05/14/2008 04:38:12 pm by Dan Krohn

	The Financial Times today reports comments from the president of Germany having printed that "Global financial markets have become 'a monster' that 'must be put back in its place', the German president has said, comparing bankers with alchemists who were responsible for 'massive destruction of assets'. (By the way, the Financial Times is highly recommended for anyone interested in economic coverage.) This blog had not referred to the creators of exotic overly leveraged derivatives and other creative instruments as "alchemists" but the label is apt. These folks were indeed trying to make gold from base metals. Additionally former Federal Reserve Chairman Paul Volcker testified before Congress to the effect that the Fed was not taking an adequately anti-inflation stance. That means he wants to see higher interest rates - something this blog has been predicting for a while. It's nice to have such people in essential agreement with one's position. But this blogger wishes we were all more optimistic.

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Crippling the Invisible Hand 05/14/2008 10:11:21 am by Dan Krohn

	Here's something new to ponder. As part of its effort to stabilize the economy, the Fed has been loaning to financial institutions to which it did not loan money in the past. The line between traditional banks and investment banks has been blurred to its greatest degree since the Great Depression. And many of the assets which the Fed is taking as collateral or perhaps purchasing outright from "banks" are greatly overvalued in those transactions. If those assets default to any substantial degree which is at least a 50 - 50 shot, the Fed will take a big hit. That his will either be added in some creative way to the federal deficit (probably in some governmental equivalent of "off balance sheet" accounting) or taxpayers will have to make up the difference. Translated: much of the financial razzle dazzle currently underway is merely a postponement on paying the piper for excesses of the overly creative financial markets. Now there are many who will be arguing that we should trust the market and let things play out as they will. These folks, many of whom are found within the Bush administration, have dug in against the concept of a "bailout" for foolish consumers who committed to mortgages they could not afford. There has already been a threatened veto which has delayed action in Congress. Note that this anti-bailout language is not being applied to financial institutions which have made bad credit decisions, and there is plenty of activity underway to help them bail. (Logical to expect consumers to be financially savvy, but not hold to the same standards for bankers, isn't it?) The market is not being left alone to operate freely. At this point, the market would not be able to get the job done even if allowed to do so - without extraordinary pain. We have crippled Adam Smith's invisible hand, and it's about time we admitted it. Primarily through the selling of loans among financial institutions and all kinds of creative securitization of darn near every financing in existence (including truly bizarre and arcane "derivatives" and "synthetics"), far too many financial decisions are now divorced from production of what is actually being financed. Quick review: the base theory is that people will automatically be driven by market forces ("the invisible hand") to do what is beneficial for the economy. So for example, if there is a shortage of tomatoes, the price of tomatoes will rise. This automatically leads farmers to plant more tomatoes in place of a crop less in demand and providing less profit. As this bubble bath bursts (for the bubble is not just U.S. real estate), all kinds of decisions will be made that have nothing to do with whether or not the farmer is successfully growing tomatoes. Those losing money on whatever interesting financial instrument is tanking at the moment will be pressed to increase liquidity in any way that they can. Ultimately, this trickles back to the bank holding the loan to the tomato farmer. That lender will do its best to call in that loan - whether or not the tomato crop is looking good and profitable. So the farmer is crunched and might go out of business. And with the farmer under pressure, the tomatoes just might not be harvested in an optimal manner. So tomato prices will stay high, which is just what Adam Smith's invisible hand says will not happen. Our short term operating view combined with exceedingly creative financial shenanigans has crippled the invisible hand badly. The pity is that no one seems to have the guts, ideas, power, or knowledge to fix it.

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Short Term Thinking Today 05/14/2008 09:46:27 am by Dan Krohn

	The consumer price index apparently did not rise as quickly as expected per the recent announcement, so many talking heads are leaping to the conclusion that inflation is not so big a problem in the U.S. after all. Apparently the stock market is expected to rise on the cheerful news. Some pundits are talking of how this will give the Fed a break and save its being tempted to raise interest rates to combat inflation. Get real. This euphoria overlooks a few factors. To start, inflation is still moving all too quickly in other countries from China to the U.K. If the U.S.were economically isolated perhaps this would not matter, but remember globalization. No country is economically isolated today. The U.S. imports much - starting with oil (the price of which hit a new high yesterday). The dollar is still fundamentally weak due to absurd levels of deficit spending. If anything has held inflation in check, it is the fact that the American consumer is poorer and is looking for every opportunity to cut spending. That is most assuredly not good for the economy. To add more confusion, housing costs are computed in a truly funky way for the consumer price index. Rising housing costs due to higher mortgage rates on new loans or adjustments of old ones are not part of the computation. What's truly interesting is the discussion of the Fed's raising interest rates so rapidly on the heels of truly extraordinary interest rate cuts. The U.S. economy is a bit out of control, though we've yet to see the most exciting (and not in a pleasant sense) part of the ride.

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Not Out of the Fire Yet 05/12/2008 11:19:39 am by Dan Krohn

	In our short term world with a short term focus on the economy and short term thinking, people seem to get excited at every bit of good news. Heck, there are even news stories cheering on the stock market rebound claiming it results from a drop in oil prices, though that drop is temporary and small. What is being overlooked by too many is that the economic problems are not going away that quickly. Many more mortgages are on the verge of default as higher fuel and food prices pinch budgets at the same time that adjustible rate mortgages are going up. (Curious that - since the Fed has pushed the discount rate to an historical low.) The mortgage problems will not disappear overnight. No this economy of challenge will linger for quite a while as mortgages unwind and force the unwinding of a complex mix of derivative securities which were largely born of the housing bubble. Refreshing to see some honesty as the chief executive of HSBC, a company hit hard in this market, opined that the challenges will last beyond 2008.

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Burma Update 2 05/12/2008 11:26:55 am by Dan Krohn

	It's nice to have some company in a discussion as to whether or not the world should sit back and watch hundreds of thousands die of thirst, starvation and disease due to the greed and heartlessness of a government. Willem Buiter, Professor of European Political Economy, London School of Economics and Political Science, has blogged that the right to sovereignty is lost in some circumstances; and that what is going on in Myanmar is such a circumstance. This blogger would not go quite that far and is not advocating mandatory regime change at this time. But it's time for mandatory opening of the borders to aid workers with full cooperation (and no harassment) in their efforts. Unfortunately, several events - or more properly nonevents - of recent years make it clear that our species has not evolved very much from its early tribal way of thinking. Instead of conceiving of humanity as one group, we humans insist on dividing ourselves into artificial small groups. Then having divided ourselves up, we consistently make war among the groups or ignore tragedy because it is not our group's problem. The list is a long one: Burma, Darfur and Ruanda come readily to mind as recent examples. Some might argue that Serbia/Kosovo was an exception, but that can easily be seen as a problem among people quite close to if not part of the industrial west group. Hopefully someday when a human being suffers anywhere, we will all possessed by empathy suffer as well. But for now, alas, it's all about me.

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Burma Update 05/09/2008 10:53:33 am by Dan Krohn

	It has not taken long to see where the Myanmar government stands regarding its people. The UN has suspended aid efforts as it cannot obtain visas for its people. The military dictatorship is not letting any outsiders in. This includes a team of more than 80 doctors who flew in from Bangladesh and were turned back. Additionally, the government is confiscating all relief supplies upon arrival, so there is no guaranty that they will be delivered. As a practical matter it is unlikely that the Burmese government has the capability to distribute the supplies effectively even if it chose to do so. Will the world sit back and issue press statements while watching tens of thousands die? Or will the world's leaders join together and prepare to take action if the situation is not changed?

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Inflation Confirmation 05/08/2008 05:53:10 pm by Dan Krohn

	The IMF stated today that inflation in the world economy is its main concern. No surprise here. So we have the stifling combination of prices rising and lenders tightening. Though the Fed has been lowering interest rates, one cannot help but wonder when that will turn around in an effort to combat inflation. But the Fed is in a sticky place. Business bankruptcy filings are up. Corporate defaults on junk bonds are up. Basically businesses are finding it hard to survive. The Fed will not want to push rates up as that simple adds more to the cost of operating a business. As businesses fail, people find themselves out of work. So they cannot pay their (rising) bills. And the businesses owed money by those which are defaulting or disappearing, in turn find their financial picture worsening. As all this happens in the U.S., it will become increasingly apparent that the Fed cannot exert the influence it once did. With increasing record deficits, a falling dollar, and higher interest rates to be found in Europe, money is starting to move from the U.S. to other locations. Holding dollars is simply less attractive now than it used to be. That alone can drive interest rates up. There is a nasty domino effect in this economy. Unfortunately, the economy is positioned such that the odds of it getting worse before it gets better are high.

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A Burma Question 05/08/2008 01:14:21 pm by Dan Krohn

	The nation of Burma also called Myanmar is one of the poorest on the planet. Its people live under a repressive military dictatorship which allows no hint of democracy. And as we all know, that country was devastated by a cyclone several days ago. The government issued a plea for international assistance but has since moved very slowly in allowing aid to enter the country. Untold thousands are without food, water, shelter or power. Undoubtedly many of those who survived the initial horrific onslaught are now failing to survive the lack of drinking water and food. Given this situation, the question arises: when should the rest of the world decree that this has gone on long enough and take out the military dictatorship by military means? Certainly wars have been fought for far less noble reasons. This blog entry is not advocating immediate war, but if the concept of a just war has any validity - the possibility should be discussed openly and quickly. There comes a time when decent people cannot sit by and watch innocent people die horrible deaths. In this such a situation? If the government of Myanmar contines to drag its feet while peaceful efforts are made, then perhaps a large armada off its coast is needed to inspire change. Another difficult issue arises in this situation. The Myanmar government does not have the wherewithal (and not likely the will) to manage distribution of water and food even if it is brought into the country. Outsiders must be allowed onsite to get the job done. But this government is terribly afraid of permitting any outside activity in the country. Given its record, the Myanmar government is not likely to let others with the necessary logistical abilities in. Unfortunately, this is a situation demanding quick decisions and action. It is all too likely that delay will render many aid efforts moot.

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Fasten Your Economic Seatbelt 05/06/2008 10:14:39 am by Dan Krohn

	A study released Monday by the Fed indicates that banks are tightening credit standards across the board: from credit cards to loans to large businesses. So we have the interesting situation of the Fed making money available to banks (and now other financial institutions as well) at modern day record low interest rates, while the banks are lending at higher rates if at all. It takes no rocket scientist, or even an economist, to realize that contraction of credit availability across the board tends to shrink the economy. (The bankers indicated a pullback on college loans, too. In terms of global competition, we might as well give others an additional advantage.) Outside of consumer loans - mortgages and credit cards, the hardest hit sector will be small businesses. As small businesses make up the greatest growth area in the U.S. economy and hence in employment, their inability to obtain credit for expansion (or the necessity of their paying more for that credit) will limit their ability to grow and bring on more employees. In addition to making fewer loans at higher rates, many bankers in the study stated that they were tightening up the legalese in the loan documents -- basically preparing their legal positions in case of defaults. As to why the bankers in the study say they are tightening credit standards, 94% answered the economic outlook. So we can see where the guys with the money are placing their bets. In a recent entry, this blogger warned against too readily believing government statistics, especially when first released. Within the last week there was premature cheer when unemployment numbers came in better than expected. In our short term society, that is enough for writers to be editorializing as to how things aren't so bad after all. The stock market took an upward bounce. Alas, it was temporary. This is a time for caution and watchfulness. For any readers who are owners in closely held small to mid size businesses, here's some advice. Follow the lead of the bankers in tightening up your deals. The relationships that thrive in good times become strained in tough times. So make sure critical relationships are formalized: written down and signed. Some business relationships should be restructured so as to better insure delivery and payment or minimize losses in case of defaults. If manure hits the fan, you might find that to have been very cheap insurance.

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The Will to Prevent Famine 05/05/2008 04:48:10 pm by Dan Krohn

	New reports today indicate that U.S. production of maize (largely being grown as a result of biofuel subsidies) is likely to be exceedingly low due to bad weather. This comes on top of other reports that the U.K. is reconsidering its approach to biofuels. Diversion of farming efforts to biofuels inevitably takes productive land out of the food supply business. (Note that increased food costs also affect the cost of feeding livestock that pull plows in less developed countries.) India is apparently considering banning some or all futures trading in foods out of concern that such trading exacerbates food price increases. All in all, the prospect of widespread starvation continues to increase. (See previous entries in this blog for more on this topic.) Given this situation, the work of Nobel prize winning economist Amartya Sen is of utmost importance. In his book Development as Freedom Sen describes in understandable terms how easy it is to prevent widespread starvation where governments have the will to do so. Unfortunately that will is often lacking, both in leaders of the unfortunate countries suffering the shortages and among the leaders of wealthier countries who are guided by greed and simply lack compassion. Indeed Sen points out that a standard response to famine is that it is the fault of the people who are starving, hence they have brought it on themselves - thereby relieving the rest of us of responsibility. It is always easier to blame someone else than take on responsibility oneself. Another arguement likely to be heard is that we simply need to let market forces work their magic. Adam Smith's invisible hand will fix it all. Well, that argument won't hold water for two reasons: (1) to prevent widespread hunger will require government intervention as history has adequaely demonstrated, and (2) few, if any, of the wealthier countries have left Adam Smith's invisible hand alone themselves. Almost all of the industrialized western countries have some degree of agricultural subsidies in effect. As noted above, several have subsidies in effect which divert land from edible crops to biofuel production. Many countries have tariffs protecting domestic food producers. Most have subsidies or tax breaks in place affecting the oil industry, which is the source of fuel for farm equipment and most fertilizer - thus affecting food prices. So if you start to hear mumblings about how we can just wait and let the free market fix things, check to see where that speaker himself has been positioned on governmental interference with the free market. Remarkable how one's approach to government interference in the market is determined by who is benefits. Ultimately this situation will come down to compassion. Is the world ready and willing to take necessary measures to prevent suffering or not?

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Baloney Alert 05/05/2008 02:22:19 pm by Dan Krohn

	With a deadly combination of a political campaign year and much exciting news about the economy at this time, it is worth noting a few items that might pop up to mislead. There are many such items out there - many of which are unintentional. This blog entry will mention just a few. First consider official economic news and statistics issued by the U.S. government. It has become commonplace for news to be released followed some weeks or months later by a restating of the particular statistic. While it is to be expected that data might be adjusted to achieve greater accuracy as more information comes in, can anyone doubt that those who are in a position to control the news releases will not be tempted to issue initial reports as favorable as possible to their own interests? So when we see favorable economic data coming forth, we must pause for a moment wondering the extent to which it might be revised at a later date. Pity this is the case. But we have a government which has shown it has no problem hiding information or giving wrong information to the American people. When economic data is difficult to understand at best, we can hardly expect accuracy if accuracy works against those controlling the data release. The second issue as to economic data from the U.S. government is its willingness to change the calculations upon which the data is based. So what is said to be 5% unemployment today might have come out at 8% unemployment if calculated by earlier or different methodologies. Since no leaders want to admit that things stink on their watch, the revisions to calculation methodology can be counted on to make numbers appear more favorable. This blog has mentioned before that most people simply glaze over when faced with anything related to economics. A pity since economics is so critical. Here is a sneaky statistic to watch where you can almost guaranty that some "experts" will be taking the position that things are not so bad. Inflation. It should not be a surprise to the average American that prices are going up. Food prices are up. Fuel prices are up. (And as noted before, increases in energy prices ultimately are reflected in the price of just about everything.) Factors are in place which will continue to push prices up: particularly the falling dollar which should continue to fall for some time given the forces in place. (Do not be deceived by short term fluctuations.) But you will see inflation statistics which look much better than they ought to look. Fear not, the value of housing is falling, which will be included in inflation numbers to make them look better than they really are. Here's what it means for the typical American homeowner: Your net worth will be dropping as you lose equity in your house, but pretty much everything else you buy will cost more. What a deal!

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Energy and the Shock Doctrine 05/01/2008 11:45:49 am by Dan Krohn

	For those who have some familiarity with Naomi Klein's book The Shock Doctrine we currently have it being used in the U.S. on a difficult and hot issue. Basically the shock doctrine is described by Klein as taking advantage of some huge negative event (like 9/11) to get a confused public to accept new rules which it would not accept upon calm reflection. (The book is an interesting read and certainly carries plenty of controversy. It's cited here for the usefulness of the phrase and explanation of the methodology.) Here's the one going on now. Fuel prices are at record highs and people are really scared. Shock is a good word for the way Americans feel at the gas pump. Under these circumstances, there is opportunity to push through energy related policies which will benefit a small but powerful few. President George W. Bush has consistently taken positions aimed at increasing profits for the oil and gas industry. The list goes on and on from opposing requirements that cars get better mileage to weakening any environmental protections that can be found. The ties of this administration to the energy industry are no secret. In spite of these efforts, not everything the administration has wanted has been obtained. (Note, this entry is about process - not about Bush bashing. Sometimes this blogger agrees with the current president's policy - just rarely on the environment.) So now we have a fuel price shock creating the perfect moment to push perviously rejected plans through. Just this week Bush attacked Congress for not allowing drilling in the Alaskan Wildlife Refuge and for not going along with other aspects of his energy industry friendly programs. Now that the matter is hitting us hard in the wallet, it is likely that Americans will sacrifice the environment while gazing at the carrot of cheaper fuels. (Whether the carrot is real or illusory is an altogether differnt issue.) It is not an abstract issue nor an easy one. It is a matter of balancing our current and near term standard of living against the one we will bequeath to our children and their children. For example, BBC America recently aired a news story on the topic of illnesses in Colorado which many claim are linked to pollution caused by the current massive natural gas drilling boom. The energy company representative interviewed stated that they were operating within all government requirements. There was no indication that they would try to operate at a level cleaner than that required by law. Energy companies cannot justify spending substantial sums on enviromental protection if their competitors are not doing the same. These companies are out to make a profit, so the most one can expect them to do is comply with laws and regulations. The only option, unless one forsakes environmental protection altogether, is to level the field by having sufficiently strong environmental laws in place applicable to all. And waiting for absolutely incontestable scientific evidence of a link between pollution and illness is not a reaonable choice. If a link between pollution and serious illness exists, too many people will suffer greatly and/or die before absolute agreement upon evidence is established. What is needed is a cool, detached yet quick study of these issues so that the difficult balancing of access to fuel and environmental protection can be done properly. Not likely. Sorry kids, but my generation wants a nice lifestyle with cheap fuel for our big cars, and we want it now. You'll just have to develop new technologies to clean up any mess we leave for you.

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