Wednesday, April 30, 2008

Fed Cuts Rates to 2.0%

The cut, the seventh since September, was modest by recent standards, reflecting upward pressure on inflation from higher food and energy prices and the weak dollar. Those trends suggest further rate cuts might do more harm than good in the months ahead...

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented for a second-straight meeting, this time favoring no change in rates. It's the sixth-straight dissent Fed Chairman Ben Bernanke has faced on a fed funds decision.

"Economic activity remains weak," the Fed said, citing "subdued" spending and a "further" softening in labor markets. Markets "remain under considerable stress," the Fed said.

Barring an unforeseen collapse in the economy or financial markets, rates will probably stay where they are for several months at least, though the Fed left the door open to more cuts if needed...

But the economy still faces many headwinds, and any recovery looks more like a slow "U" than a rapid "V" shape. Housing is unlikely to rebound before 2009 at the earliest, and employment declines -- along with soaring food and gasoline prices -- have weighed on consumer confidence and spending. That leaves exports, aided by the weak dollar, as one of the sole sources of support for the economy.

read the Wall Street Journal article

1st Quarter 2008 0.6% Growth


My thoughts: Slow growth, but far better than the recession that many had predicted.

Tuesday, April 29, 2008

Oil and the Dollar


One factor that has sent the dollar down and oil up recently has been the Federal Reserve's months-long round of rate cuts. In an attempt to stimulate the ailing U.S. economy, the central bank has cut rates by three percentage points since September. But the rate cuts are also inflationary, weakening the dollar and sending oil prices higher.

"The weak dollar is a major detriment to the price of oil," said Stephen Schork, publisher of the energy industry newsletter The Schork Report. "It's keeping prices artificially high."

Since this time last year, the dollar has plummeted over 10% against global currencies, and oil has climbed about 80%. As the dollar continues to depreciate in value, investors have bought oil futures as a hedge against inflation.

Also, oil is priced in dollars worldwide, so a falling dollar provides less incentive for oil-exporting countries to increase output, or for foreign consumers to cut back on oil use.

read the CNN story

Monday, April 28, 2008

The Fed's Misguided Policy

The Fed's Bender

So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.

Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting – taking the fed funds rate to 2.25% from 5.25% last September – has had little effect on the banking crisis it was supposed to ease...

Meanwhile, the Fed's decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s. Oil has climbed to nearly $119 a barrel today from $70 in late August, a 70% increase. Farm and other commodities have seen a similar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California...

The practical impact has been to send energy and food prices soaring. This is a direct tax on both the world's poor and America's middle class. Just when the U.S. economy needs a resilient consumer given the fall in housing prices, these price increases have eviscerated consumer pocketbooks. In its attempt to help Wall Street and the financial system, Fed policy is punishing average Americans. The public is frustrated and angry with these price increases, and it has a right to be. Inflation is the thief of the thrifty middle class.

The Fed's problem has been both political and intellectual. Politically, Mr. Bernanke has been unwilling to say no to Wall Street and the Beltway political class, which reflexively demand easier money in a crisis. This demand has become almost Pavlovian since Wall Street came to believe during the late 1990s in what was known, fairly or not, as the "Greenspan put." It takes character to resist this political pressure, but that is what Fed chairmen are supposed to have.

As for the intellectual problem, the Fed and much of Wall Street convinced themselves that the only inflation measure that matters is "core inflation," which excludes food and energy. The Fed's monks devised that measure to avoid an overreaction to commodity price movements, but instead they have used it to pretend that food and energy prices don't matter. Throughout this decade, they pointed to core inflation to argue that "inflationary expectations remain well anchored," even as the dollar and commodity price signals were telling us that the opposite was true. Americans don't buy gas and groceries with "core" dollars...

As the Fed's open-market committee meets this week, what the world wants is a revival of American monetary leadership. It wants the Bernanke Fed to stop the global run on the dollar, and that means declaring an end to its rate-cutting mistake.

read the entire essay

Wednesday, April 23, 2008

On-Line EOCT Study Guide

click here for study guide

The Candidates on Trade

Race to the Bottom: The Presidential Candidates' Positions on
Trade by
Sallie James

In recent weeks the economy has been in the headlines and in the sights of politicians seeking the presidency. Particularly on the Democratic side, the candidates have sought to paint a picture of a doom-and-gloom economy and a convenient culprit: the trade policies of the Bush administration.

Although Sen. John McCain has largely stuck to his free-trade principles, even when it might have been politically expedient to appeal to voters’ worst instincts, Sens. Hillary Clinton and Barack Obama have entered into a seemingly escalating war of words over the alleged damage done by trade liberalization. As news about the economy worsened and crucial primary contests in industrial states such as Ohio and Pennsylvania approached, the rhetoric reached a nadir.

As voters consider the mix of policy offerings by the candidates, a look at their records on trade during their time in Congress and their statements during the campaign can give some early guidance as to the direction of the next administration’s trade policy. Although trade votes are a necessarily imperfect yardstick with which to measure future policy—packaged as they often are with other, sometimes contradictory, legislation—they seem to be consistent with the campaign pledges of the candidates.

Voters could expect a President Mc-Cain to promote freer trade and cuts in market-distorting subsidies, and a President Clinton or a President Obama to view free trade between voluntary actors as something to be restrained, loaded with conditions, or counterbalanced by an expansion of the welfare state.

read the report

Bush: Economy Not In A Recession

President Bush denied Tuesday that the United States' economy is in recession, calling it instead a "slowdown."

He pointed out that the economy grew in the last quarter of 2007 and that figures are not yet in for the first quarter of 2008. A common rule of thumb says a recession is two consecutive quarters of the gross domestic product shrinking.

But in the United States, an official declaration of a recession is made - often after a recovery has already begun - by a committee from the National Bureau of Economic Research, a private organization.

It defines a recession as "a significant decline in economic activity" over a period of a several months, and takes into account the depth of the decline, not just the duration, according to the NBER's Web site. It also uses a broad array of indicators in addition to the GDP, it says.
The United States has not been in recession since 2001, but many economists expect a recession this year. Some economists have said the United States is already experiencing one, and surveys suggest much of the public agrees.

from CNN

Gas Prices and Government

Economics 101: The Price of Gas
Sterling Terrell


Gas prices are up and oil executives are once again testifying before Congress. Clearly, many politicians, pundits, and consumers lament the rising cost of gas. Before we join them in their chorus, let us take a step back and ask this question: Are gas prices really all that high?

A change in price can be a result of inflation, taxes, changes in supply and demand, or any combination of the three.

First, we need to take into account inflation. The result of the Federal Reserve printing too much money is a loss of purchasing power of the dollar: something that cost $1.00 in 1950 would cost about $8.78 today. As for gas prices, in 1950 the price of gas was approximately 30 cents per gallon. Adjusted for inflation, a gallon of gas today should cost right at $2.64, assuming taxes are the same.

But taxes have not stayed the same. The tax per gallon of gas in 1950 was roughly 1.5% of the price. Today, federal, state, and local taxes account for approximately 20% of gas's posted price. Taking inflation and the increase in taxes into account (assuming no change in supply or demand) the same gallon of gas that cost 30 cents in 1950 should today cost about $3.13.

Neither have supply or demand remained constant. The world economy is growing. China and India are obvious examples. At the same time, Americans continue to love driving SUVs and trucks. As for supply, we are prohibited (whatever the reasons may be) from using many of the known oil reserves in our own country. Furthermore, due to government regulation, the last oil refinery built in the United States was completed in 1976. In addition, the Middle East ispolitically unstable which leads to a risk premium on the world's major source of oil. It is obvious that the demand for oil has grown while supplies have been restricted...

Those who want the government to step in and do something about the high price of gas are either forgetful of recent history or too young to remember the oil crisis of 1979. During that time, restrictions on the price of gasoline led to the inability of some to find gas at all. Price ceilings always lead to shortages. The only thing worse than having to pay "too much" for gas is not being able to find gas at any price.

Let us not be swayed by politicians out for power or by reporters out to create news where none exists. Facts and economic logic should prevail rather than rhetoric.


read the entire article

Cartoon: Oil Prices


Cartoon: Oil Prices


Withholding Tax Growth


Monday, April 21, 2008

Fortune 1000: the Top Ten

1 Wal-Mart Stores 378,799.0 12,731.0
2 Exxon Mobil 372,824.0 40,610.0
3 Chevron 210,783.0 18,688.0
4 General Motors 182,347.0 -38,732.0
5 ConocoPhillips 178,558.0 11,891.0
6 General Electric 176,656.0 22,208.0
7 Ford Motor 172,468.0 -2,723.0
8 Citigroup 159,229.0 3,617.0
9 Bank of America Corp. 119,190.0 14,982.0
10 AT&T 118,928.0 11,951.0

see the entire list

Notice that General Motors and Ford both lost money.

Cartoon: H.M.O.

Saturday, April 19, 2008

Thursday, April 17, 2008

Free Trade is Good

Foreign Trade Angst
Walter Williams

The United States is the world's largest recipient of foreign direct investment. According the Economic Report of the President, in 2004, foreigners owned $5.5 trillion in U.S. assets and had $2.3 trillion in sales. They produced $515 billion of goods and services, accounting for 5.7 percent of total U.S. private output, and employed 5.1 million workers, or 4.7 percent of the U.S. workforce in 2004. According to the Congressional Research Service, in 2006 alone, foreign investors spent $184 billion investing in U.S. businesses and real estate, the highest amount foreign investors have spent since 2000. My question to Clinton, Obama and the anti-trade lobby is, would Americans be better off if there were no foreign investment in our country?

According to the Bureau of Labor Statistics, between 1996 and 2006, about 15 million jobs were lost and 17 million created each year. That's an annual net creation of 2 million jobs. Roughly 3 percent of the jobs lost were a result of foreign competition. Most were lost because of technology, domestic competition and changes in consumer tastes...

There's great angst over the loss of manufacturing jobs. The number of U.S. manufacturing jobs has fallen, and it's mainly a result of technological innovation, and it's a worldwide phenomenon. Daniel W. Drezner, professor of political science at the University of Chicago, in "The Outsourcing Bogeyman" (Foreign Affairs, May/June 2004), notes that U.S. manufacturing employment between 1995 and 2002 fell by 11 percent. Globally, manufacturing job loss averaged 11 percent. China lost 15 percent of its manufacturing jobs, 4.5 million manufacturing jobs compared with the loss of 3.1 million in the U.S. Job loss is the trend among the top 10 manufacturing countries who produce 75 percent of the world's manufacturing output (the U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada and Mexico).

But guess what -- globally, manufacturing output rose by 30 percent during the same period. According to research by the Federal Reserve Bank of St. Louis, U.S. manufacturing output increased by 100 percent between 1987 and today. Technological progress and innovation is the primary cause for the decrease inmanufacturing jobs. Should we save manufacturing jobs by outlawing labor-saving equipment and technology?

read the entire essay

The Economist Cover


Tuesday, April 15, 2008

Delta-Northwest Merger

Delta Air Lines announced a long-speculated deal to acquire Northwest Airlines for about $3.1 billion Monday, a combination that will create the world's largest airline and could lead to a series of other deals to reshape the U.S. airline industry.

The new carrier will operate under the Delta name, and be based in Atlanta.

Delta said the carrier will maintain the nine hubs of both airlines in the United States, Europe and Asia, serving more than 390 destinations in 67 countries. The combined carrier will have $35 billion in annual revenue, more than 800 airplanes and 75,000 employees, according to Delta...

read the CNN story

Income Tax Day






Sunday, April 13, 2008

Big Green Egg and Pork Spareribs






5 hours; 3/1/1 method at 290 degrees; internal was 180 degrees

Saturday, April 12, 2008

Recommended Reading: Hoover's Attack on Laissez Faire

Hoover's Attack on Laissez-Faire
Murray Rothbard (from Chapter 7 of America's Great Depression)

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire — to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.

Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses...

Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century...

Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what Anderson has accurately called the "Hoover New Deal." For if we define "New Deal" as an antidepression program marked by extensive governmental economic planning and intervention — including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works) — Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force...

read the entire essay

My Comments: Economic freedom and laissez-faire are vastly superior to central planning, government intervention, and various middle-of-the-road policies that carry us further down the road to serfdom.

Cartoon: Gas Prices and Housing Market

Essay: Our Financial Bailout Culture

Our Financial Bailout Culture
Ethan Penner

Last week's congressional hearings on the Bear Stearns "non-bailout" were fascinating, and frightening. Our leading financial regulators said the Federal Reserve's unprecedented action was necessary to ensure the stability of financial markets, which would have melted down had nature taken its course.

When asked by the committee if opening the Fed borrowing window for investment banks (which was done later) could have saved Bear, New York Fed President Timothy Geithner responded that "We only allow sound institutions to borrow against collateral," thus implying that Bear was not sound. That raises the question of when Bear became unsound, especially in light of the public statements about the company's strength by their CEO only days earlier. If Bear was undercapitalized and overleveraged, shouldn't red flags have gone up long before?...

The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. Meanwhile, they drained that appreciation regularly through refinancings to pay for vacations, new cars and other pleasantries, all of which created the prosperity for which politicians were pleased to take credit...

Had Bear gone bankrupt, these funds would have been compelled to seize and immediately liquidate the collateral into an already highly distressed market, ensuring that its investors (you and me again) would have likely lost much of their stake. Painful? Surely. Eye-opening? Definitely.

Instead of losses spreading through the system, however, the government stepped in. As J.P. Morgan CEO James Dimon said in the hearings, "This would have been far more, in my opinion, expensive to taxpayers had Bear Stearns gone bankrupt and added to the financial crisis we have today. It wouldn't have even been close."

This is clearly true on this deal and in the short run. But as Mr. Bunning implied, isn't it the regulators' job to ensure that we don't end up here ever again? That is the dilemma of "moral hazard." Consequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road.

And so we have the insidious modern trend to shirk responsibility and blame others for our missteps. This trend, this "victim mentality," is a path toward personal disaster.

Perhaps if the Fed had raised short-term rates more aggressively, the excesses of the bubble could have been avoided. Maybe regulators could have noticed that the criteria for achieving an AAA rating had weakened markedly and inserted themselves early on. Yes, we can hope that the government takes the appropriate steps to ensure that the regulatory system improves as a result of this crisis. However, we citizens also need to accept our share of the responsibility.

Homeowners must learn that there are risks to using a home as an ATM. Investors who borrowed to flip condos must learn the downside of such risk. Individuals who steered money from insured bank deposits into uninsured money market accounts to pick up 1% more yield – like the institutional investors who purchased complex securities with little due diligence – need to know that in an efficient market, extra yield means extra risk. Those who played the derivatives market, focusing more on computer-driven pricing models and less on managing counterparty risk, must pay for that oversight. And, much as it is impolitic to say, people who took money from lenders and signed without considering how they'd repay those loans must also be held accountable.

In one of this year's primary debates, Ron Paul said it is not the president's job to run the economy. I'd add that it is not the government's job either. It is each and every citizen's job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons...

read the entire essay

Tuesday, April 8, 2008

Cartoon: Pay Raises and Expectations

Education and Employment


from Carpe Diem

New Book: Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve


No matter who you are-investor, trader, homeowner, 401(k) holder, or CEO-you are bound to feel the impact of Alan Greenspan's “Age of Ignorance” for years to come.

According to MSN Money columnist William A. Fleckenstein, Greenspan's nearly 19-year career as Federal Reserve Chairman is even worse than anyone imagined. Labeled “Mr. Bubble” by the New York Times, Greenspan was nothing less than a serial bubble blower with a long history of bad decision-making. His famous “Greenspan Put” fueled the perception of a Goldilocks economy-but, as this explosive exposé reveals, the bear has finally caught up with Goldilocks.

Using transcripts of Greenspan's FOMC meetings as well as testimony before Congress, this eye-opening book delivers a timeline of his most devastating mistakes and weaves together the connection between every economic calamity of the past 19 years:

  • The stock market crash of 1987
  • The Savings & Loan crisis
  • The collapse of Long Term Capital Management
  • The tech bubble of 2000
  • The feared Y2K disaster
  • The credit bubble and real estate crisis of 2007

Fleckenstein explains just how far-reaching Greenspan's mess has been flung, and presents damning evidence that contradicts the former Fed chief's public naiveté concerning shifts in the market and economy. He also points to a disturbing fact, that throughout his career, Greenspan not only made costly mistakes, but made the same ones-over and over again. And not only was he never able to recognize or admit to those mistakes, he constantly rewrote his own history to justify them.

Greenspan's Bubbles offers a lock-stock-and-barrel portrait of a flawed but fascinating man whose words and actions have led a whole generation astray, and whose legacy will continue to challenge us in the years ahead.

from the review at Amazon


Of course those who are familiar with actual free market economics would know that Murray Rothbard had exposed Greenspan two decades ago.

A Minority Report: Alan Greenspan
by Murray Rothbard (8/87)

Greenspan's real qualification is that he can be trusted never to rock the establishment's boat. He has long positioned himself in the very middle of the economic spectrum. He is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply.

There is one thing, however, that makes Greenspan unique, and that sets him off from his Establishment buddies. And that is that he is a follower of Ayn Rand, and therefore "philosophically" believes in laissez-faire and even the gold standard. But as the New York Times and other important media hastened to assure us, Alan only believes in laissez-faire "on the high philosophical level." In practice, in the policies he advocates, he is a centrist like everyone else because he is a "pragmatist."

As an alleged "laissez-faire pragmatist," at no time in his prominent twenty-year career in politics has he ever advocated anything that even remotely smacks of laissez-faire, or even any approach toward it. For Greenspan, laissez-faire is not a lodestar, a standard, and a guide by which to set one's course; instead, it is simply a curiosity kept in the closet, totally divorced from his concrete policy conclusions...

Over the years, Greenspan has, for example, supported President Ford's imbecilic Whip Inflation Now buttons when he was Chairman of the Council of Economic Advisers. Much worse is the fact that this "high philosophic" adherent of laissez-faire saved the racketeering Social Security program in 1982, just when the general public began to realize that the program was bankrupt and there was a good chance of finally slaughtering this great sacred cow of American politics. Greenspan stepped in as head of a "bipartisan" (i.e. conservative and liberal centrists) Social Security Commission, and "saved" the system from bankruptcy by slapping on higher Social Security taxes...

...And as icing on the cake, they know that Greenspan's "philosophical" Randianism will undoubtedly fool many free market advocates into thinking that a champion of their cause now perches high in the seats of power.

read the entire essay

Another take on Greenspan

The result of this has been to increase the willingness of investors to participate in speculative bubbles because they know that if things go wrong and they are unable to get out before the bubble burst, their good friend Alan Greenspan will bail them out and limit their losses. Greenspan has thus been responsible for bubbles like the tech stock bubble and the housing bubble both by suppressing interest rates and providing the "liquidity" needed to create the bubbles, and also by reducing investors fear of losses after the bubble bursts by creating the expectations that the Fed will bail them out.

The consequences of this have been great. Instead of falling as a result of increased production, the consumer price index rose nearly 74% between August 1987 and November 2005, an average annual increase of 3.1%...

Greenspan's policy of inflating bubbles to counter the negative effects of the bursting of previous ones is like someone who remains on a sinking ship because he doesn't like to swim.

read the entire essay
Greesnpans' reputation has taken a well deserved beating since his days (late 2000) when nearly everyone thought he was "the maestro of the rock-solid prospering American economy."