"...real GDP grew at an annual rate of 1.8% during the first quarter
of 2011. Not exactly what the doctor ordered for a still very sick
patient."
James Hamilton
S&P 500 rally continues unabated... Gold broke another record. Oil is
over $100.
The question "How much of the alleged "economic growth" involves
Ponzi scheme casino activity like Goldman Sachs?" is really important in
a long run...
Banks pouring money into technology funds, wealthy clients and institutions
clamoring to get pieces of start-ups, expectations of stock market debuts
building -- as Wall Street's machinery kicks into second gear, some
investors with memories of the Internet bust a decade earlier are wondering
whether this sudden burst of activity spells danger for the industry
once again.
With all this exuberance, valuations are soaring. Investments in
Facebook and Zynga have more than quintupled the implied worth of each
company in the last two years. The social shopping site Groupon is said
to be considering an initial public offering that would value the company
at $25 billion. Less than a year ago, the company was valued at $1.4
billion.
... ... ...
But as enthusiasm surged, many firms also rushed to make investments
for their clients and themselves through special-purpose funds and direct
investments. And in many cases the banks got burned just as ordinary
investors did.
"The investment pools that we did back in 2000 did extremely poorly,
because many of those companies went from filing an I.P.O. to bankruptcy
courts in a matter of months," said Mr. Weisel, whose firm was acquired
by Stifel Financial last year.
In 1998, Goldman Sachs Capital Partners, the bank's private equity
arm, began a new, $2.8 billion fund largely geared toward Internet stocks.
Before that fund, the group had made fewer than three dozen investments
in the technology and communications sectors from 1992 to mid-1998,
according to Goldman Sachs documents about the fund.
But between 1999 and 2000, the new fund made 56 technology-related
investments, of about $27 million on average. In aggregate, the fund
made $1.7 billion in technology investments -- and lost about 40 percent
of that after the bubble burst. (The group, which manages the money
of pensions, sovereign wealth funds and other prominent clients, declined
the opportunity to invest in Facebook early this year.)
Philip A. Cooper, who in 1999 was head of a separate Goldman Sachs
group that managed fund of funds and other investments, recalled that
investors were clamoring, "We want more tech, we want more." Bowing
to pressure, he created a $900 million technology-centric fund in 1999,
and within eight weeks he had nearly $2 billion in orders. Despite the
frenzy, he kept the cap at $900 million.
"There was a lot of demand, but we couldn't see any way we could
prudently put that much capital to work," said Mr. Cooper, who has since
left Goldman.
Other Wall Street firms, including JPMorgan Chase and Morgan Stanley,
also made a number of small to midsize investments during the period.
In 1999, for instance, Morgan Stanley joined Goldman Sachs and others
in a $280 million investment in CarsDirect.com, which scrapped its initial
plans to go public when the market deteriorated.
"We thought we were going to double our money in just a couple of
weeks," said Howard Lindzon, a hedge fund manager of Lindzon Capital
Partners and former CarsDirect.com investor. "No one did any due diligence."
Mr. Lindzon lost more than $200,000 on his investment.
Also in 1999, Chase Capital Partners (which would later become part
of JPMorgan Chase) invested in Kozmo.com -- an online delivery service
that raised hundreds of millions in venture funding. JPMorgan Chase,
which just recently raised $1.2 billion for a new technology fund, at
the time called Kozmo.com "an essential resource to consumers." At its
height, the company's sprawling network of orange bike messengers employed
more than a thousand people. Less than two years later, it ceased operations.
An online grocer, Webvan, was one of the most highly anticipated
I.P.O.'s of the dot-com era. The business had raised nearly $1 billion
in start-up capital from institutions like Softbank of Japan, Sequoia
Capital and Goldman Sachs. Goldman, its lead underwriter, invested about
$100 million.
On its first day, investors cheered as Webvan's market value soared,
rising 65 percent to about $8 billion at the close. Less than two years
later, Webvan was bankrupt.
About the same time, Internet-centric mutual funds burst onto the
scene. From just a handful in early 1999, there were more than 40 by
the following year. One fund, the Merrill Lynch Internet Strategies
fund, made its debut in late March 2000 -- near the market's peak --
with $1.1 billion in assets. About one year later, the fund, with returns
down about 70 percent, was closed and folded into another fund.
"We all piled into things that were considered hot and sexy," said
Paul Meeks, who was the fund's portfolio manager. Mr. Meeks started
six tech funds for Merrill Lynch from 1998 to 2000.
Today, the collective amount of money that Wall Street banks are
pumping into Internet start-ups, on top of the surging cash piles from
venture capital groups, hedge funds and private equity, is a major concern
for some investors.
Over the last five months, many venture capital players have raised
giant amounts of capital. One Facebook investor, Accel Partners, is
about to raise $2 billion for investments in China and the United States,
while Bessemer Venture Partners is said to be closing in on $1.5 billion
for a new fund. Greylock Partners, Sequoia Capital, Andreessen Horowitz
and Kleiner Perkins Caufield & Byers have collectively raised more than
$3 billion in the last six months.
Mr. Weisel, who has also been tracking hedge fund activity, finds
the numbers dizzying. Countless hedge funds are investing in private
placements -- "dozens and dozens of hedge funds are doing the same thing,"
he said.
As cash continues to pile up, the fear is that all this money cannot
be put to work responsibly. With only a few perceived "winners," some
investors must be choosing losers or paying too much, Mr. Meeks said.
"When you see the valuations being bandied about -- I do think, boy,
these better be really special companies."
Peter Lattman contributed reporting.
LONDON – History has no final verdicts. Major shifts in events and
power bring about new subjects for discussion and new interpretations.
Fifty years ago, as de-colonization accelerated, no one had a good
word to say for imperialism. It was regarded as unambiguously bad, both
by ex-imperialists and by their liberated subjects. Schoolchildren were
taught about the horrors of colonialism, how it exploited conquered
peoples. There was little mention, if any, of imperialism’s benefits.
Then, in the 1980’s, a revisionist history came along. It wasn’t
just that distance lends a certain enchantment to any view. The West
– mainly the Anglo-American part of it – had recovered some of its pride
and nerve under US President Ronald Reagan and British Prime Minister
Margaret Thatcher. And there was the growing evidence of post-colonial
regimes’ failure, violence, and corruption, especially in Africa.
But the decisive event for the revisionists was the collapse of the
Soviet empire, which not only left the United States top dog globally,
but also seemed, to the more philosophically minded, to vindicate Western
civilization and values against all other civilizations and values.
With the European Union extending its frontiers to embrace many ex-communist
states, the West became again, if briefly, the embodiment of universal
reason, obliged and equipped to spread its values to the still-benighted
parts of the world. Francis Fukuyama’s The End of History and the
Last Man testified to this sense of triumph and historical duty.
Such a conjuncture set the stage for a new wave of imperialism (though
the reluctance to use the word remained). In doing so, it was bound
to affect interpretations of the old imperialism, which was now extolled
for spreading economic progress, the rule of law, and science and technology
to countries that would never have benefited from them otherwise.
Foremost among the new generation of revisionist historians was Niall
Ferguson of Harvard University, whose television series, based on his
new book Civilization: The West and the Rest, has just started
showing in Britain. In its first episode, Ferguson appears amid the
splendid monuments of China’s Ming Dynasty, which, in the fifteenth
century, was undoubtedly the greatest civilization of the day, with
its naval expeditions reaching the coasts of Africa. After that, it
was all downhill for China (and “the Rest”) and all uphill for the West.
Ferguson snazzily summarizes the reasons for this reversal in six
“killer apps”: competition, science, property rights, medicine, the
consumer society, and the work ethic. Against such tools – unique products
of Western civilization – the rest had no chance.
From such a perspective,
imperialism, old and new, has been a beneficent influence, because it
has been the means of spreading these “apps” to the rest of the world,
thereby enabling them to enjoy the fruits of progress hitherto confined
to a few Western countries.
Understandably, this thesis has not met with universal approbation.
The historian Alex von Tunzelmann accused Ferguson of leaving out all
of imperialism’s nasty bits: the Black War in Australia, the German
genocide in Namibia, the Belgian exterminations in the Congo, the Amritsar
Massacre, the Bengal Famine, the Irish potato famine, and much else.
But that is the weakest line of attack. Edward Gibbon once described
history as being little better than a record of the “crimes, follies,
and misfortunes of mankind.” Imperialism certainly added its quota to
these. But the question is whether it also provided, through Hegel’s
“cunning of reason,” the means to escape from them. Even Marx justified
British rule in India on these grounds. Ferguson, too, can make a sound
argument for such a proposition.
The most serious weakness in Ferguson’s presentation is his lack
of sympathy for the civilizations dismissed as “the rest,” which also
points to the most serious limitation of the revisionist case. The “triumph
of the West” that followed the collapse of Communism in Europe was clearly
not the “end of history.” As Ferguson must know, the main topic of discussion
in international affairs nowadays concerns the “rise” of China, and
more generally Asia, as well as the stirring of Islam.
Of course, the Chinese may prefer to talk about “restoration” rather
than “rise,” and point to a “harmonious” pluralism of the future. But
“rise” is how most people think of China’s recent history, and in history
the rise of some is usually associated with the decline of others. In
other words, we may be reverting to that cyclical pattern that historians
assumed to be axiomatic before the seemingly irreversible rise of the
West implanted in them a view of linear progress toward greater reason
and freedom.
Europe is plainly in decline, politically and culturally, though
most Europeans, blinded by their high living standards and the pretensions
of their impotent statesmen, are happy to dress this up as progress.
Chinese savings are underwriting much of the American civilizing mission
that Ferguson applauds. The pattern seems clear: the West is losing
dynamism, and the rest are gaining it.
The remainder of this century will show how this shift plays out.
For the moment, most of us have lost the historical plot. It is possible,
for example, to imagine a “Western world” (one that applies Ferguson’s
“killer apps”) in which the actual West is no longer the dominant factor:
America will simply passes the torch to China, as Britain once did to
America.
But it seems to me extremely unlikely that China, India, and “the
rest” will simply take over Western values wholesale, for this would
amount to renouncing any value in their own civilizations. Some syntheses
and accommodations between the West and the rest will inevitably accompany
the shift in power and wealth from the former to the latter. The only
question is whether the process will be peaceful.
Robert Skidelsky, a member of the British
House of Lords, is Professor Emeritus of Political Economy at Warwick
University.
13) There is
an insularity and arrogance
to policymakers around capital requirements that is distinctly reminiscent
of the Treasury-Fed-Wall Street consensus regarding derivatives in the
late 1990s – i.e., officials are so convinced by the
arguments of big banks that they dismiss out of hand any attempt to
even open a serious debate.14) Next time, when our largest
banks get into trouble, they may be beyond “too big to fail”.
As seen recently in Ireland, banks that
are very big relative to an economy can become “too big to save” – meaning
that while senior creditors may still receive full protection (so far
in the Irish case), the fiscal costs overwhelm the government and push
it to the brink of default.
15) The fiscal damage to the United States in that scenario
would be immense, including through the effect of much higher long term
real interest rates. It remains to be seen if the dollar could
continue to be the world’s major reserve currency under such circumstances.
The loss to our prestige, national security,
and ability to influence the world in any positive way would presumably
be commensurate.
16) In 2007-08, our largest banks –
with the structures they had lobbied for and built – brought us to the
verge of disaster. TARP and other government actions helped avert
the worst possible outcome, but only by providing unlimited and unconditional
implicit guarantees to the core of our financial system. This
can only lead to further instability in what the Bank of England refers
to as a “doom
loop”.
... ... ...8) At the heart of
any banking crisis is a political problem – powerful people, and the
firms they control, have gotten out of hand. Unless this is dealt
with as part of the stabilization program, all the government has done
is provide an unconditional bailout. That may be consistent with
a short-term recovery, but it creates major problems for the sustainability
of the recovery and for the medium-term. Serious countries do
not do this.
9) As Larry Summers put it, in his
2000 Ely Lecture to the American Economic Association, “[I]t is certain
that a healthy financial system cannot be built on the expectation of
bailouts” (American Economic Review, vol. 90, no. 2, p.13).
10) Seen in this context, TARP was badly mismanaged.
In its initial implementation, the signals were mixed – particularly
as the Bush administration sought to provide support to essentially
insolvent banks without taking them over. Standard FDIC-type procedures,
which are best practice internationally, were applied to small- and
medium-banks, but studiously avoided for large banks. As a result,
there was a great deal of confusion in financial markets about what
exactly was the Bush/Paulson policy that lay behind various ad hoc deals.
11) The Obama administration, after some initial hesitation,
used “stress tests” to signal unconditional support for the largest
financial institutions. By determining officially that these firms
did not lack capital – on a forward looking basis – the administration
effectively communicated that it was pursuing a strategy of “regulatory
forbearance” (much as the US did after the Latin American debt crisis
of 1982). The existence of TARP, in that context, made the approach
credible – but the availability of unconditional loans from the Federal
Reserve remains the bedrock of the strategy.
12) The downside scenario in the stress tests was overly optimistic,
with regard to credit losses in real estate (residential and commercial),
credit cards, auto loans, and in terms of the assumed time path for
unemployment. As a result, our largest banks remain undercapitalized,
given the likely trajectory of the US and global economy. This
is a serious impediment to a sustained rebound in the real economy –
already reflected in continued tight credit for small- and medium-sized
business.
13) Even more problematic is the underlying
incentive to take excessive risk in the financial sector. With
downside limited by government guarantees of various kinds, Andrew Haldane
of the Bank of England bluntly characterizes our repeated boom-bailout-bust
cycle as a “doom
loop.”
14) Exacerbating this issue, TARP funds supported not only
troubled banks, but also the executives who ran those institutions into
the ground. The banking system had
to be saved, but specific banks could have wound down and leading bankers
could and should have lost their jobs. Keeping these people and
their management systems in place serious trouble for the future.
March 20, 2011
Spencer Thomas:
Very good post. Thank you.
Over the past three decades, large parts of our culture here
in the US have internalized the lessons of the new Social Darwinism,
with a significant body of literature to explain and justify it.
Many of us have internalized, without
even realizing it, the ideas of “dog eat dog”, “every man for himself”,
“society should be structured like the animal kingdom, where the
weak and sick simply die because they cannot compete, and this is
healthy”, and “everything that happens to you is your own fault.
There is no such thing as circumstance that cannot be overcome,
and certainly no birth lottery.”
The levers pulled by politicians and the Fed put these things
into practice, but even if we managed get different (better) politicians
or Fed chairmen, ones who weren’t steeped in this culture and ideology,
we’d still be left with the culture in the population at large,
and things like the “unemployed stigma” are likely to die very,
very hard. Acceptance of the “just-world phenomenon” here in the
US runs deep.
perfect stranger:
“Religion is just as vulnerable to corporate capture as is
the government or the academy.”
This is rather rhetorical statement, and wrong one. One need
to discern spiritual aspect of religion from the religion as a tool.
Religion, as is structured, is complicit:
in empoverishment, obedience, people’s preconditioning, and legislative
enabler in the institutions such as Supreme – and non-supreme –
Court(s). It is a form of PR of the ruling class for the governing
class.
DownSouth:
perfect stranger,
Religion, just like human nature, is not that easy to put in
a box.
For every example you can cite where religion “is complicit:
in empoverishment, obedience, people’s preconditioning, and legislative
enabler in the institution,” I can point to an example of where
religion engendered a liberating, emancipatory and revolutionary
spirit.
Examples:
•Early Christianity •Nominalism •Early Protestantism •Gandhi
•Martin Luther King
Now granted, there don’t seem to
be any recent examples of this of any note, unless
we consider Chris Hedges a religionist, which I’m not sure we can
do. Would it be appropriate to consider Hedges a religionist?
perfect stranger:
Yes, that maybe, just maybe be the
case in early stages of forming new religion(s).
In case of Christianity old rulers from Rome were trying to save
own head/throne and the S.P.Q.R. imperia by adopting new religion.
You use examples of Gandhi and MLK which is highly questionable
both were fighters for independence and the second, civil rights.
In a word: not members of establishment just as I said there were
(probably) seeing the religion as spiritual force not tool of enslavement.
Matt:
This link may provide some context:
http://en.wikipedia.org/wiki/Prosperity_theology
In particular, there seems to be an extremely popular variant
of the above where the starting proposition “God makes moral
people rich” is improperly converted to “Rich people are more moral”
which is then readily negated to “Poor people are immoral” and then
expanded to “Poor people are immoral, thus they DESERVE to suffer
for it”. It’s essentially the theological equivalent of dividing
by zero…
DownSouth:
Rex,
I agree.
Poll after poll after poll has shown that a majority of Americans,
and a rather significant majority, reject the values, attitudes,
beliefs and opinions proselytized by the stealth religion we call
“neoclassical economics.”
That said, the ranks of the neoclassicists
are not small. They constitute what Jonathan Schell calls a “mass
minority.” I suspect the neoclassicists have about
the same level of popular support that the Nazis did at the time
of their takeover of Germany in 1932, or the Bolsheviks had in Russia
at the time of their takeover in 1917, which is about 20 or 25%
of the total population.
The ranks of the neoclassicists are made to appear far greater
than they really are because they have all but exclusive access
to the nation’s megaphone. The Tea Party can muster a handful of
people to disrupt a town hall meeting and it gets coast to coast,
primetime coverage. But let a million people protest against bank
bailouts, and it is ignored. Thus, by manipulation of the media,
the mass minority is made to appear to be much larger than it really
is.
The politicians love this, because as they carry water for their
pet corporations, they can point to the Tea Partiers and say: “See
what a huge upwelling of popular support I am responding to.”
JTFaraday:
Well, if that’s true, then the unemployed are employable but
the mass mediated mentality would like them to believe they are
literally and inherently unemployable so that they underestimate
and under-sell themselves.
This is as much to the benefit of those who would like to pick
up “damaged goods” on the cheap as those who promote the unemployment
problem as one that inheres in prospective employees rather than
one that is a byproduct of a bad job market lest someone be tempted
to think we should address it politically.
That’s where I see this blame the unemployed finger pointing
really getting traction these days.
attempter:
I apologize for the fact that I only read the first few paragraphs
of this before quitting in disgust.
I just can no longer abide the notion that “labor” can ever be
seen by human beings as a “cost” at all. We really need to refuse
to even tolerate that way of phrasing things. Workers create all
wealth. Parasites have no right to exist. These are facts, and we
should refuse to let argument range beyond them.
The only purpose of civilization is to provide a better way of
living and for all people. This includes the right and full opportunity
to work and manage for oneself and/or as a cooperative group. If
civilization doesn’t do that, we’re better off without it.
psychohistorian:
I am one of those long term unemployed.
I suppose my biggest employment claim would be as some sort of
IT techie, with numerous supply chain systems and component design,
development, implementation, interfaces with other systems and ongoing
support. CCNP certification and a history of techiedom going back
to WEYCOS.
I have a patent (6,209,954) in my name and 12+ years of beating
my head against the wall in an industry that buys compliance with
the “there is no problem here, move on now” approach.
Hell, I was a junior woodchuck program administrator back in
the early 70’s working for the Office of the Governor of the state
of Washington on CETA PSE or Public Service Employment. The office
of the Governor ran the PSE program for 32 of the 39 counties in
the state that were not big enough to run their own. I helped organize
the project approval process in all those counties to hire folk
at ( if memory serves me max of $833/mo.) to fix and expand parks
and provide social and other government services as defined projects
with end dates. If we didn’t have the anti-public congress and other
government leadership we have this could be a current component
in a rational labor policy…but I digress.
I have experience in the construction trades mostly as carpenter
but some electrical, plumbing, HVAC, etc. also.
So, of course there is some sort of character flaw that is keeping
me and all those others from employment…..right. I may have more
of an excuse than others, have paid into SS for 45 years but still
would work if it was available…..taking work away from other who
may need it more….why set up a society where we have to compete
as such for mere existence???????
One more face to this rant. We need government by the people
and for the people which we do not have now. Good, public focused,
not corporate focused government is bigger than any entities that
exist under its jurisdiction and is kept updated by required public
participation in elections and potentially other things like military,
peace corps, etc. in exchange for advanced education. I say this
as someone who has worked at various levels in both the public and
private sectors…there are ignorant and misguided folks everywhere.
At least with ongoing active participation there is a chance that
government would, once constructed, be able to evolve as needed
within public focus….IMO.
Ishmael:
Some people would say I have been unemployed for 10 years. In
2000 after losing the last of my four CFO gigs for public companies
I found it necessary to start consulting. This has lead to two of
my three biggest winning years. I am usually consulting on cutting
edge area of my profession and many times have large staffs reporting
to me that I bring on board to get jobs done. For several years
I subcontacted to a large international consulting firm to clean
up projects which went wrong. Let me give some insight here.
First, most good positions have gate
keepers who are professional recruiters. It is near
impossible to get by them and if you are unemployed they will hardly
talk to you. One time talking to a recruiter at Korn Fery I was
interviewing for a job I have done several times in an industry
I have worked in several times. She made a statement that I had
never worked at a well known company. I just about fell out of my
chair laughing. At one time I was a senior level executive for the
largest consulting firm in the world and lived on three continents
and worked with companies on six. In addition, I had held senior
positions for 2 fortune 500 firms and was the CFO for a company
with $4.5 billion in revenue. I am well known at several PE firms
and the founder of one of the largest mentioned in a meeting that
one of his great mistakes was not investing in a very successful
LBO (return of in excess of 20 multiple to investors in 18 months)
I was the CFO for. In a word most recruiters are incompetent.
Second, most CEO’s any more are just
insecure politicians. One time during an interview
I had a CEO asked me to talk about some accomplishments. I was not
paying to much attention as I rattled off accomplishments and the
CEO went nuclear and started yelling at me that he did not know
where I thought I was going with this job but the only position
above the CFO job was his and he was not going anywhere. I assured
him I was only interested in the CFO position and not his, but I
knew the job was over. Twice feed back that I got from recruiters
which they took at criticism was the “client said I seemed very
assured of myself.”
Third, government, banking, business
and the top MBA schools are based upon lying to move forward.
I remember a top human resource executive telling me right before
Enron, MCI and Sarbanes Oxley that I needed to learn to be more
flexible. My response was that flexibility would get me an orange
jump suit. Don’t get me wrong, I have a wide grey zone, but it use
to be in business the looked for people who could identify problems
early and resolve them. Now days I see far more of a demand for
people who can come up with PR spins to hide them. An attorney/treasurer
consultant who partnered with me on a number of consulting jobs
told me some one called me “not very charming.” He said he asked
what that meant, and the person who said that said, “Ish walks into
a meeting and within 10 minutes he is asking about the 10,000 pound
guerilla sitting in the room that no one wants to talk about.” CEO
do not want any challenges in their organization.
Fourth, three above has lead to the hiring of very young and
inexperienced people at senior levels. These people are insecure
and do not want more senior and experienced people above them and
than has resulted in people older than 45 not finding positions.
Fifth, people are considered expendable and are fired for the
lamest reasons anymore. A partner at one of the larger and more
prestigious recruiting firms one time told me,
“If you have a good consulting business,
just stick with it. Our average placement does not last 18 months
any more.” Another well known recruiter in S. Cal.
one time commented to me, “Your average consulting gig runs longer
than our average placement.”
With all of that said, I have a hard time understanding such
statements as “@attempter “Workers create all wealth. Parasites
have no right to exist.” What does that mean? Every worker creates
wealth. There is no difference in people. Sounds like communism
to me. I make a good living and my net worth has grown working for
myself. I have never had a consulting gig terminated by the client
but I have terminated several. Usually, I am brought in to fix what
several other people have failed at. I deliver basically intellectual
properties to companies. Does that mean I am not a worker. I do
not usually lift anything heavy or move equipment but I tell people
what and where to do it so does that make me a parasite.
Those people who think everyone is equal and everyone deserves
equal pay are fools or lazy. My rate is high, but what usually starts
as short term projects usually run 6 months or more because companies
find I can do so much more than what most of their staff can do
and I am not a threat.
I would again like to have a senior challenging role at a decent
size company but due to the reasons above will probably never get
one. However, you can never tell. I am currently consulting for
a midsize very profitable company (grew 400% last year) where I
am twice the age of most people there, but everyone speaks to me
with respect so you can never tell.
Lidia:
Ishmael, you’re quite right. When I showed my Italian husband’s
resume to try and “network” in the US, my IT friends assumed he
was lying about his skills and work history.
Contemporaneously, in Italy it is
impossible to get a job because of incentives to hire “youth”. Age
discrimination is not illegal, so it’s quite common to see ads that
ask for a programmer under 30 with 5 years of experience in COBOL
(the purple squirrel).
Hosswire
Some good points about the foolishness of recruiters, but a great
deal of that foolishness is forced by the clients themselves. I
used to be a recruiter myself, including at Korn Ferry in Southern
California. I described the recruiting industry as “yet more proof
that God hates poor people” because my job was to ignore resumes
from people seeking jobs and instead “source” aka “poach” people
who already had good jobs by dangling a higher salary in front of
them. I didn’t do it because I disparaged the unemployed, or because
I could not do the basic analysis to show that a candidate had analogous
or transferrable skills to the opening.
I did it because the client, as Yves said,
wanted people who were literally in
the same job description already. My theory is that
the client wanted to have their ass covered in case the hire didn’t
work out, by being able to say that they looked perfect “on paper.”
The lesson I learned for myself and
my friends looking for jobs was simple, if morally dubious. Basically,
that if prospective employers are going to judge you based on a
single piece of paper take full advantage of the fact that you get
to write that piece of paper yourself.
Ishmael:
Hosswire — I agree with your comment. There are poor recruiters
like the one I sited but in general it is the clients fault. Fear
of failure. All hires have at least a 50% chance of going sideways
on you. Most companies do not even have the ability to look at a
resume nor to interview. I did not mean to same nasty things about
recruiters, and I even do it sometimes but mine.
I look at failure in a different light than most companies. You
need to be continually experimenting and changing to survive as
a company and there will be some failures. The goal is to control
the cost of failures while looking for the big pay off on a winner.
Mannwich:
As a former recruiter and HR “professional” (I use that term
very loosely for obvious reasons), I can honestly say that you nailed
it. Most big companies looking for mid to high level white collar
“talent” will almost always take the perceived safest route by hiring
those who look the best ON PAPER and in a suit and lack any real
interviewing skills to find the real stars. What’s almost comical
is that companies almost always want to see the most linear resume
possible because they want to see “job stability” (e.g. a CYA document
in case the person fails in that job) when in many cases nobody
cares about the long range view of the company anyway. My question
was why should the candidate or employee care about the long range
view if the employer clearly doesn’t?
Ishmael:
Manwhich another on point comment. Sometimes either interviewing
for a job or consulting with a CEO it starts getting to the absurd.
I see all the time the requirement for stability in a persons background.
Hello, where have they been the last 15 years. In addition, the
higher up you go the more likely you will be terminated sometime
and that is especially true if you are hired from outside the orgnanization.
Companies want loyalty from an employee but offer none in
return.
The average tenure for a CFO anymore is something around 18 months.
I have been a first party participant (more than once) where I went
through an endless recruiting process for a company (lasting more
than 6 months) they final hire some one and that person is with
the company for 3 months and then resigns (of course we all know
it is through mutual agreement).
Ishmael:
Birch:
The real problem has become and maybe this is what you are referring
to is the “Crony Capitalism.” We have lost control of our financial
situation. Basically, PE is not the
gods of the universe that everyone thinks they are. However, every
bankers secret wet dream is to become a private equity guy. Accordingly,
bankers make ridiculous loans to PE because if you say no to them
then you can not play in their sand box any more. Since the govt
will not let the banks go bankrupt like they should then this charade
continues inslaving everyone.
This country as well as many others has a large percentage of
its assets tied up in over priced deals that the bankers/governments
will not let collapse while the blood sucking vampires suck the
life out of the assets.
On the other hand, govt is not the answer. Govt is too large
and accomplishes too little.
kevin de bruxelles:
The harsh reality is that, at least
in the first few rounds, companies kick to the curb their weakest
links and perceived slackers. Therefore when it comes
time to hire again, they are loath to go sloppy seconds on what
they perceive to be some other company’s rejects. They would much
rather hire someone who survived the layoffs working in a similar
position in a similar company. Of course the hiring company is going
to have to pay for this privilege. Although not totally reliable,
the fact that someone survived the layoffs provides a form social
proof for their workplace abilities.
On the macro level, labor has been under attack for thirty years
by off shoring and third world immigration. It is no surprise that
since the working classes have been severely undermined that the
middle classes would start to feel some pressure. By mass immigration
and off-shoring are strongly supported by both parties. Only when
the pain gets strong enough will enough people rebel and these two
policies will be overturned. We still have a few years to go before
this happens.
davver:
Let’s say I run a factory. I produce cars and it requires very
skilled work. Skilled welding, skilled machinists. Now I introduce
some robotic welders and an assembly line system. The plants productivity
improves and the jobs actually get easier. They require less skill,
in fact I’ve simplified each task to something any idiot can do.
Would wages go up or down? Are the workers really contributing to
that increase in productivity or is it the machines and methods
I created?
Lets say you think laying off or cutting the wages of my existing
workers is wrong. What happens when a new entrant into the business
employs a smaller workforce and lower wages, which they can do using
the same technology? The new workers don’t feel like they were cut
down in any way, they are just happy to have a job. Before they
couldn’t get a job at the old plant because they lacked the skill,
but now they can work in the new plant because the work is genuinely
easier. Won’t I go out of business?
Escariot:
I am 54 and have a ton of peers who are former white collar
workers and professionals (project managers, architects, lighting
designers, wholesalers and sales reps for industrial and construction
materials and equipment) now out of work going on three years. Now
I say out of work, I mean out of our trained and experienced fields.
We now work two or three gigs (waiting tables, mowing lawns, doing
free lance, working in tourism, truck driving, moving company and
fedex ups workers) and work HARD, for much much less than we did,
and we are seeing the few jobs that are coming back on line going
to younger workers.
It is just the reality. And for most of us the descent has not
been graceful, so our credit is a wreck, which also breeds a whole
other level of issues as now it is common for the credit record
to be a deal breaker for employment, housing, etc.
Strangely I don’t sense a lot of anger or bitterness as much
as humility. And gratitude for ANY work that comes our way.
Health insurance? Retirement accounts? not so much.
Mickey Marzick:
Yves and I have disagreed on how extensive the postwar “pact”
between management and labor was in this country. But if you drew
a line from say, Trenton-Patterson, NJ to Cincinatti, OH to Minneapolis,
MN, north and east of it where blue collar manufacturing in steel,
rubber, auto, machinery, etc., predominated, this “pact” may have
existed but ONLY because physical plant and production were concentrated
there and workers could STOP production. Outside of these heavy
industrial pockets, unions were not always viewed favorably. As
one moved into the rural hinterlands surrounding them there was
jealously and/or outright hostility. Elsewhere, especially in the
South “unions” were the exception not the rule. The differences
between NE Ohio before 1975 – line from Youngstown to Toledo – and
the rest of the state exemplified this pattern. Even today, the
NE counties of Ohio are traditional Democratic strongholds with
the rest of the state largely Republican. And I suspect this pattern
existed elsewhere. But it is changing too…
In any case, the demonization of the unemployed is just one notch
above the vicious demonization of the poor that has always existed
in this country. It’s a constant reminder for those still working
that you could be next – cast out into the darkness – because you
“failed” or worse yet, SINNED. This internalization of the “inner
cop” reinforces the dominant ideology in two ways. First, it makes
any resistance by individuals still employed less likely. Second,
it pits those still working against those who aren’t, both of which
work against the formation of any significant class consciousness
amongst working people. The “oppressed” very often internalize the
value system of the oppressor.
As a nation of immigrants ETHNICITY may have more explanatory
power than CLASS. For increasingly,
it would appear that the dominant ethnic group – suburban, white,
European Americans – have thrown their lot in with corporate America.
Scared of the prospect of downward social mobility and constantly
reminded of URBAN America – the other America – this group is trapped
with nowhere to else to go.
It’s the divide and conquer strategy employed by ruling elites
in this country since its founding [Federalist #10] with the Know
Nothings, blaming the Irish [NINA - no Irish need apply] and playing
off each successive wave of immigrants against the next. Only when
the forces of production became concentrated in the urban industrial
enclaves of the North was this strategy less effective. And even
then internal immigration by Blacks to the North in search of employment
blunted the formation of class consciousness among white ethnic
industrial workers.
Wherever the postwar “pact of domination” between unions and
management held sway, once physical plant was relocated elsewhere
[SOUTH] and eventually offshored, unemployment began to trend upwards.
First it was the “rustbelt” now it’s
a nationwide phenomenon. Needless to say, the “pact” between labor
and management has been consigned to the dustbin of history.
White, suburban America has hitched its wagon to that of the
corporate horse. Demonization of the unemployed coupled with demonization
of the poor only serve to terrorize this ethnic group into acquiescence.
And as the workplace becomes a multicultural matrix this ethnic
group is constantly reminded of its perilous state. Until this increasingly
atomized ethnic group breaks with corporate America once and for
all, it’s unlikely that the most debilitating scourge of all working
people – UNEMPLOYMENT – will be addressed.
Make no mistake about it, involuntary UNEMPLOYMENT/UNDEREMPLYEMT
is a form of terrorism and its demonization is terrorism in action.
This “quiet violence” is psychological and the intimidation wrought
by unemployment and/or the threat of it is intended to dehumanize
individuals subjected to it. Much like spousal abuse, the emotional
and psychological effects are experienced way before any physical
violence. It’s the inner cop that makes overt repression unnecessary.
We terrorize ourselves into submission without even knowing it because
we accept it or come to tolerate it. So long as we accept “unemployment”
as an inevitable consequence of progress, as something unfortunate
but inevitable, we will continue to travel down the road to serfdom
where ARBEIT MACHT FREI!
FULL and GAINFUL EMPLOYMENT are the ultimate labor power.
Eric:
It’s delicate since direct age discrimination is illegal, but
when circumstances permit separating older workers they have a very
tough time getting back into the workforce in an era of high health
care inflation. Older folks consume more health care and if you
are hiring from a huge surplus of available workers it isn’t hard
to steer around the more experienced. And nobody gets younger, so
when you don’t get job A and go for job B 2 weeks later you, you’re
older still!
James:
Yves said- “This overly narrow hiring spec then leads to absurd,
widespread complaint that companies can’t find people with the right
skills”
In the IT job markets such postings are often called purple squirrels.
The HR departments require the applicant to be expert in a dozen
programming languages. This is an excuse to hire a foreigner on
a temp h1-b or other visa.
Most people aren’t aware that this model dominates the sciences.
Politicians scream we have a shortage of scientists, yet it seems
we only have a shortage of cheap easily exploitable labor. The economist
recently pointed out the glut of scientists that currently exists
in the USA.
http://www.economist.com/node/17723223
This understates the problem. The majority of PhD recipients
wander through years of postdocs only to end up eventually changing
fields. My observation is that the top ten schools in biochem/chemistry/physics/
biology produce enough scientists to satisfy the national demand.
The exemption from h1-b visa caps for academic institutions exacerbates
the problem, providing academics with almost unlimited access to
labor.
The pharmaceutical sector has been decimated over the last ten
years with tens of thousands of scientists/ factory workers looking
for re-training in a dwindling pool of jobs(most of which will deem
you overqualified.)
http://pipeline.corante.com/archives/2011/03/03/a_postdocs_lament.php
Abe, NYC:
I wonder how the demonization of the unemployed can be so strong
even in the face of close to 10% unemployment/20% underemployment.
It’s easy and tempting to demonize an abstract young buck or Cadillac-driving
welfare queen, but when a family member or a close friend loses
a job, or your kids are stuck at your place because they can’t find
one, shouldn’t that alter your perceptions? Of course the tendency
will be to blame it all on the government, but there has to be a
limit to that in hard-hit places like Ohio, Colorado, or Arizona.
And yet, the dynamics aren’t changing or even getting worse. Maybe
Wisconsin marks a turning point, I certainly hope it does
damien:
It’s more than just stupid recruiting,
this stigma. Having got out when the getting was
good, years ago, I know that any corporate functionary would be
insane to hire me now. Socialization wears off, the deformation
process reverses, and the ritual and shibboleths become a joke.
Even before I bailed I became a huge pain in the ass as economic
exigency receded, every bosses nightmare. I suffered fools less
gladly and did the right thing out of sheer anarchic malice.
You really can’t maintain corporate
culture without existential fear – not just, “Uh
oh, I’m gonna get fired,” fear, but a visceral feeling that you
do not exist without a job. In properly
indoctrinated workers that feeling is divorced from economic necessity.
So anyone who’s survived outside a while is bound to be suspect.
That’s a sign of economic security, and security of any sort undermines
social control.
youniquelikeme:
You hit the proverbial nail with that reply. (Although, sorry,
doing the right thing should not be done out of malice)
The real fit has to be in the corporate
yes-man culture (malleable ass kisser) to be suited
for any executive position and beyond that it is the willingness
to be manipulated and drained to be able to keep a job in lower
echelon.
This is the new age of evolution in the work place. The class
wars will make it more of an eventual revolution, but it is coming.
The unemployment rate (the actual one, not the Government one) globalization
and off shore hiring are not sustainable for much longer.
Something has to give, but it is more likely to snap then to
come easily. People who are made to be repressed and down and out
eventually find the courage to fight back and by then, it is usually
not with words.
down and out in Slicon Valley:
This is the response I got from a recruiter:
”I’m going to be overly honest with you. My firm doesn’t
allow me to submit any candidate who hasn’t worked in 6-12 months
or more. Recruiting brokers are probably all similar in that
way…. You are going to have to go through a connection/relationship
you have with a colleague, co-worker, past manager or friend
to get your next job….that’s my advice for you. Best of luck
”
I’m 56 years old with MSEE. Gained 20+ years of experience at
the best of the best (TRW, Nortel, Microsoft), have been issued
a patent.
Where do I sign up to gain skills required to find a job now?
Litton Graft :
“Best of the Best?” I know you’re down now, but looking
back at these Gov’mint contractors you’ve enjoyed the best socialism
money can by.
Nortel/TRW bills/(ed) the Guvmint
at 2x, 3x your salary, you can ride this for decades.
At the same time the Inc is attached to the Guvmint ATM localities/counties
are giving them a red carpet of total freedom from taxation. Double
subsidies.
I’ve worked many years at the big boy bandits, and there is no
delusion in my mind that almost anyone, can do what I do and get
paid 100K+. I’ve never understood the mindset of some folks who
work in the Wermacht Inc: “Well, someone has to do this work” or
worse “What we do, no one else can do” The reason no one else “can
do it” is that they are not allowed to. So, we steal from the poor
to build fighter jets, write code or network an agency.
Hosswire:
I used to work as a recruiter and
can tell you that I only parroted the things my clients told me.
I wanted to get you hired, because I was lazy and didn’t want to
have to talk to someone else next.
So what do you do? To place you that recruiter needs to see on
a piece of paper that you are currently working? Maybe get an email
or phone call from someone who will vouch for your employment history.
That should not be that hard to make happen.
Francois T :
The “bizarre way that companies now spec jobs” is essentially
a coded way for mediocre managers to say without saying so explicitly
that “we can afford to be extremely picky, and by God, we shall
do so no matter what, because we can!”
Of course, when comes the time to hire back because, oh disaster!
business is picking up again, (I’m barely caricaturing here; some
managers become despondent when they realize that workers regain
a bit of the higher ground; loss of power does that to lesser beings)
the same idiots who designed those “overly narrow hiring spec then
leads to absurd, widespread complaint that companies can’t find
people with the right skills” are thrown into a tailspin of despair
and misery. Instead of figuring out something as simple as “if demand
is better, so will our business”, they can’t see anything else than
the (eeeek!) cost of hiring workers. Unable to break their mental
corset of penny-pincher, they fail to realize that lack of qualified
workers will prevent them to execute well to begin with.
And guess what: qualified workers cost money, qualified workers
urgently needed cost much more.
This managerial attitude must be another factor that explain
why entrepreneurship and the formation of small businesses is on
the decline in the US (contrary to the confabulations of the US
officialdumb and the chattering class) while rising in Europe and
India/China.
Kit:
If you are 55-60, worked as a professional (ie, engineering say)
and are now unemployed you are dead meat. Sorry to be blunt but
thats the way it is in the US today. Let me repeat that : Dead Meat.
I was terminated at age 59, found absolutely NOTHING even though
my qualifications were outstanding. Fortunately, my company had
an old style pension plan which I was able to qualify for (at age
62 without reduced benefits). So for the next 2+ years my wife and
I survived on unemployment insurance, severance, accumulated vacation
pay and odd jobs. Not nice – actually, a living hell.
At age 62, I applied for my pension, early social security, sold
our old house (at a good profit) just before the RE crash, moved
back to our home state. Then my wife qualified for social security
also. Our total income is now well above the US median.
Today, someone looking at us would think we were the typical
corporate retiree. We surely don’t let on any differently but the
experience (to get to this point) almost killed us.
I sympathize very strongly with the millions caught in this unemployment
death spiral. I wish I had an answer but I just don’t. We were very
lucky to survive intact.
Ming:
Thank you Yves for your excellent post, and for bringing
to light this crucial issue.
Thank you to all the bloggers, who add to the richness of the
this discussion.
I wonder if you could comment on this Yves, and correct me if
I am wrong…I believe that the power of labor was sapped by the massive
available supply of global labor. The favorable economic policies
enacted by China (both official and unofficial), and trade negotiations
between the US government and the Chinese government were critical
to creating the massive supply of labor.
Thank you. No rush of course.
Nexus:
There are some odd comments and notions here that are used to
support dogma and positions of prejudice. The world can be viewed
in a number of ways. Firstly from a highly individualised and personal
perspective – that is what has happened to me and here are my experiences.
Or alternatively the world can be viewed from a broader societal
perspective.
In the context of labour there has always been an unequal confrontation
between those that control capital and those that offer their labour,
contrary to some of the views exposed here – Marx was a first and
foremost a political economist. The political economist seeks to
understand the interplay of production, supply, the state and institutions
like the media. Modern day economics branched off from political
economy and has little value in explaining the real world as the
complexity of the world has been reduced to a simplistic rationalistic
model of human behaviour underpinned by other equally simplistic
notions of ’supply and demand’, which are in turn represented by
mathematical models, which in themselves are complex but merely
represent what is a simplistic view of the way the world operates.
This dogmatic thinking has avoided the need to create an underpinning
epistemology. This in turn underpins the notion of free choice and
individualism which in itself is an illusion as it ignores the operation
of the modern state and the exercise of power and influence within
society.
It was stated in one of the comments that the use of capital
(machines, robotics, CAD design, etc.) de-skills. This is hardly
the case as skills rise for those that remain and support highly
automated/continuous production factories. This is symptomatic of
the owners of capital wanting to extract the maximum value for labour
and this is done via the substitution of labour for capital making
the labour that remains to run factories highly productive thus
eliminating low skill jobs that have been picked up via services
(people move into non productive low skilled occupations warehousing
and retail distribution, fast food outlets, etc). Of course the
worker does not realise the additional value of his or her labour
as this is expropriated for the shareholders (including management
as shareholders).
The issue of the US is that since the end of WW2 it is not the
industrialists that have called the shots and made investments it
is the financial calculus of the investment banker (Finance Capital).
Other comments have tried to ignore the existence of the elites
in society – I would suggest that you read C.W.Mills – The Power
Elites as an analysis of how power is exercised in the US – it is
not through the will of the people.
For Finance capital investments are not made on the basis of
value add, or contribution through product innovation and the exchange
of goods but on basis of the lowest cost inputs. Consequently, the
‘elites’ that make investment decisions, as they control all forms
of capital seek to gain access to the cheapest cost inputs. The
reality is that the US worker (a pool of 150m) is now part of a
global labour pool of a couple of billion that now includes India
and China. This means that the elites, US transnational corporations
for instance, can access both cheaper labour pools, relocate capital
and avoid worker protection (health and safety is not a concern).
The strategies of moving factories via off-shoring (over 40,000
US factories closed or relocated) and out-sourcing/in-sourcing labour
is also a representations of this.
The consequence for the US is that the need for domestic labour
has diminished and been substituted by cheap labour to extract the
arbitrage between US labour rates and those of Chinese and Indians.
Ironically, in this context capital has become too successful as
the mode of consumption in the US shifted from workers that were
notionally the people that created the goods, earned wages and then
purchased the goods they created to a new model where the worker
was substituted by the consumer underpinned by cheap debt and low
cost imports – it is illustrative to note that real wages have not
increased in the US since the early 1970’s while at the same time
debt has steadily increased to underpin the illusion of wealth –
the ‘borrow today and pay tomorrow’ mode of capitalist operation.
This model of operation is now broken. The labour force is now being
demonized as there is a now surplus of labour and a need to drive
down labour rates through changes in legislation and austerity programs
to meet those of the emerging Chinese and Indian middle class so
workers rights need to be broken. Once this is done a process of
in-source may take place as US labour costs will be on par with
overseas labour pools.
It is ironic that during the Regan administration a number of
strategic thinkers saw the threat from emerging economies and the
danger of Finance Capital and created ‘Project Socrates’ that would
have sought to re-orientate the US economy from one that was based
on the rationale of Finance Capital to one that focused in productive
innovation which entailed an alignment of capital investment, research
and training to product innovative goods. Of course this was ignored
and the rest is history. The race to the lowest input cost is ultimately
self defeating as it is clear that the economy de-industrialises
through labour and capital changes and living standards collapse.
The elites – bankers, US transnational corporations, media, industrial
military complex and the politicians don’t care as they make money
either way and this way you get other people overseas to work cheap
for you.
S P:
Neoliberal orthodoxy treats unemployment as well as wage supression
as a necessary means to fight “inflation.” If there was too much
power in the hands of organized labor, inflationary pressures would
spiral out of control as supply of goods cannot keep up with demand.
It also treats the printing press as a necessary means to fight
“deflation.”
So our present scenario: widespread unemployment along with QE
to infinity, food stamps for all, is exactly what you’d expect.
The problem with this orthodoxy is that it assumes unlimited
growth on a planet with finite resources, particularly oil and energy.
Growth is not going to solve unemployment or wages, because we are
bumping up against limits to growth.
There are only two solutions. One is tax the rich and capital
gains, slow growth, and reinvest the surplus into jobs/skills programs,
mostly to maintain existing infrastructure or build new energy infrastructure.
Even liberals like Krugman skirt around this, because they aren’t
willing to accept that we have the reached the end of growth and
we need radical redistribution measures.
The other solution is genuine classical liberalism / libertarianism,
along the lines of Austrian thought. Return to sound money, and
let the deflation naturally take care of the imbalances. Yes, it
would be wrenching, but it would likely be wrenching for everybody,
making it fair in a universal sense.
Neither of these options is palatable to the elite classes, the
financiers of Wall Street, or the leeches and bureaucrats of D.C.
So this whole experiment called America will fail.
Neither snow, nor rain, nor riots in Saudi Arabia or once in
a hundred year earthquakes shall deter these markets from rallying
into the close. Good old Benny, always can depend on him to
turn a frown upside down.Seriously, although the major US
indices had a nice bounce off their lows, they are far from
out of the woods, and we cannot yet be complacent about this
correction.
Defensive positions are recommended
until the uptrend is re-established. While it
was heartening to see the SP 500 climb back above its 50 DMA
which is now around 1299, the NDX tech sector is still lagging
withits 50 DMA around 2317, and this is the chart that I watch,
in addition to financials and the Russell 2000, to judge the
quality of any rallies. Too often they will jam the SP 500 futures
higher and try to drag the rest of the market along with it.
I will be keenly interested in seeing the full extent of
the damage in Japan, and any follow on problems to a quake of
this magnitude, especially with regard to their nuclear infrastructure.
I am sure they will handle it as they have done so many times
in the past, rising as one people to the challenge. There will
be many comparisons to how the markets reacted to the Kobe earthquake
in the 1990's.
In terms of the US economy, there
is no real recovery yet that I can determine. The earthquake
of the financial crisis has left the country divided, its economy
sputtering. Repairs have not been made, and those who created
and benefited from the crisis are seeking conscripts to take
their pain.
John Williams of
Shadowstats had this to say:
"Markets Are Flying Blind.
In terms of meaningful economic reporting, the financial
markets continue to be flying blind, at the moment. Economic
data of questionable significance continue to flow from
the government’s statistical bureaus, including this morning’s
(March 11th) report of February retail sales. There will
be a full review of the economic outlook in the Hyperinflation
update, and the constant-dollar February retail sales will
be assessed in the March 17th Commentary, following the
CPI release.
On its surface, the February retail sales report was
positive on a nominal (not-adjusted for inflation) basis,
as well as likely in real (inflation-adjusted) terms. The
reporting-quality problems remain in unstable monthly seasonal-factor
adjustments. Seasonal patterns have been warped by the depth
and duration of an economic downturn that is unprecedented
in the post-World War II era of modern economic reporting.
The retail data will be revised in a pending annual benchmark
revision, scheduled for April 29th.
At that time, retail sales levels and growth of at least
the last year should be subject to major downside revisions,
showing a weaker economy than has been recognized previously.
As with the recent, major downside revisions to payroll
employment, and the pending downside revisions to industrial
production later in March, the retail sales downgrade will
be a precursor to major downside revisions in GDP history
of the last several years, which are due for release in
late July.
While there also are seasonal-adjustment issues with
the trade data, the reported January 2011 deficit has set
up a potential dampening of growth to be reported in first-quarter
2011 GDP, at the end of April."
The parable of the broken window was introduced by
Frédéric Bastiat
in his 1850 essay Ce qu'on voit et ce qu'on ne voit pas (That
Which Is Seen and That Which Is Unseen) to illustrate the hidden
costs associated with destroying property of others. The
parable, also known
as the broken window fallacy, demonstrates how the
law of unintended consequences affects economic activity people
typically see as beneficial.
The parable
Bastiat's original parable of the broken window from Ce qu'on
voit et ce qu'on ne voit pas (1850):
Have you ever witnessed the anger of the good shopkeeper, James
Goodfellow, when his careless son happened to break a pane of glass?
If you have been present at such a scene, you will most assuredly
bear witness to the fact that every one of the spectators, were
there even thirty of them, by common consent apparently, offered
the unfortunate owner this invariable consolation—"It is an ill
wind that blows nobody good. Everybody must live, and what would
become of the glaziers if panes of glass were never broken?"Now,
this form of condolence contains an entire theory, which it will
be well to show up in this simple case, seeing that it is precisely
the same as that which, unhappily, regulates the greater part of
our economical institutions.
Suppose it cost six francs to repair the damage, and you say
that the accident brings six francs to the glazier's trade—that
it encourages that trade to the amount of six francs—I grant it;
I have not a word to say against it; you reason justly. The glazier
comes, performs his task, receives his six francs, rubs his hands,
and, in his heart, blesses the careless child. All this is that
which is seen.
But if, on the other hand, you come to the conclusion, as is
too often the case, that it is a good thing to break windows, that
it causes money to circulate, and that the encouragement of industry
in general will be the result of it, you will oblige me to call
out, "Stop there! Your theory is confined to that which is seen;
it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon
one thing, he cannot spend them upon another. It is not seen that
if he had not had a window to replace, he would, perhaps, have replaced
his old shoes, or added another book to his library. In short, he
would have employed his six francs in some way, which this accident
has prevented.[1][2]
The fallacy of
the onlookers is that they considered only the positive effects for
the glazier and those he may now purchase from without considering the
equally harmful effects for the shopkeeper and those he now cannot purchase
from.
The implications of the fallacy can also be extended to the glazier.
The onlookers assume that this needed window will have a positive effect
for the glazier, but in order to assume this, the glazier must have
time and supplies available which currently have no other use. If the
glazier has other jobs which demand his time and supplies, this additional
job now represents a negative constraint for the glazier in that he
may not be able to complete his other jobs on time.
In short, the broken window (and the
boy who broke it) did not provide any net benefit to the town, but rather
made the town poorer by at least the value of one window, if not more.
[Mar 13, 2011]
Enough By James
Kwak
A friend passed on
this article in The Motley Fool by Morgan Housel. It begins this
way:
“Enough.
“That’s the title of Vanguard founder John Bogle’s fantastic
book about measuring what counts in life.
“The title, as Bogle explains, comes from a conversation between
Kurt Vonnegut and novelist Joseph Heller, who are enjoying a party
hosted by a billionaire hedge fund manager. Vonnegut points out
that their wealthy host had made more money in one day than Heller
ever made from his novel Catch-22. Heller responds:
‘Yes, but I have something he will never
have: enough.’”
...Speaking on the side of greater reform for the biggest banks,
Mervyn King – governor of the Bank of England – gave a forceful
interview to the British newspaper The Telegraph at the
end of last week.
“Why do banks in general want to pay bonuses? It’s because they live
in a ‘too big to fail’ world in which the state will bail them out on
the downside.”
In Mr. King’s view, casino-type banking caused the crisis of 2007-08.
“Financial services don’t like
the word ‘casino’, but instruments were created and traded only within
the financial community. It was a zero sum game. No one knew which ones
were winners when the crisis hit. Everyone became a suspect. Hence,
no one would provide liquidity to any of those institutions.”
“We allowed a [banking] system to build up which contained the seeds
of its own destruction.”
And “reform” efforts so far do not amount to much.
“We’ve not yet solved the ‘too big to fail’ or, as I prefer to call
it, the ‘too important to fail’ problem. The concept of being too important
to fail should have no place in a market economy.”
Read the rest of this entry »
jcb
March 10, 2011
Okay. But suppose that the basis of Fed policy -- say QE2,3,4
-- consisted of pouring money into the bond market. And that the
money went largely to speculative inflation of assets or commodities,
not to any broad-based economic activity that might raise prices
in relative proportions? Sound implausible?
Some recent results of QE2 here:
http://www.zerohedge.com/article/primary-dealers-flip-50-another-bond-issued-two-weeks-ago-back-fed
http://www.zerohedge.com/article/exclusive-bill-gross-dumps-all-treasuries-brings-total-government-related-holdings-zero-flee
http://www.zerohedge.com/article/pimco-offloads-40-billion-treasurys-frontrunning-fed-creates-billions-profits-gross-does-not
If I understand correctly,
primary dealers in government bonds are buying them from the Treasury
and reselling them for a profit to the Fed under QE2. Then, if the
case of Pimco is typical, putting the proceeds into cash. If so,
how does this help aggregate demand or GDP? And how does it help
the economy?
Shouldn't you or someone be walking back the claims made on behalf
of QE2 as a stimulus to economic growth? And shouldn't you consider
the potential for new bubbles, as so much of the cash from QE2 goes
into speculative funds in, say, commodities such as oil?
I think it goes to show that micro-economic just-so tales ("Once
upon an island, long-ago . . .") to prove points about macro-economic
monetary policy (without taking into account real world existing
distribution of resources) won't get us very far.
Oupoot:
I tend to agree that the analysis is way too simplistic. The one
thing I do remember from Eco 101 is Ceteris Paribus (everything
else stays the same). In all the theories I learnd from the many
textbooks I have read since, it is not stated anymore as it is taken
for granted. But in the real world: nothing stays the same...
anne :
https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI
March 10, 2011
The 3 month Treasury interest rate is at 0.07%, the 2 year Treasury
rate is 0.63%, while the 10 year is 3.37%.
The Vanguard A rated short-term investment grade bond fund, with
a maturity of 3.0 years and a duration of 2.2 years, has a yield
of 1.89%. The Vanguard A rated intermediate-term investment grade
bond fund, with a maturity of 6.8 years and a duration of 5.2 years,
is yielding 3.61%. The Vanguard A rated long-term investment grade
bond fund, with a maturity of 23.9 years and a duration of 12.5
years, is yielding 5.64%. *
The Vanguard Ba rated high yield
corporate bond fund, with a maturity of 6.0 years and a duration
of 4.8 years, is yielding 5.81%.
The Vanguard convertible bond fund, with a maturity of 4.9 years
and a duration of 4.3 years, is yielding 3.29%.
The Vanguard A rated high yield tax exempt bond fund, with a
maturity of 13.2 years and a duration of 7.7 years, is yielding
4.52%.
The Vanguard GNMA bond fund, with a maturity of 5.6 years and
a duration of 2.7 years, is yielding 3.45%.
The Vanguard inflation protected Treasury bond fund, with a maturity
of 8.5 years and a duration of 7.6 years, is yielding 0.28%.
* Remember, the Vanguard yields are after cost. The Federal Funds
rate is no more than 0.25%.
river :
So, if oil's true cost say in one year's time is $6.00 a gallon,
and there is no readily available alternative, and $6.00 a gallon
causes a massive recession/depression to ensue, should the Fed even
lower interest rates? Well, they can't lower interest rates now,
but in hindsight, should they have lowered interest rates back in
2008? The Fed doesn't drill oil, so they have no control over this
price, so why should they do anything to help the economy suffering
from an increase in the price rise of Oil?
Our whole society is built on the energy we are able to produce,
and if that energy is too expensive, it starves out consumption
from the rest of the economy. If oil gets to be $5.00 or $6.00 a
gallon or more, the economics of everything changes. Houses that
are farther from work and city centers will become unsellable, while
the small supply of homes in close will greatly increase in value,
thousands of vehicles already produced will become unsellable and
undriveable. This is real wealth that will basically evaporate do
to gas costs increasing like this, and is infinitely deflationary.
So why does the Fed partake in QE2, QE3 and QE4 and keep the
interest rates pegged at zero when high gas prices end up being
a deal breaker?
mark:
I'm perplexed because it is relatively easy to "financialize"
the commodity - to create a financial asset, such as stock or debt
or a derivative or a futures contract, the price of which moves
more or less in tandem with the underlying asset's price. For examples,
gold mining stocks track gold prices, there are copper proxies in
the capital markets, ETFs for rare earths and lithium, and so on.
And we have seen there could be asset bubbles involving financial
assets. And that the price of the financial asset affects behavior
concerning the underlying asset. So I think inevitably there could
be bubbles in the commodity and conversely a "don't react to commodity
price changes" necessarily means "don't react to financial asset
price changes". And whether that is right or wrong, I confess it
does surprise me you hold that laissez faire view.
Why isn't residential real estate
an example of the commodity in this post? Or fiber
optic cable, to harken back to the Nasdaq bubble. Or tulips?
mark:
I would just add, in your hypothetical, there are no financial
institutions, no lending, etc., just sea shells for commodities,
spot priced, cash on delivery. So, yeah, there's not much for the
island's Fed to do. But introduce finance, lending, credit, securities
trading, forward contracts, etc. all keyed off the commodities,
and I think the Fed might find something to do.
FRauncher:
"I'm perplexed because it is relatively easy to "financialize"
the commodity"
I'm glad to know it's easy, because I sure wish someone would
explain to me how these various financial derivatives work. What
assets do the managers hold? Do they actually hold contracts for
the delivery of oil? Or is this just some big betting pool like
Chelsea vs Arsenal?
hapa:
"it's interesting to think about how technological change
that improves the quality or lowers the price of the renewable good
plays into this. Such a change could offset the increase in the
cost of living that households face. Thus improving technology,
not Fed policy, is the key to helping people on the island struggling
with high prices."
improving technology, and affordably scrapping the old. if for
instance you assume (or draw a line in favor of) way better HVAC
equipment, you have a lot of drafty windows & walls to fix along
the way.
Benjamin Cole:
The CPI, in case anybody has looked, is today (220) about where
it was in August 2008 (219). That's about 2 1/2 years ago. Since
the CPI tends to over state inflation, we have been in deflation
for nearly three years.
And yet some people, such as Richard Fisher of the Dallas Fed,
seem to have the screaming meemies about inflation.
And no one has made headlines that natural gas is an an eight-year
low. An eight year low!
Commodities, especially with the NYMEX and other exchanges, have
become wild. Copper recently collapsed. Commodities often boom before
bust, a cycle known by many through history. It takes the boom to
bust the prices.
I cannot imagine a more stupid policy than tightening now.
tinbox:
Should the Fed Respond to Commodity Prices?
That's easy. Depends on whether Jamie Dimon and Warren Buffet
want the Fed to respond. The Fed only exists to keep the top 6 banks
in business. Everything else is window dressing. To imagine that
the Fed has the leeway to make a decision independent of the impact
on major banks is pure fantasy.
03/09/2011It was to be expected: after 7 consecutive weeks of inflows
during which the market drifted aimlessly, while seeing insiders dump
a few billion to witless retail hot potato chasers, forming what some
are calling a quadruple top, not to mention various revolutions and
now counter-revolutions in MENA, the retail investor has once again
said enough and turned their back on stocks. The beneficiary: taxable
bond funds, which saw a whopping $4.8 billion in inflows, despite attempts
by everyone in the propaganda machine to dissuade investors (read Baby
Boomers) from putting their money into fixed income and reroute capital
to stocks. Well, in an age of immediate demanded gratification and POMO-adjusted
Newtonian third laws, every future inflow better be met with a greater
than expected spike in the market, or the resulting outflow in the next
week will be vicious. Also those hoping that the ongoing outflow from
munis will finally end, will have to wait at least one more week: the
week ending March 3 saw $711 million in muni outflows. Of course, following
today's spanking by Jeff Gundlach we wouldn't hold our breath on a massive
resurgence in capital allocation to an asset class which one of the
greatest fixed income minds is due for a 15-20% correction. Yet what
truly boggles the mind, is Legg Mason's response on how the $672 billion
asset manager plans to deal with billions in sudden redemption requests:
"Those outflows will be largely offset by market appreciation,"
said Nachtwey, chief financial officer of Legg Mason." In other
words, the Ponzi will continue... or else Legg Mason is dunzo.
Indeed, where else can U.S. investors expect to see tax-equivalent
yields of 7.7% on high-quality paper? It’s not far off the bargains
corporate bond investors were
feasting on back in late 2008. See How to Play the Panic in Muni
Bonds on page P23 of Barron’s (it is a sign
of these classic contrarian times that another $1 billion fled the muni
bond fund arena last week).
THOSE METALS ARE PRECIOUS INDEED
After practically everyone wrote off gold early this year the yellow
metal broke out last week and silver surged to fresh 31-year high too.
If it’s not concern over sovereign debt issues then its fears of the
spreading unrest in the Middle East and North Africa. According to the
FT, the U.S. mint is reporting new all-time highs with with regards
to sales of silver American Eagle coins in each of the past two months.
Remember when
municipal finance specialists,
politicians,
fixed-income fund managers,
credit analysts,
municipal finance columnists,
municipal finance executives,
bond analysts,
business reporters, and
sundry other "experts" pooh-poohed the warning Meredith Whitney's
gave in December on CBS's
"60 Minutes" about a coming meltdown in the muni market, with some
suggesting the banking analyst was well out of her depth?Well, I
wonder what they are saying now that Jeff Gundlach, one of the most
successful fixed-income investors of modern times, has voiced similar
concerns about the outlook for what has been a very popular investment
class:
"Jeffrey
Gundlach: Munis Are The New Subprime" (CNBC.com)
Bond king Jeff Gundlach likened municipal bonds to subprime mortgage
bonds on CNBC’s Strategy Session on Wednesday.
“You’ve got a history of low defaults, which
is comforting. But that kind of sounds like what subprime sounded like back
in 2006,” Gundlach said.
Gundlach said the markets for subprime bonds and municipal bonds are
similar because the buyers are similar. Muni
bond buyers aren’t seeking fundamentally good credit stories—they are buying
for “technical reasons,” Gundlach said. This is exactly what
happened with subprime
With subprime bonds, buyers were seeking highly-rated credit with very
low default histories in order to satisfy regulatory bank capital requirements.
They largely ignored deteriorating fundamentals, and continued to buy subprime
mortgage-backed securities at a rapid clip even when the problems with the
market were becoming apparent in the first half of 2007.
Muni bonds are bought for a different “technical
reason”—the tax benefit—and buyers are once again ignoring deteriorating
fundamentals. So are munis going the way of subprime?
“If by that you mean, lower, then yes. If you mean crashing, I’m agnostic
on that,” he told David Faber.
Got that? Munis are headed lower.
And he’s “agnostic” on whether or not they will crash. When one of the most
important names in bond investing says he cannot tell whether or not an
entire class of bonds will crash, there’s reason for investors to worry.
Munis are now offering higher yields than U.S. Treasurys of comparable
duration, which is the inverse of the usual relationship, says Dan Loughran,
senior portfolio manager at OppenheimerFunds.
03/09/2011 | ZeroHedge
DoubleLine's Jeff Gundlach appeared on CNBC earlier, and among other
things, the muni market was discussed. It appears that the fund manager
whom many consider to be roughly in the same ballpark as Howard Marks
when it comes to fixed income investing is very much in Meredith Whitney's
camp when it comes to his outlook on muni market prospects.
Asked by Faber if he believes that munis
are ultimately going the way subprime securities did, Gundlach responds
"If by that you mean lower, the answer is yes. If you mean crashing,
I am agnostic on that." And for all those who love taking
out their actuarial tables and their historical default data to refute
what is simply common sense, Gundlach has a few words as well:
"I don't think you need to know what the default rates
are going to be, or need to know how low low is, munis are going
to go down. There are going to be other
shoes to drop. There might be so many it looks like
Imelda Marcos' closet when all the shoes drop because all the states
have to deal with this stuff....
Between here and the endgame lies the valley and the valley is
full of fear. And I think the muni market
is going to go down by at least 15 to 20%. At least."
As for Kaminsky relentless advocacy of munis, this time coming out
with the always disingenuous "hold to maturity" defense, Gundlach simply
made a mockery of that whole spiel: "You
know what the definition of an investor? It is a trader who is underwater.
People say they hold to maturity until they get scared and sell. It
gets scary when the prices start to drop. The fear factor here is going
to be palpable."
This is probably the single smartest statement ever made on CNBC,
where for once a guest actually replied with what is elsewhere known
as common sense, instead of ivory tower economic theories that work
everywhere but in the market (yes, stocks just like housing can only
go up, until they can't). Aside from that cue the congressional subpoena.
.And while Gundlach is bearish on munis and pretty much everything
else, with an S&P 500 target of 500 "if
deflation wins", the ironic thing is that the one asset
class he likes, noted in reference to the disclosure on Zero Hedge that
PIMCO has sold everything, "now we know who's gonna buy them when the
Treasury stops. PIMCO." Perhaps. But that will occur at least 100 basis
point wide of here. Otherwise Gross would obviously not be selling into
the recent drop.
by I am a Man I am... on Wed, 03/09/2011 - 15:13 #1033913
my muni bond portfolio was up this past month, anyone know how many
defaults we've had this year?? anyone?? a decent muni is yielding a
whopping 2.4%. this guy is clueless on the muni market
simon says
on Wed, 03/09/2011 - 15:46
#1033999
Sorry TD, I don't buy it. Letting quasi-sovereigns like Munis
fail will undo the support that Treasuries and MBSs have received from
the Fed. The Fed/Treasury will support AAA Munis (and maybe lower)
for sure - they will just take their time to blink - so maybe we will
see rising yields, but no failure. Will wreak havoc on inflation
of course, but that's what real money is for.
prophet_banker
on Wed, 03/09/2011 - 16:27
#1034139
according to financial reporter Ellen Brown, all that has to happen
is refinance with 6month or less maturity, and use tax's as collateral,
and the Fed already has the mandate to buy local and state muni's, just
not the political will.
gabeh73
on Wed, 03/09/2011 - 17:25
#1034321
At first thought I assumed the Fed would jump in this muni market
no problem. However, after further thought I realized that letting the
munis blowup would be used as justification to expand the federal government(or
at least state) and this is something that is a 100% lock goal at all
times for TPTB. So ya, I believe Lockhart...they won't be saving the
munis.
March 4, 2011
Given that Libya is increasingly looking to be entering a stalemated
civil war, we can forget most of their production for the next few years.
And it was easy, light sweet quality oil.
This I think will be typical of the reaction to peak oil - political
instability as the oil rich monarchies and dictatorships fail to keep
their young, restive and rapidly growing and increasingly hungry and
religiously radicalised populations under control.
Decline from the peak will not be a smooth geological curve. It will
not be an economic event. It will be violent and explosive.
A lot of people will die.
The esteemed (by us) geologists and economists posting here will
have all their predictions rapidly overtaken by events.
Selected Comments
Engineer-Poet
I think one of the issues is that it is hard to get the
price of uranium up high enough, long enough, to really go after
additional supply.
The market is fully supplied; even lifting the embargo on India
didn't budge prices much.
The USA has around 700,000 tons of depleted UF6 in inventory
(over 470,000 tons of elemental U). That's not reserves, that's
inventory left over from enrichment since the Manhattan project.
There is also about 60,000 tons of uranium in spent fuel, mostly
from LWRs. All uranium is feedstock for fast breeder reactors, and
that inventory alone is sufficient to run the USA at ~100 quads/yr
for several hundred years.
That's
why the Integral Fast Reactor had to die: it would have killed
fossil fuels and "green" energy with one stroke. It also requires
about 1/10 the steel and concrete of sources like wind, making it
more economical if political factors don't torpedo it.
the recent historical pattern is toward less electricity
generated using uranium, rather than more. Many of the old reactors
are nearing the ends of their lives, and countries are not taking
steps to replace them.
That's politics. Uranium remains a bargain, energy-wise (and
the major supply-side response to AGW).
You should know this, but you're in deep denial.
enemy of state:
fail to keep their young, restive and rapidly growing
and increasingly hungry and religiously radicalised populations
under control.
What I see happening with these revolutions makes me seriously
question the "religiously radicalised" part. It looks like a secular
driven revolt. Desire for democracy, a better distribution of opportunity,
and above a need to feel respected seems to be the driving force.
Outside of a few areas -especially Pakistan, and Afghanistan (not
in MENA) these folks seems only mildly religious to me. I think
the radical Islam thing was mainly a desperate attempt to find a
way out, as other methods had had no success freeing these people.
Now, they have examples of seemingly successful secular revolutions.
[I say seemingly, because chasing out the old regimes is the
easy part, and as long as the current chaos continues the economies
of these countries are slipping backwards.]
Ina Deaver:
My problem with the Stewart bit is that it would be funny if
it weren’t so incredibly sad.l tho clips are saying “But it isn’t
the same thing at all — the CEOs have private contracts, whereas
the government is a party to the contracts it wants to eviscerate
with teachers. And teachers – anyone can do that.”
Expat:
Stewart is right, but it doesn’t matter. It turns Stewart’s fine
satire and cutting edge reporting into a sad farce.
Wall Street, the GOP, the Tea Party, and Washington are greedy,
horrible sociopaths. I can’t decide if they simply represent people
or if they rose to those positions because they are sociopaths.
The former is perhaps excessively cynical, but just look at every
day behaviour as you drive or walk around your town or city.
I suppose Americans would rise up if they weren’t too fat and
lazy!
[Mar 06, 2011] Blast from the past
I wade through hundreds of commentaries and news reports on a daily
basis. Occasionally, I come across an article that really makes me stop
and say: "Amen, brother." When that happens, I feel compelled to share
it with Financial Armageddon
readers (and anybody else who cares about what is going on in the world
around us).
The latest example is a post entitled "Suppressing the Cognitive
Dissonance of a Bogus Recovery," by Charles Hugh Smith, author of
Survival+:
Structuring Prosperity for Yourself and the Nation and publisher
of the Of Two Minds
blog, a long-time favorite of mine. I invite you to read through it
and see if you don't agree with me that Charles' take on reality is
a breath of fresh, unadulterated air:
Despite a 24/7 campaign of carefully managed "good news,"
76% of Americans do not believe the U.S. "recovery." Hmm, I wonder
why?
A massive outbreak of economic cognitive dissonance is
being suppressed with wave after wave of manufactured "good news."
Every visibly negative bit of data is run through a media and Central
State assembly line to refashion it as "good news" and "evidence"
that the "nascent recovery is taking hold." Whatever cannot be rejiggered
is simply buried or suppressed.
The fact that
five
corporations control the the vast majority of the U.S. mainstream
media certainly aids that manufacturing process.
Let's run through a few of the most blatant examples
of suppressed dissonance:
1. If the economy is recovering so strongly
(
+3% GDP growth in the first quarter!)
then why are tax revenues down?
Federal budget deficit hits April record: The April deficit
soared to $82.7 billion. Total revenues for April were down 7.9
percent from a year ago. In the seven months of this year, corporate
tax receipts are up 8.9% to $77.1 billion. The same cannot be said
of individual income tax revenue, which is down 11.6% in the first
seven months to $500.8 billion.
Through the first seven months of the current budget year, which
began on Oct. 1, the deficit totals nearly $800 billion. That is
down only slightly from last year's deficit during the same period
of $802 billion. Revenues total $1.2 trillion in those seven
months, down 4.5 percent from the same period last year.
How can tax revenues be falling when the economy is "growing
strongly"? As for those corporate profits:
corporate profits register biggest year-over-year gain in 25 years.
As this chart from the Federal Reserve shows, non-financial corporate
profits were almost 14% of GDP before the global meltdown. In a
$13 trillion economy, that's $1.8 trillion.
But much of the "good news" in Corporate America is not quite
as rosy as presented.
2. Rising corporate profits mask falling sales.
Consider Walmart's last report, which caused the financial media
to quiver in ecstasy because the retailer logged a 10% increase
in profits. But behind the hype, (profits rose $0.3 billion on $99
billion in sales, whoopie),
Walmart same-store sales drop; gross margins decline.
You have to read to the very last line to get to the sobering
reality: same-store sales dropped in the U.S. and gross margins
declined. Both are bad news, yet you'd never know it from the lead
paragraphs and talking heads.
3. Corporate profits are boosted with special charges
and other accounting trickery. It takes a forensic accounting
analysis of corporate filings to discern what's real and what's
been juiced to boost quarterly "earnings."
Meanwhile, corporations are loading up on debt again: Junk bonds
-- essentially risky bets on future corporate earnings -- made up
the biggest share of corporate debt sales on record last year. That
hardly suggests prudence on the part of the companies loading up
on tens of billions of dollars of high-interest debt. Load the company
with debt, goose profits, cash out the big bonuses and then let
the balance sheet implode.
4. Much of global corporate America's earnings resulted
from the weak dollar. Now that boost to the bottom line
has largely vanished in the collapse of the euro.
Many of America's premiere global companies earn most of their
revenue overseas. Equipment maker Eaton, for instance, gets 55%
of its sales from outside the U.S. Global companies such as Coca-Cola
not only reap most of their sales overseas-- they also depend on
international growth to boost their profits.
As the U.S. dollar has risen 25% against the euro, the U.S. multinationals'
plump profits (in dollars)
will take a huge hit. Indeed, American multinationals such as
Caterpiller have already seen their stocks pummeled
as traders realize the dollar's rise will slice their profits.
Here's how the weak dollar boosted U.S. corporate profits. In
mid-2008, when a U.S. company booked 100 euros in profit made overseas,
that translated into $160 in profits when calculated in U.S. dollars.
Now that same 100 euros in profit translates into $122—a huge reduction.
If that wasn't bad enough, our major trading partners are heading
into epic slowdowns. As the wheels fall off the credit/housing bubble
in China--the global engine for commodities and manufacturing--and
the credit storm takes down Europe--the world's largest trading
bloc--U.S. corporate sales and profits will suffer.
5.
Income inequality has risen to 1929 levels.
If times are indeed good, they're only good for the top 5% of households.
The bottom 80% have seen their net worth and incomes decline. So
much for "trickle-down" prosperity.
6. U.S. households remain mired in debt. U.S.
households took on too much debt and the consequences are still
unfolding:
14% of mortgages delinquent or in foreclosure. This is only
the above-water part of the iceberg; banks are holding tens of thousands
of loans out of foreclosure lest their insolvency become too obvious.
Tens of thousands of homes are being hidden in the "shadow inventory"
of homes which are in default but which are not listed for sale.
Resetting the mortgage payments down a few dollars will do nothing
to change the massive over-indebtedness:
Home-Loan Aid Proves Little Help For Those With Other Big Bills
to Pay.
7. Another wave of mortgage resets has yet to hit--housing's
bogus "recovery" will dissolve like a sand castle in a tsunami.
8. The U.S. banking system is still rotten to the core. The
list of ills in the U.S. banking industry is long indeed, but perhaps
one fact reveals how little has been changed in the past few years
of turmoil: U.S. commercial banks (not investment banks)
generated a record $22.6 billion in derivatives trading revenues
in 2009 -- the same year that the Federal Reserve spent trillions
of dollars to
prop up the U.S. mortgage market and the banking sector.While
massive Federal intervention staved off systemic insolvency last
year,
many U.S. banks remain effectively insolvent.
9. The U.S. trade imbalance is growing again. Though imports
fell in the recession, imports rose 18% from the second quarter
of 2009 to the fourth quarter.
Ultimately, the trade deficit adds to the nation's indebtedness.
Though the trade deficit has dropped from the 2006 peak at $800
billion, it is still on track to
reach $500 billion in 2010.
10. Economic "intelligence" is essentially propaganda.
Despite the daily flood of financial and economic data, pundits,
government agencies and forecasters were caught off-guard by the
subprime mortgage crisis, the resulting banking crisis and now once
again by the European banking storm and sovereign debt crisis.
liquidity-induced rallies are never sustained if the macro fundamentals
don’t follow suit.
Equity markets overseas are down considerably as the realization of
what $100 oil is likely to do to purchasing power at the consumer level
and profit margins at the producer level. The U.S. dollar is still soft
and gold is consolidating after yesterday’s surge to new record highs.
Treasuries are surprisingly not benefiting from the slide in equities
though there is a modestly positive tone in European debt markets and
a nice 5bps rally in Japanese government bonds back down to 1.25% (didn’t
Japan just get downgraded recently … twice??).
It is still testament to the greed factor that according to the just-released
Investors Intelligence survey, we still have over 50% bulls and less
than 20% bears populating the poll universe. Yikes!
... ... ...
CONSTRUCTION STILL IN THE DOLDRUMSEven with a (spurious) rebound
in residential outlays that was largely skewed by a surge in multi-family
housing starts, total U.S. construction spending sagged 0.7% MoM in
January on top of a 1.6% slide the month before. Non-residential expenditures
tumbled 3.3% sequentially and are down now in each of the past four
months. Between that, real consumer spending and capex shipments, we
may well begin to see all those 4% GDP growth forecasts for Q1 end up
being cut in half!
OPTIM-ISMToo bad the ISM index doesn’t feed right into GDP.
The economy would be booming. The ISM manufacturing index did come in
better than expected in February but rarely has such a strong number
in the past been so well advertised. The diffusion index ticked up to
61.4, which is the highest print since May 2004 (the peak for the cycle,
but …. the bulls would tell you that still meant another 3-plus years
of economic growth and a bull market mania), not to mention up seven
months in a row. That is a streak and nothing in the components suggested
any near-term giveback.
New orders edged up to 68.0 from 67.8 while inventories were run
down to 48.8 from 52.4 in January. So what this in turn did was kick
the orders-to-inventories ratio higher for the third month in a row,
to 1.39x from 1.29x — the best print since January 2010, and if you
recall, that led the headline index to a new interim high three months
hence.
Most components posted gains, including the jobs sub-index, which
was in contrast to most of the regional manufacturing indicators. It
jumped to 64.5 from 61.7 in what was the fastest advance since January
1973— when factory payrolls rose a hefty 0.65% (which would translate
into +75,000 today!). The other 10 times that the employment index was
this strong or stronger was in the 1950s, and factory payroll rose an
average of 1.2% (which would equate to +130,000!).
RANDOM MARKET THOUGHTS
Only time will tell if yesterday’s market action was a true watershed.
It was the first time since last July that the stock market was down
on the first day of the month. Till yesterday, the opening days in January
and February had already accounted for over half the year-to-date gains
in the S&P 500 (over 90% last year).
It was also the first time since the last leg of the bear market rally
began six months ago that “good” news failed to ignite equity prices.
Yesterday we saw auto sales shoot up 6.7% to 13.4 million units (at
an annual rate) which was the best level since August 2009, and we also
saw the ISM inch higher to 61.4 from 60.8 with the “internals” of the
report just as solid as the headline. This is likely a sign that Mr.
Market had already paid up for these nice tidings. Recall that last
September the data were still looking iffy, and it was not clear that
double-dip risks had totally faded, but the stock market ripped in any
event. That was a mirror image sign that at the time, all the “bad”
news was priced in.We also have a situation where economists are
now taking down their GDP numbers after four months of raising them.
Analysts have stopped raising their EPS forecasts. Corporate guidance
has been spotty at best, and we have corporate insiders selling their
stock at 10x the rate they are buying it. Not an encouraging signpost
at all. The short interest is flirting with three-year lows so the absence
of any short-covering as the market retreats could end up making price
declines more intense than normal. So far, a big market decline has
been averted because the “buy the dip” mentality is so well ingrained,
but dangerous at the same time. The widespread view that $100 oil will
only cause a ripple in the global economic outlook is equally dangerous.
The complexion of the FX market has also changed materially. The
U.S. dollar, always a safe-haven in troubling times as it was in the
aftermath of the global credit collapse and periodically last year amid
the European debt fiasco, is no longer playing that traditional role
during this latest round of turmoil overseas. Gold, silver, the yen
and the Swiss franc have emerged as the safe-havens this time around.
Could be a sign of the U.S. dollar losing its allure as the place to
go when the going gets tough and no doubt spur talk as to whether the
reserve currency status will ultimately be relinquished.
The weak performance of the U.S. dollar would certainly seem to reflect,
at a certain level, a lack of confidence over U.S. policy making. Nothing
in Ben Bernanke’s sermon yesterday should alter that view, especially
his dismissive response to the Fed’s role in fuelling the surge in the
commodity complex since last summer. He claims that since commodity
prices have risen in all currency terms, hence this is not a weak-dollar
story. To us, this misses the point. The Fed’s stated intent was to
encourage risk-taking behaviour with QE2. He even mentioned the Russell
2000 on CNBC recently. Well, emerging equities have a tight correlation
with small cap stocks, and by igniting a huge rally in those markets,
their economies boomed from the hot money investment flows. And since
it is this part of the world that is the marginal buyer of raw material,
it is little wonder why the supply-demand balance for commodities was
thrown further off kilter by the Fed’s quantitative easing.
Ben Bernanke said his concern was that inflation had fallen last
summer to uncomfortable levels. So the main aim was to reflate and the
stated goal was a wealth effect on spending. But only 20% of Americans
own equities directly. And the inflation that the Fed has helped generate
are in necessities, which is why in real terms, wages are either stagnating
or contracting outright. If we hadn’t had a strong price deflator in
January, consumer spending would have also been up in real terms, not
down.
No doubt we will get a nice cushion for February spending out of
auto sales — an antidote to what seems to be a lacklustre chain store
sales. But even with incentives running wild, auto sales are still nowhere
near the 16-18 million unit pre-credit-bubble norm. This is about as
good as it will get, even with the subprime market for auto loans staging
a revival.
Two more items from Ben Bernanke’s testimony that investors may want
to pay attention to:
“... downside risks to the recovery have receded, and the
risk of deflation has become negligible.”
These are not the words of someone about to embark on QE3. This could
be important for a market that has had an
86% correlation with movements in the Fed’s balance sheet over the past
two years.
“Until we see a sustained period of stronger job creation,
we cannot consider the recovery to be truly established.”
Something else for investors to consider.
How sustainable is a two-year 100% rally in equity prices if the
economic recovery itself isn’t sustainable? This is what
we have said all along — the U.S. economy is much more fragile than
is commonly believed, and liquidity-induced
rallies are never sustained if the macro fundamentals don’t follow suit.
Ted Kavadas:
Of course, oil is not the only commodity rising sharply. Many,
if not most, are.
IMHO, there are various aspects of this “inflationary episode”
that are particularly dangerous. One aspect is the growth rate disparity
as seen, among other measures, in the “prices paid” vs. “prices
received.”
For those interested, I recently wrote a blog post on the issue
– it can be found at this link:
http://economicgreenfield.blogspot.com/2011/02/changing-dynamics-underlying-profit.html
Lyle:
Except that the two total revolutions in history, France and
Russia in the end just exchanged who was in the Elite. In France
they chopped off the heads of the old elite and Napolean and his
crew came in, then after Waterloo the remnants of the old elite
came back, along with some of the Napoleanic elite. In Russia they
killed the old elite or exiled them, and a new elite arose that
in the end was no better than the old one. Things never get better,
never have never will elites are always going to be with us and
will always only care for their interests. Any other point of view
requires smoking something to maintain.
kievite:
“Except that the two total revolutions in history, France and
Russia in the end just exchanged who was in the Elite. “
The same is true for the evolution of mankind from Rome till
present days. In each country the elite (which less politically
correct is called oligarchy) dominates the political process and
if one elite is weakened, the other take its place. In this sense,
unfortunately, democracy is just a nice myth. It exists exclusively
within the narrow social strata called elite (or top 1%).
So the real question is how strong is the grip of the elite and
here large historic variations are possible. I would prefer the
US oligarchy to the USSR oligarchy any day.
Another question is how isolated and self-sustained is the elite
(social mobility issues). While people mistakenly assume that the
USA have substantial vertical mobility, it does has slightly more
vertical mobility then say, Great Britain, but definitely less then
modern Russia (which substantially changed the composition of the
elite after the dissolution of the USSR). It’s funny but in this
sense Russia is one of the most democratic counties in the world
which manage substantially change its elite twice in one century.
Sadly this statement will not be approved by Hilary Clinton or Barack
Obama :-)
Human societies have almost infinite capacity for self-delusion.
eric:
Both the French and Russian revolutions made material improvements
in many people’s lives. Of course, lots of bad stuff happened too,
but I don’t think you have to be on drugs to think that in both
cases there was some improvement overall.
RBHoughton:
Thank you for the constructive comments Lyle and Kievite – excuse
me for feeling you are unnecessarily pessimistic.
The French Revolution offers a good example of what I suspect
is the best way of protecting the social contract. To be sure it
was nearly destroyed by the neighbours until Napoleon stepped-in,
but, once that happened, it worked very well and we are still living
with the consequences of his initiatives. He described his government
as “a dictatorship over a vast democracy.’
I know little of the Russian Revolution and cannot comment beyond
noting that the errors of Marx have been absurdly overstated and
there remains an immense amount of reliable analysis in his work.
Independence in USA was followed by at least 30 years of responsible
government until we Poms destroyed it in 1812. There is a mass of
insightful information there to guide us as well.
The British Revolution in 1688 is irrelevant as it was like the
Egyptian one we are witnessing now – one power centre replacing
another – which is the point Lyle percipiently makes in respect
of Russia too.
So I focus on France and USA two centuries ago and I am confident
that this time our efforts will be successful because of our technological
development. The internet has changed the rules. Concealment is
no longer an option. Power centers will have to confront publicity
for their acts. They will never voluntarily express contrition or
shame – they will try to justify the unjustifiable. That’s only
one step from their complete failure.
nonclassical:
Folks,
Read this about internet manipulation. Realize
John Rendon
of “Rendon Group” admitted in the article on the Bushit lies to
drive internationally illegal invasion of Iraq, that, “The NEXT
time we will have total control of propaganda=information..this
time we didn’t”.
Rendon is referring to recent advent of CIA
and FBI huge computer mega-facilities whereby “information warriors”
will
come on forums such as this to contradict information.
The internet is devolving as we speak. There
is a fundamentalist argument over whether truth even exists, outside
the hallowed “individual”.
While most here on this forum are incredibly
economically aware, I am not sure whether they are prepared by their
education to comprehend Socratesian dialogue on truth in these debates.
Having debated Jonah Goldberg on his ridiculous stance on “truth”,
it does require enough background to remind opposition that even
THEIR claims are subject to the test of truth.
Point is, it’s about to get a lot muddier, deeper…
Here’s the article in which Rendon makes his
claim:
http://ics.leeds.ac.uk/papers/vp01.cfm?outfit=pmt&folder=2053&paper=3010
Max424:
What a great headline. GW strikes again.
I could be wrong (I can’t find my link), but
I believe it was the take-no-prisoners capitalista David Rubenstein,
founder of the ruthless Carlyle Group, that said investing in China
was a very smart play because China’s preference for state central
planning — and 5 year plans — added a great deal of stability
to the outsider’s risk equation.
It’s all such a joke, isn’t it? It would be
hilarious if it wasn’t so tragic.
Daily watching fraudulent banksters and psychotic
gamblers insidiously chatting
with obsequious CNBC hosts; listening to Republican free-market
poseurs professing their love for small businesses and jobs when
they’re actually out to destroy both in the name of Global Corporatism;
witnessing a torrent of Liberterians nut jobs — that believe anarchy
and apartheid are not only compatible but the perfect symbiotic
representation of the ideal society — descend on us like a Biblical
plague; and especially knowing that Barrack “Probably Our Last Chance”
Obama put the same people in charge of the economy that had just
blown up the economy; the only conclusion I can draw is I will never
see sanity restored to my corner of the world* in my lifetime.
* I consider America my corner of the world,
for better or worse.
Jessica
Alternatively, the elite was always in charge economically but they
have shifted from a pattern that worked better for a lot of (1st
world) people (high growth rate; lower percentage of elite taking)
to a pattern that works worse for especially 1st world people (lower
growth rate; less left over for the serfs).Actually
I think it is some of both. The technological changes of recent
decades and the expanded trade possibilities of Pax Americana have
disproportionally benefited the elite. Reduced racism and sexism
have also left less extraordinary talent among the serfs to organize
a rebellion. And academia, which once produced ideas useful for
us serfs, has been incorporated as the R&D wing of corporate rule.
beowulf
“Who doesn’t like totalitarian governments?”
Err, any bondholder who wants their debt repaid. In international
law, there’s a jagged little pill called “odious debts”.
a legal theory
which holds that the national debt incurred by a regime for purposes
that do not serve the best interests of the nation, should not be
enforceable. Such debts are thus considered by this doctrine to
be personal debts of the regime that incurred them and not debts
of the state. In some respects, the concept is analogous to the
invalidity of contracts signed under coercion. beowulf:
More on odious debt, nice to see Washington
and London are on board. :o)
The United States
set the first precedent of odious debt when it seized control of
Cuba from Spain. Spain insisted that Cuba repay the loans made to
them by Spain. The U.S. repudiated (refused to pay) that debt, arguing
that the debt was imposed on Cuba by force of arms and served Spain’s
interest rather than Cuba’s, and that the debt therefore ought not
be repaid. This precedent was upheld by international law in Great
Britain v. Costa Rica (1923) when money was put to use for illegitimate
purposes with full knowledge of the lending institution; the resulting
debt was annulled
scraping_by:
“Deficit-conscious”?
David Stockman’s The Triumph of Politics was
his memoir of watching Reagan’s handlers create a deficit by cutting
the taxes of the rich and inflating military spending, then using
the deficit as the excuse for cutting social programs. Aren’t we
seeing the same game again? Or is that the “extremist” point of
view?
The “deficit-conscious” are either the con artists
or the marks.
wunsacon:
Then again, I *am* deficit conscious. But, I want to solve it
by increasing taxes on the wealthy and by cutting the war budget.
ohioralph :
If you cut the war budget, there would be no need to raise taxes.
In fact, reducing our “national security” would enhance the argument
for “cutting” social security.
Please see this link which identifies our $1.2 TRILLION “national
security budget” Ninety percent(90%) cut anyone.
http://original.antiwar.com/engelhardt/2011/03/01/the-real-us-national-security-budget/
Paul Tioxon:
The other obvious reason why a super majority of Americans do
not want politicians or anyone else to touch Social Security, under
pain of death, real and political, there is the practical matter
of the pay stub. If undereducated and below average, average Americans
pay attention to anything, it is the paycheck. On it, broken out
as clear as can be, are all of the taxes you pay and the other item
that is not a tax, but a contribution, FICA. There is almost no
one who does not ask the question, what the hell happened to my
paycheck? It is usually explained by the old heads who know that
while you may beat down the federal income tax and get a refund,
FICA, is your future Social Security check from the government when
you retire. They also know a great deal about other benefits associated
with it, including disability. So, while it may come as news to
the econometric crowd, and all of the Ivy Leaguers, stock brokers
and other wise masters of the universe that there is some political
convergence around SSI that may seem anomalous, it is not. Many
of the people may be fooled most of the time about a lot of issues,
but this is not one of them.
Just as the banking system has collapsed 3 times in the last
75 years, Social Security has never missed a payment in all of that
time due to being a ticking time bomb, broke, insolvent, or demographically
unsustainable. It has more credibility, more support and less need
for calculus than NASA.
bobinsherwood:
I am by no means fully informed, but I have done a little research.
I have a pension from my employer that will pay me $500 a month
starting in August, OR I could take a lump sum of $105,000. This
lump sum is in the ballpark of what it would cost me for an annuity
with a payout similar to my pension. It just so happens that my
total FICA contributions including my employer contributions total
almost 300,000. The SSA projects that my SS payment will be about
$1500 a month which is what $300k in an annuity would get me or
in the ballpark.
krick:
The thing that always bothers me about Social Security reform
discussions is that they always talk about raising the retirement
age as the “only solution” to making Social Security solvent for
the long haul.
Nobody ever suggests that we just treat Social Security like
a welfare program for the elderly. That’s essentially what it is,
we just need to admit it. I don’t understand why people who have
ample retirement income and/or pensions get Social Security at all.
If we treated Social Security like welfare and only gave it to people
over 65 who actually needed it, there wouldn’t be a solvency problem.
The argument against this would obviously be… “I paid into the
system, I want my money back when I get old”. The response is that
there are hundreds (if not thousands) of other programs that our
tax money funds that the average person never “gets back”. It’s
just the cost of living in a society that provides assistance and
safety nets for the less fortunate. I may not use any of these programs,
but I’d like to know that they’ll be there if I ever do need them.
Procopius:
Well, some people may not “need” their Social Security payments,
but one reason the program works is that it has low overhead. Adding
a means test would cost more than it would save. It’s simply more
cost-effective to continue the current system, which doesn’t require
expensive people to make decisions which must then be appealed to
more expensive people.
I’m quoting from memory, so my details may be a little bit off,
but in “The Predator State”, Jamie Galbraith pointed out that Social
Security is a “significant” part of their retirement income for
65% of elderly people, and the ONLY retirement income for 20%. It
is a bad, bad mistake to mess with it.
Michael Haley:
This is no news, the Tea Party has been against cuts to Medicare
from the beginning. They are also against cuts to defense, and as
mentioned social security. This is the main reason they are in such
an untenable position, because when you combine that with being
against any tax increases yet demand big cuts in spending, where
do you go?
I think we have to cut health care costs, and Obama’s plan does
not do that, at least enough, if at all. If we cut health care costs
Medicare will come down.
Neither party wants to talk about it, which is also the dilemma
for the budget. I think it is a mistake to say to the Democrats
that they can use Republican efforts to cut medicare or social security
against them, this shouldn’t be turned into a political football.
We need to deal with this.
ZachPruckowski:
Fixing rising medical costs is the only solution. If we just
cut or scale back Medicare/Medicaid without solving the rising medical
costs issues, we’re going to have an awful lot of angry people who
are being bankrupted by medical care, aren’t getting medical treatment
they need, or are watching loved ones die for lack of money. That’s
not a stable long-term situation.
DownSouth:
Bruce Krasting said: “This is not a popularity contest. It is
about economics.”
You’re stuck in the early 19th century, reciting the same old
hackneyed talking points that the kleptocrats have used for over
200 years. And they’re just as big a fiction now as they were then.
Maybe this from Robert L. Heilbroner’s book The Worldly Philosophers
will help us to see through the klepm Smith, Malthus, and Ricardo
elaborated the laws of economic distribution. These laws seemed
to explain not only how the produce of society tended to be distributed
but how it should be distributed. The laws showed that profits were
evened out and controlled by competition, that wages were always
under pressure from population, and that rent accrued to the landlord
as society expanded. And that was that. One might not necessarily
like the result, but it was apparent that this result was the natural
outcome of society’s dynamics: there was no personal ill will involved
nor any personal manipulation. Economic laws were like the laws
of gravitation, and it seemed as nonsensical to challenge one as
the other. Hence a primer of elementary economic principles said:
“A hundred years ago only savants could fathom them [economic laws].
Today they are commonplaces of the nursery, and the only really
difficulty is their too great simplicity.”
Aunt Deb:
I work for my state’s Elderinfo office. I meet many of those
people Procopius mentioned above, the people for whom Social Security
means they can have a relatively independent old age. I have friends
who work with people who receive Social Security disability income
and Social Security supplemental income. These programs are vital
to many Americans and I think if Social Security were changed significantly
from its current form, we would discover that the number of people
in poverty would increase rapidly.
My practical experience makes me think that Social Security is
a program that achieves its goals. I don’t see any reason to tamper
with this program other than to insure it can continue to function
as it does now on into the future.
My experience with Medicare, however, has led me to conclude
that there are serious problems that need to be clearly understood
and dealt with, the quicker the better. Among those problems are
the payment schedule which is in the hands of the RUC and Congress,
a very bad cost-controlling situation; the absurd semi-privatized
Medicare Advantage sector; the opaque and expensive “medigap” industry;
the truly incomprehensible Medicare D semi-privatized prescription
drug coverage. I would very much like to see these addressed.
ep3:
ya know it upset me when Matt taibbi called the teabaggers idiots.
Yes they are and they are racists, but we need them. Social Security
would be a perfect cause for all of us to come together to fight
the oligarchs with. Right now, breaking the oligarch hold on our
country should be priority number 1.
DownSouth
Using the lexicon of Nietzsche, I would say most Tea Partiers are
active nihilists.
“Active nihilism…is not content to be extinguished passively
but wants to extinguish everything that is aimless and meaningless
in a blind rage,” is how Michael Allen Gillespie explains Nietzsche’s
philosophy in Nihilism Before
Nietzsche; “it is a lust for destruction that purifies humanity.”
It is “driven by the spirit of revenge or by resentment.”
While Nietzsche didn’t believe active nihilism
was something “affirmative and healthy,” he nevertheless held it
in much higher regard than what he did passive nihilism.
Passive nihilism is the “doctrine of resignation,”
the “will to nothingness.” Passive nihilists don’t want to go out
“with a bang” like the active nihilists, “but with a whimper.”
[Mar 03, 2011] The Effect of Middle East Collapse
All told, those countries had oil production of 16.61 million
barrels/day in 2010, 56% of total OPEC oil production. Add in natural
gas liquids, and together they represented 22.7% of total world hydrocarbons
production, according to the International Energy Agency
In the short term, battles in the streets in a country could cut off
its oil production altogether. In the longer term, revolutions in these
countries are likely to be fairly short in duration, and confined mostly
to the cities, although if Libya’s Muammar Gaddafi starts a fashion
of blowing up oil pipelines we may have to recalibrate this calculation.
The new governments are almost certain to be anti-Western, anti-capitalist
and economically incompetent – like the post-1979 clerical regime in
Iran, for example.
To calculate the short-term (up to 24 months, before long-term demand
adjustments can be made or significant new supplies can appear) demand
elasticity of oil, we now have an excellent control experiment, in the
events of 2007-08. Between the summer of 2007 (April – September) and
the summer of 2008 the U.S. economy expanded marginally, by 0.45% in
real terms. The average global oil price increased by 70% between those
two half-years, from $68.43 to $116.34. On the other hand, U.S. oil
demand declined by 3.54%, from 20.902 million barrels/day to 20.163
million. If we assume that, given flat prices, demand would have increased
by the same 0.45% as the overall economy, then the 70% price increase
caused a demand drop of 3.99%, say 4% -- a demand elasticity of 4/70.
Given that elasticity, to make demand drop sufficiently to absorb
an 11.4% fall in supply would require a price increase of almost exactly
200%. In other words, oil prices would have to treble from the current
$100 per barrel to $300 per barrel. The U.S. gasoline price would increase
from its current $3.19 per gallon average to $9.57 per gallon.
Bernanke’s Unstoppable, Self Reinforcing Feedback-Loop
Our economic death spiral into the Second Great Depression . Wracked
up by both parties over many decades our debt has evolved into a yearly
deficit that can no longer be serviced with tax revenue and borrowing.
To avoid default Ben Bernanke chose to monetize the un-payable portion
of our deficit. Each month about 100 billion dollars are created out
of thin air to cover our government’s bills.
This has set forth an unstoppable, self reinforcing, feedback-loop
whereby:
- Debt monetization (printing money out of thin air to cover the
portion of governments spending not satisfied by tax revenue and
borrowing) reduces the value of the dollar.
- The debt monetization triggers dollars to flow out of bonds
and into commodities.
- This increases demand, commodity prices rise.
- As commodities make their way into
the supply chains businesses and consumers realize higher prices.
- Since globalization has caused wages to stagnate at 1970 levels,
and with 23% unemployment, businesses try to eat increases, this
in turn reduces hiring, causes layoffs and kills expansion.
- Consumers reduce their purchases, case in point:
Wal-Mart is losing market share to the
Dollar Store - that right there spells retail health (read: it’s
terminal).
- Nations whose citizens spend 32%-52% of their entire budget
on food are especially affected.
- In those nations where citizens spend 32%-52% of total their
income on food; food riots erupt, social unrest breaks out, governments
topple.
- Geographically speaking, many of these nations are in the Middle
East where about a third of the world's oil supply comes from -
so oil production is adversely affected, the price of oil increases.
Drastically increases. The empire must then send in troops and warships
to protect oil assets from being wiped off the map.
- Oil is an integral part of everything
from farming to manufacturing to transportation, therfore the prices
of all goods and services rise.
- This of course creates more stress on our economy, which drives
tax revenues down, whic creates a greater deficit, which causes
idiot Ben to lean on the print button and monetize even more debt.
- Like an infinite loop in some errant computer code we go back
to #1 above and iterate back through this unstoppable, self reinforcing,
negatively-insane-Ben Bernanke-code that we call a negative self
reinforcing feedback loop.
Tertium Squid:
I think the book’s worth it. I also saw the movie first – it’s
a pretty fast condensation and favors videotaped statements by the
principals that are ironic in hindsight.
The movie has weaknesses that don’t appear in the book. The condensation
rather gives the idea that most of Enron’s problems appeared near
the end; the book makes it clear that the blow-up was no quick thing,
and was years in the making. Some of their favorite tricks and frauds
had gone on for a very long time.
If memory serves, the movie also kind of gave the idea that these
guys were criminal masterminds, but the book disabuses that notion.
They weren’t that self-aware until right before the very end. They
believed their own lies.
Another thing I appreciated about the book is that it gave a
glimpse into the perverse advantages of securitization, and how
they could be used to blow up the world economy a decade later.
Here’s how I described the book on my blog:
“Saw the movie of the same title but hadn’t read the book; if
anything this 400 page book is even more accesible than the film
– almost to a fault. The authors are excessively conversational,
and don’t show much faith in their reader’s understanding. I wonder
if they imagined their words being read aloud at a Wal-Mart and
wrote accordingly.”
Oh, and I pointed out that Fastow was CFO because that matters
a lot to the narrative. Lay and Skilling tried to skate by pinning
all the blame on a loose-cannon CFO, but criminal investigation
(and journalistic efforts like the book we are describing) make
it clear how pervasive the fraud and chicanery was.
John Emerson
Every once in awhile I say this, always to now
avail as far as I know:
Sometimes you want to think inside the box.
Some visionaries are crooks, and others are delusionary. Sometimes
the “impossible dream” really IS impossible. Sometimes what they
say “can’t be done” really CAN’T be done. Some authorities deserve
respect.
Optimism can be poison, especially canned media
optimism. The opposite of optimism is not necessarily pessimism
(though pessimism and nay-saying are my own specialties: there’s
nothing wrong with cursing the darkness). It can just be realism,
or good sense, or paying attention or the simple absence of mania.
There’s all that stuff out there which is sold
as liberating by people who really believe in their product, and
which is sold as new and bold and exciting by people who really
believe in their product, but which is really just the same old
thing that hundreds of other people have said over the last 10,
20, or 50 years. Hopefully the target suckers will figure this out
someday.
Society
Groupthink :
Two Party System
as Polyarchy :
Corruption of Regulators :
Bureaucracies :
Understanding Micromanagers
and Control Freaks : Toxic Managers :
Harvard Mafia :
Diplomatic Communication
: Surviving a Bad Performance
Review : Insufficient Retirement Funds as
Immanent Problem of Neoliberal Regime : PseudoScience :
Who Rules America :
Neoliberalism
: The Iron
Law of Oligarchy :
Libertarian Philosophy
Quotes
War and Peace
: Skeptical
Finance : John
Kenneth Galbraith :Talleyrand :
Oscar Wilde :
Otto Von Bismarck :
Keynes :
George Carlin :
Skeptics :
Propaganda : SE
quotes : Language Design and Programming Quotes :
Random IT-related quotes :
Somerset Maugham :
Marcus Aurelius :
Kurt Vonnegut :
Eric Hoffer :
Winston Churchill :
Napoleon Bonaparte :
Ambrose Bierce :
Bernard Shaw :
Mark Twain Quotes
Bulletin:
Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient
markets hypothesis :
Political Skeptic Bulletin, 2013 :
Unemployment Bulletin, 2010 :
Vol 23, No.10
(October, 2011) An observation about corporate security departments :
Slightly Skeptical Euromaydan Chronicles, June 2014 :
Greenspan legacy bulletin, 2008 :
Vol 25, No.10 (October, 2013) Cryptolocker Trojan
(Win32/Crilock.A) :
Vol 25, No.08 (August, 2013) Cloud providers
as intelligence collection hubs :
Financial Humor Bulletin, 2010 :
Inequality Bulletin, 2009 :
Financial Humor Bulletin, 2008 :
Copyleft Problems
Bulletin, 2004 :
Financial Humor Bulletin, 2011 :
Energy Bulletin, 2010 :
Malware Protection Bulletin, 2010 : Vol 26,
No.1 (January, 2013) Object-Oriented Cult :
Political Skeptic Bulletin, 2011 :
Vol 23, No.11 (November, 2011) Softpanorama classification
of sysadmin horror stories : Vol 25, No.05
(May, 2013) Corporate bullshit as a communication method :
Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law
History:
Fifty glorious years (1950-2000):
the triumph of the US computer engineering :
Donald Knuth : TAoCP
and its Influence of Computer Science : Richard Stallman
: Linus Torvalds :
Larry Wall :
John K. Ousterhout :
CTSS : Multix OS Unix
History : Unix shell history :
VI editor :
History of pipes concept :
Solaris : MS DOS
: Programming Languages History :
PL/1 : Simula 67 :
C :
History of GCC development :
Scripting Languages :
Perl history :
OS History : Mail :
DNS : SSH
: CPU Instruction Sets :
SPARC systems 1987-2006 :
Norton Commander :
Norton Utilities :
Norton Ghost :
Frontpage history :
Malware Defense History :
GNU Screen :
OSS early history
Classic books:
The Peter
Principle : Parkinson
Law : 1984 :
The Mythical Man-Month :
How to Solve It by George Polya :
The Art of Computer Programming :
The Elements of Programming Style :
The Unix Hater’s Handbook :
The Jargon file :
The True Believer :
Programming Pearls :
The Good Soldier Svejk :
The Power Elite
Most popular humor pages:
Manifest of the Softpanorama IT Slacker Society :
Ten Commandments
of the IT Slackers Society : Computer Humor Collection
: BSD Logo Story :
The Cuckoo's Egg :
IT Slang : C++ Humor
: ARE YOU A BBS ADDICT? :
The Perl Purity Test :
Object oriented programmers of all nations
: Financial Humor :
Financial Humor Bulletin,
2008 : Financial
Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related
Humor : Programming Language Humor :
Goldman Sachs related humor :
Greenspan humor : C Humor :
Scripting Humor :
Real Programmers Humor :
Web Humor : GPL-related Humor
: OFM Humor :
Politically Incorrect Humor :
IDS Humor :
"Linux Sucks" Humor : Russian
Musical Humor : Best Russian Programmer
Humor : Microsoft plans to buy Catholic Church
: Richard Stallman Related Humor :
Admin Humor : Perl-related
Humor : Linus Torvalds Related
humor : PseudoScience Related Humor :
Networking Humor :
Shell Humor :
Financial Humor Bulletin,
2011 : Financial
Humor Bulletin, 2012 :
Financial Humor Bulletin,
2013 : Java Humor : Software
Engineering Humor : Sun Solaris Related Humor :
Education Humor : IBM
Humor : Assembler-related Humor :
VIM Humor : Computer
Viruses Humor : Bright tomorrow is rescheduled
to a day after tomorrow : Classic Computer
Humor
The Last but not Least Technology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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March 12, 2019
