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Great Depression 2 Right Around The Corner?

Scary stuff from MarketWatch columnist Paul Farrell the other day. On Monday, Farrell wrote:

Now it’s time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street’s “greed is good” DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington’s 41,000 special-interest lobbyists will drive America into the Great Depression 2.

Farrell then goes and rattles off 30 ‘leading edge’ indicators of the next Great Depression. From the piece:

Every day there is more breaking news, proof Wall Street’s greed is already back to “business as usual” and in denial, grabbing more and more from the new “Bailouts-R-Us” bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas — anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 “leading indicators.” Each problem has one or more possible solutions, but lacks unified political support. Time’s running out. We’re already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

1. America’s credit rating may soon be downgraded below AAA
2. Fed refusal to disclose $2 trillion loans, now the new “shadow banking system”
3. Congress has no oversight of $700 billion, and Paulson’s Wall Street Trojan Horse
4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
19. Corporate bond market, both junk and top-rated, slumps more than 25%
20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
21. Unemployment heading toward 8% plus; more 1930’s photos of soup lines
22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
23. China’s sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
24. Despite global recession, U.S. trade deficit continues, now at $650 billion
25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
26. Now 46 million uninsured as medical, drug costs explode
27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
28. Outgoing leaders handicapping new administration with huge liabilities
29. The “antitaxes” message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises

And “leading indicator” number 30? Farrell wrote:

At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan’s Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America’s problems will take years and will burn trillions.

He sees “nothing but large increases in the deficit … I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” It’ll get worse because “the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.”

Reuters concludes: “Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. ‘I just want to get people thinking about this, and to realize this is a road to disaster,’ said Whitehead. ‘I’ve always been a positive person and optimistic, but I don’t see a solution here.’”

Farrell’s conclusion?:

We see the Great Depression 2. Why? Wall Street’s self-interested greed. They are their own worst enemy … and America’s too.

Geez. Looks like I picked the wrong week to quit smoking…

Scenes from Airplane! (1980)
YouTube Video Link

Source:

“30 reasons for Great Depression 2 by 2011”
Paul B. Farrell
MarketWatch, November 17, 2008

Latest Economic Forecasts? More Pain

There was definitely no shortage of dreary economic forecasts released today. Reuters’ Nancy Waitz talked about the latest Blue Chip survey of 50 economists, and wrote:

The U.S. economy is headed for a recession that will be deeper and last longer than those of the previous two, according to the closely watched Blue Chip survey of economists released on Monday.

“The consensus strongly suggests the current recession will be deeper and last longer than those of 2001 and 1990-1991,” the monthly Blue Chip Economic Indicators newsletter said. “Some of our panelists believe it may (rival) the 1981-1982 downturn, but that is not yet the consensus view.”

The newsletter, which conducted its latest poll on November 5-6, said economists now expect the economy to shrink at a 2.8 percent annual rate in the fourth quarter. A month ago, the consensus view was for a 1.1 percent contraction.

Economists predict U.S. gross domestic product will contract at a 1.5 percent pace in the first quarter of 2009, much sharper than the 0.1 percent drop forecast in October.

For 2009 as a whole, economists expect GDP to shrink 0.4 percent.

Bloomberg’s Dakin Campbell and Liz Capo McCormick talked about the economic outlook of one particularly influential economist. They wrote Monday:

“The evidence is more than compelling” that the U.S. is in a recession, said Robert Hall, who heads the National Bureau of Economic Research’s panel that dates economic cycles. Hall, an economics professor at Stanford University, spoke Nov. 7 after a government report showed unemployment rose to 6.5 percent in October and job losses stretched into a 10th month.

A former Clinton Treasury official believes the floundering economy will take stocks down even further. From the CNBC website today:

The economy will worsen in the coming months and cause the market to fall another 20 to 25 percent in the United States and abroad, said Nouriel Roubini, a New York University business professor, on CNBC’s “Squawk Box” on Monday.

“There’s going to be negative growth all the way to the end of 2009,” he said. “The surprises from now are going to be on the downside, for the economy, for earnings, for the financial system.”

Job losses will accelerate in the next months, Roubini said, and he expects a weak economic recovery in the short and mid-term.

“There’s going to be a very slow recovery, because you have the financial system that’s impaired; earnings are not going to grow very fast, and therefore the stock market will go sideways for quite a while,” he said.

In addition to the stock market, the credit crisis could get a lot worse as well. Reuters’ Pedro Nicolaci da Costa wrote earlier today:

Worldwide losses from the credit crisis will total $1.4 trillion, of which only $800 billion have been realized so far, Goldman Sachs U.S. chief economist Jan Hatzius said on Monday.

This means further pain ahead for both the banking sector and the economy as a whole, Hatzius said, adding that further fiscal stimulus will be needed to prevent an even deeper downturn.

“This calls for a large amount of economic stimulus,” Hatzius told a financial industry conference.

Sources:

“Economists see U.S. headed for prolonged recession”
Nancy Waitz
Reuters, November 10, 2008

“Yield Curve May Steepen to Record During Recession (Update2)”
Dakin Campbell, Liz Capo McCormick
Bloomberg, November 10, 2008

“Stock Market To Fall Another 20%-25%: Roubini”
CNBC, November 10, 2008

“Global losses from crisis to reach $1.4 trillion: Goldman”
Pedro Nicolaci da Costa
Reuters, November 10, 2008

Number Of Unemployed Americans Most In 25 Years

Here’s some cheery news to digest as we fast approach the 2008 holiday season. Jeannine Aversa, the Associated Press Economics Writer, wrote tonight:

The nation’s jobless ranks zoomed past 10 million last month, the most in a quarter-century, as piles of pink slips shut factory gates and office doors to 240,000 more Americans with the holidays nearing. Politicians and economists agreed on a painful bottom line: It’s only going to get worse.

The unemployment rate soared to a 14-year high of 6.5 percent, the government said Friday, up from 6.1 percent just a month earlier. And there was more grim news from U.S. automakers: Ford Motor Co. and General Motors Corp., American giants struggling to survive, each reported big losses and figured to be announcing even more job cuts before long.

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My, how things have changed since Larry Kudlow’s “Goldilocks Economy” of- 2008? Kudlow wrote on the National Review Online website back on January 4:

Yes, corporate profits are slowing and jobs are softening. Despite 52 months of ongoing jobs gains and 1.3 million new payrolls in the past year, December jobs registered only 18,000 and the unemployment rate ticked back up to (a still historically low) 5 percent… Meanwhile, the Goldilocks economy remains alive and well. It’s still the greatest story never told.

And it might remain that way. While more than a million new jobs may have been created last year, it’s looking like we’ll lose those gains (plus tax?) by the time the new year rolls around. Aversa noted:

About 10.1 million people were unemployed in October, the most since the fall of 1983. More people have jobs now, since the population has grown, but it’s still a staggering jobless figure. With employers slashing jobs every month so far this year, some 1.2 million positions have disappeared, over half in the past three months alone.

Sources:

“Jobless ranks hit 10 million, most in 25 years”
Jeannine Aversa
Associated Press, November 7, 2008

“Goldilocks Needs Tax-Reform…”
Larry Kudlow
National Review Online, January 4, 2008

Pollyanna Creep

Once in a while, I’ll refer to individuals who are overly-optimistic as Pollyannas. The term comes from the 1913 children’s novel Pollyanna, which is about a young girl of the same disposition. You’ll know them when you meet them. Their favorite song is Bobby McFerrin’s “Don’t Worry, Be Happen.” In case you’re still a little hazy about the concept, here’s a good example of a Pollyanna in action. Just last week, when all hell was breaking loose on Wall Street, there was a comment on a Chicago Tribune piece which basically said, “Don’t worry, this will pass, it’s all just part of a cycle, the U.S. economy will soon recover and boom again, yada, yada, yada…” Which sounds great— if you believe in a financial system that is devoid of evolution (or de-evolution, for that matter.)

Now, there are some who believe that the U.S. government suffers from something called “Pollyanna creep.” Richard Siklos of The Globe and Mail (Canada) wrote last week:

That’s the dark thinking behind what is known as “Pollyanna creep,” a phrase coined by an economist named John Williams. Mr. Williams, who lives in California, runs a website called Shadowstats.com that trades in the idea that some key U.S. government statistics have become so optimistically misleading as to become essentially useless…

Over the past few years, some of Mr. Williams’ views on economic indicators - the consumer price index in particular - have been echoed by more well-known investment community figures such as bond investor Bill Gross, strategist Stephen Roach, and James Grant. “The numbers are misleading, and Wall Street uses the numbers to help sell their products,” says Mr. Williams, whose chief bugaboos include GDP and unemployment rates.

“Recently, I’d contend that what we’ve been getting is absolutely junk on the GDP,” he adds, despite recent official figures that GDP grew 3.3 per cent in the second quarter, after a small increase the previous quarter. “There’s no question that we’re in a recession, and probably have been in one since the last quarter of 2006. It didn’t start with the housing mortgage crisis.”

According to Mr. Williams, all the big measures have had their methodologies revised over the past few decades to paint the U.S. economy in the best possible light - and this has occurred regardless of which party was in the White House. However, he says, changes in methodology were always spelled out at the time - with rationales for doing so - so it’s not as though this has gone on in the dark of night.

Williams isn’t coming way out of left-field with his allegations. Back on June 9 Elizabeth MacDonald of FOX Business talked about a new book by Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, and wrote:

Monkeying around with government data started in the early ‘60s, Phillips says, during the John F. Kennedy administration. It appointed a committee to weigh changes to unemployment data, at a time when unemployment was soaring.

Out-of-work Americans who had quit searching for jobs–even if this was because none could be found–were then labeled “discouraged workers” and excluded from the ranks of the unemployed, though they were previously classified as such, Phillips notes.

In fiscal year 1969, the Johnson administration, with Congress’s blessing, orchestrated a “unified budget” that chucked in taxpayers’ Social Security funds with the rest of the federal budget, a change that let the government get its mitts on taxpayer Social Security funds for the very first time to use for all sorts of spending programs, including pork barrel projects.

The move, though, masked emerging deficits in Social Security funds, as taxpayer funds that were drawn down were replaced with treasury bonds, essentially more government debt.

Next, President Richard Nixon asked his Federal Reserve chairman Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation, Phillips says.

This new-fangled “core inflation” would simply knock out, due to nettlesome “volatility,” nettlesome food and energy prices. The new number could be shouted from the hilltops and blasted through newspaper headlines whenever the true CPI number was terrifying. It’s a number the markets are still too obsessed with today, though some seem to be surfacing out of this delusion…

I do go on. Let me continue with the cooked government data story.

In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics (BLS) decided that housing, too, was overstating CPI.

So, the BLS swapped in what it calls an “owner equivalent rent” measurement, what homeowners would pay to live in their homes if they were renters. But that number likely understated housing costs as it is based on overall rent, which stayed flat in most of the country during the housing bubble.

So, the government has cooked up its own housing inflation number that likely understates home prices, Phillips argues, and in turn has understated housing inflation during the recent housing boom by three to four percentage points.

Moreover, Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;
*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption
*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.

Pollyanna creep in the inflation data continued under the Bush administration. In 2006 it stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity, Phillips says.

Under the Clintons, Phillips says, the nation’s employment figures were massaged and kneaded too.

In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”

The Clinton administration also dropped the number of households sampled for the data, from 60,000 to 50,000, making the number more rickety.

But a disproportionate number of the dropped households were in the inner cities. So, along with a new adjustment formula that is believed to also have cut black unemployment estimates, poverty figures get to look a lot less worse, Phillips says.

So remember this. The next time you hear some economic numbers that seem too good to be true, that might very well just be the case. And as for Pollyanna? Depending on which version of the story you happen to be reading, in the end Pollyanna is paralyzed either from being hit by a car or falling off a roof.

Sources:

“Lies, damned lies and overly optimistic statistics”
Richard Siklos
The Globe and Mail (Canada), September 22, 2008

“Does the Government Manipulate Economic Data?”
Elizabeth MacDonald
FOX Business, June 9, 2008

How Main Street Views Wall Street’s Crisis

Earlier today, Bloomberg’s Laurence Viele Davidson and Michael Janofsky wrote an interesting piece on the reaction of the American public to the chaos going on down on Wall Street. As I read the article, a number of words came to mind to describe how Main Street sees the latest financial crisis:

Ignorance

“I’m trying to absorb all this,” said Palladino, 48, a television writer, as he had coffee yesterday at the Farmer’s Market in Los Angeles and read newspaper accounts of the demise of Lehman Brothers Holdings Inc.

The significance of the 158-year-old New York firm’s bankruptcy filing eluded him, he said. “I don’t know more than anyone else, financially,” he said. “A bank to me is an ATM and a checking account.”

Blamethrowing

Linda Burke, 57, a customer service consultant with AT&T Inc. in Atlanta, said she figured her retirement savings would take a hit and added that she was angry, though she wasn’t sure at whom.

“If I knew more,” she said, “I could find someone to blame.”…

Jay Leslie, 60, of East Brunswick, New Jersey, said he may not be able to retire as planned in five years.

“I may have to work longer,” said Leslie, who sells women’s clothes. He said he blamed Washington, not Wall Street. “The government didn’t have any idea how serious this was,” he said.

Litigation

That wasn’t the view of Gary Jones, 67, an Atlanta retiree who said he was “so concerned I stayed up the last two nights moving my money into T-bills and other safe havens.”

“We ought to sue the heck out of every board of director for the last 10 years,” he said.

Apathy

For Shelley Sims, 44, who lives in Lawrenceville, Georgia, and works for Georgia Pacific LLC’s import-export division, the failure of storied companies was a wake-up call. She said she would start paying more attention to financial markets.

“When you see names like these in the news, it’s alarming,” Sims said. “It made me get my mortgage papers and investment documents.”

??????

For Chaz Harris, the developments didn’t convince him that the U.S. was in any trouble.

“The economy’s pretty bad, but people are still spending money on what they want,” said Harris, 20, an unemployed warehouse worker who lives with his parents in Weehawken, New Jersey. Referring to the Take-Two Interactive Software Inc. video game, he said, “I mean, ‘Grand Theft Auto’ did half a billion in seven days. So the economy’s not that bad.”

New economic indicator?
Source: WikiGTA

Source:

“Americans Certain Lehman’s Bad, Just Not Sure It’s Bad for Them”
Laurence Viele Davidson, Michael Janofsky
Bloomberg, September 16, 2008

Quote For The Week

Last Wednesday, the U.S. Department of Labor reported that the consumer price index, or CPI, rose a moderate 0.2% in April. Excluding “volatile” food and energy prices, the “core” consumer price index increased only 0.1%. Over the past 12 months consumer prices are up 3.9%, with “core” inflation running at 2.3%.

In response to this “official” data, Joel Naroff, president of Naroff Economic Advisors Inc., told MarketWatch on May 14:

If you believe that inflation is under control, I have a bridge that spans the East River that I can sell you for a really good price.

Naroff was referring to the Brooklyn Bridge, and the fact that since its opening in 1883 several “salesmen” have attempted to sell the structure even though it has always been the property of the City of New York.

Why Jefferson Is Rolling In His Grave

Information is the currency of democracy.

-Thomas Jefferson (3rd President of the United States. 1743-1826)

I’m not aware of the context in which Thomas Jefferson said this. However, the governing body which Mr. Jefferson helped establish should take a cue from this statement. Mark Lieberman, senior economist for the FOX Business Network, wrote earlier today:

The government has come up with a novel solution to the steady drumbeat of bad economic news: Reduce funding for the agencies which produce and publish the data.

According to the economist, the Bureau of Labor Statistics has been forced to terminate all hours and earnings data reported for local areas, as well as payroll employment for 65 small metro areas. In addition to wiping out some local data, the Bush Administration’s 2009 budget proposal that was submitted to Congress in February ignores a request for funding to update samples for the housing portion of the consumer price index (CPI). Housing represents about 40% of the CPI, which, among other things, is used to determine the annual cost of living increase for Social Security recipients. Lieberman said that the BLS, which compiles CPI, uses a housing sample based on the 1990 census, and will continue to do so as the result of budget constraints.

So, why should you care? The former manager of economic analysis and research at Washington Mutual wrote:

There could be an ulterior motive to the funding cuts, according to Dean Baker, an economist and co-director of the Center for Economic Policy Research, who suggested the updated CPI sample would show more rapid inflation.

… and that Social Security recipients may be getting stiffed on their cost of living increases.

According to the BLS website:

The quality and quantity of some BLS data will be diminished, as fewer resources are available to collect and review data or to perform data analysis. This will result in lowered response rates, fewer published estimates, and a loss of detail in many data series.

The National Association for Business Economics (NABE) added:

With the economy in or on the brink of recession, everyone from Wall Street to Main Street is focused on reports of current economic indicators. Just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.

As I noted back on February 17, this doesn’t appear to be the first time the government is trying to hide bad economic data. As Lieberman concluded:

Changing the measuring rod, it seems, is easier than fixing what has to be measured.

Source:

“Economic News Too Negative? Just Cut Funding for Data”
Mark Lieberman
FOX Business Network, April 21, 2008

NBER’s Feldstein Says U.S. In Recession

Back on March 18, I wrote that Martin Feldstein, a Harvard economics professor, former Reagan advisor, and president of the National Bureau of Economic Research (which determines the dates of a recession), said the United States is in a recession that could be “substantially more severe” than recent ones. Earlier today, Dr. Feldstein told Alexis Glick of FOX Business in an interview that “My personal view is we are now in a recession.” According to FOX’s Ken Sweet, Feldstein believes the economy peaked in December, and “all the economic indicators now are pointing toward a downturn.”

Sweet wrote:

Feldstein said the housing market led the economy into a recession, which he believes “will not turn around any time soon.”

Feldstein also said he believes the Federal Reserve should not cut the interest rates any more because it would add to the risk of an out-of-control inflation rate.

“I don’t believe the Feds tools work like they did in the past,” he said. “The lower interest rate is bringing inflation higher. I don’t believe we need any more reductions.”

Source:

“NBER President: We are in a Recession”
Ken Sweet
FOXBusiness, April 16, 2008

The Failing Fed

Following through on a recommendation yesterday, I read the post “5 Reasons Why the Federal Reserve is a Failure!” from Bankaholic.com. It’s a great piece (especially the part about the Fed awarding gold stars to those deserving detentions), and I think you’ll enjoy reading it over the Easter weekend. Having obtained permission to re-post it, here is the article in its entirety:

No single quasi-private institution has as much influence on the worldwide economy as the Fed, and as a leader can head this institution for an indefinite term, no one man is as influential on the markets as the Fed Chair.

The Dollar has plummeted in the currency markets and shows few signs of recovery or even stabilization. The new style and policies that accompanied Bernanke into office have made the Forex markets more volatile than ever and even more difficult to predict. An examination of what has gone awry can help Forex traders understand this new era at the Fed.

1. The Fed ignored the signs
The Fed has stated that it will never act as a regulator in any financial market, but it has the duty to use its influence for reform when it sees signs of consumer exploitation. Since as early as 2001, at least two senior officials inside the Fed urged its board to call for tighter regulations in the housing markets, especially in abuses that were clearly evident in the handling subprime mortgages. At the time, the White House was singing the praises of America’s new society of ownership, so the Fed took this cue and did nothing.

These deceptive loans were making possible the dream of home ownership to millions of Americans, even to those who could not come close to affording it. Now these same Americans are living through a nightmare of foreclosure and debt, much in thanks to the Fed’s willingness to ignore long-term repercussions and revel in immediate accomplishments, no matter how hollow and transitory they might be.

2. The Fed did too little too late
Other than advocating for reform, the Fed should have fully committed to a strategy of lowering target interest rates. Instead, Bernanke procrastinated, and when he did finally announce a cut, it was insufficient and ineffectual, at best. On December 11th, the Fed dropped its benchmark rate by a quarter of a percent rather than the half of a percent that had been called for by analysts and investors. Wall Street promptly responded, as the Dow plummeted nearly 300 points in one day.

The Fed might argue that this cut was prudent and that a more drastic cut would have unnecessarily fueled a rise in inflation. However, many view the Fed’s temerity in this matter as merely an extension of its inertial proclivity towards inaction.

3. The Fed kept interest rates too low for too long
Though this may seem to contradict the statements above, one of the reasons that the Fed might have hesitated in cutting rates is that they were already too low to begin with. Greenspan’s long tenure at the Fed was defined by a tendency to aggressively cut interest rates, which he began to do frequently in 1987 after the drastic correction in the stock market.

This initial move helped stave off disaster, but the further rate cuts of the late 1990s eventually led to the dot-com bubble. Rates should have been raised again in the early 2000s; if this had been done, the US might have avoided the furious borrowing that has led to the current credit crunch.

4. The Fed’s view of inflation is flawed
The Fed seems rather befuddled by this important economic indicator. The soaring costs of food and energy are a phenomenon is the US and worldwide, but the Fed does not take these developments into account.

The Fed’s analysis focuses on “core inflation,” which excludes a number of indices that it views as transitory, including energy and food costs. “Headline inflation,” which does take these costs into account, is favored by European economists, who view high energy prices as a long-term trend. By choosing to disregard the rising costs of a barrel of crude oil and a bottle of olive oil, the Fed is ignoring reality.

5. The Fed gives gold stars to those deserving detentions
Fed policy following the recent economic slowdown has done nothing but reward those who helped caused it. The majority of financial stocks have suffered of late, and justifiably so. However, the Fed seems dedicated to bailing out even the worst of the perpetrators with the recent set of economic interventions that it has enacted.

While working to eliminate any downturn in the market might seem feasible for short-term success, it is a purely shortsighted endeavor that will hurt the economy in the long run. In order for a free market to truly exist, bear markets must coexist peacefully with bull markets. Unfortunately, the Fed has its bright orange vest on and is going bear hunting. This is a doomed outing, and one that is going to get us all hurt in the end.

Source:

“5 Reasons Why the Federal Reserve is a Failure!”
Bankaholic.com, March 15, 2008

When Martin Feldstein Talks, Smart People Listen

No— Martin Feldstein was never affiliated with E.F. Hutton. Rather, Dr. Feldstein is the George F. Baker Professor of Economics at Harvard University and the outgoing President and CEO of the National Bureau of Economic Research, which is the group that determines whether or not the U.S. economy is in a recession. Ros Krasny from MarketWatch caught up with the former economic advisor to President Reagan in Florida last week. Krasny wrote on Friday:

The United States is in a recession that could be “substantially more severe” than recent ones, National Bureau of Economic Research President Martin Feldstein said on Friday.

“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

“There’s no doubt that this year and next year are going to be very difficult years.”

Like an ominous storm cloud off the Florida coast, Krasny added:

Feldstein said the downturn could be the worst in the United States since World War Two.

Not good, folks. Dr. Feldstein explained his gloomy forecast for the U.S. economy. He believes the federal funds rate is headed down to 2%, adding that lower rates alone will not revive economic activity. The reason: a lack of liquidity in the credit markets. The economist said that in the global credit markets “there is a lack of confidence leading to a lack of liquidity… without credit creation, we can’t have economic growth.” He added that the combination of monetary and fiscal stimulus, along with a falling dollar, “will help to dampen the magnitude of the downturn but won’t be enough to sustain an expansion.”

All of these dire warnings, and still the NBER hasn’t declared an official recession yet (not like I’m in a hurry to hear it). MarketWatch’s Rex Nutting wrote yesterday that:

Although the official word won’t come for months, the economic data now available show that the recession probably began in December.

Four of the five indicators watched most carefully for signs of a break in economic growth are now trending lower.

It’s only a matter of time before the semi-official recession judges at the National Bureau of Economic Research meet to confirm it. They’ll wait a few months in case the trends that now seem so clear are revised higher.

According to MarketWatch’s Washington bureau chief, the four indicators that are trending lower include:

• Employment- Most important. Payrolls peaked in December and have now fallen for two consecutive months, with private-sector payrolls falling for three months in a row. The annualized growth rate over the past three months is negative 0.1%, down from 1% growth a year ago.
• Incomes- Second-most important signal. The annualized growth rate over the past three months is negative 0.8%, down from 4.7% growth a year ago.
• Industrial Output- Flat since July. The annualized growth rate over the past three months is negative 0.7%, down from 3.6% growth a year ago.
• Business Sales- Peaked in October. The annualized growth rate over the past three months is negative 3.7%, down from 4.1% growth a year ago.

The final indicator used by the NBER in determining a recession is the Monthly GDP Estimate produced by Macroeconomic Advisers. Nutting pointed out that it’s the only one of the five major indicators that’s still in positive territory, where the annualized growth rate over the past three months is 4%, up from 1.8% growth a year ago.

Sources:

“U.S. faces severe recession: NBER’s Feldstein”
Ros Krasny
MarketWatch, March 14, 2008

“Recession began in December, signposts say”
Rex Nutting
MarketWatch, March 17, 2008

Tactical Withdrawal

Last Sunday, I wrote in “Where Have You Gone, Joe McCarthy?” that:

“Our nation turns its lonely eyes to you.” Not really… but I wonder what the Senator would say if he found out the U.S. government may be taking a page out of the Soviet playbook when it comes to suppressing information from the American public. No, this isn’t conspiracy mumbo jumbo. On March 1, 2008, the federal government will be shutting down the Economic and Statistics Administration’s website EconomicIndicators.gov, due to “budgetary constraints.”

Critics of the move argued that the Bush administration was trying to hide economic data from the American people. Now, the website reads:

The U.S. Department of Commerce’s Economics and Statistics Administration (ESA) has decided to continue the economicindicators.gov website. Featuring the economic releases from ESA’s Census Bureau and Bureau of Economic Analysis (BEA), the site was started by this Administration in 2002 to give greater awareness to these economic statistics. ESA initially planned to discontinue the service due to cost concerns but given the feedback ESA received, the decision has been made to continue the site and improve its functionality.

Sorry for that comparison with the Soviet Union. Friends?

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Americans See Real Earnings Fall

This past Wednesday, Associated Press business writer Ellen Simon wrote “Workers see inflation-adjusted earnings fall 1.2% for year” in USA Today. Simon reported that inflation-adjusted earnings for the average American worker have fallen 1.2% over the last year, according to the Bureau of Labor Statistics. Higher food and fuel costs have contributed to this erosion in purchasing power, she said. According to the BLS, real earnings (earnings adjusted for inflation) fell in 8 of the last 13 months and were down 0.5% in January compared to the previous month. Dean Baker, co-director of Washington-based research group the Center for Economic and Policy Research, said:

A lot of people have lost a huge amount in their homes, jobs aren’t being created at a rapid rate and wages are falling behind inflation. Workers, in this environment, can’t keep up their consumption. It’s bad for them as far as their living standards, but this is also a serious source of drag on the economy.

Baker told the AP reporter that a consumer pullback in spending could offset Washington’s economic stimulus plan, “But we’d be in even worse shape without it,” he added.

According to Ms. Simon:

Average weekly earnings were $592.74 in January, or roughly $30,800 a year. While that’s about $1,000 a year more than workers averaged in January 2007, inflation has increased at a rate of 4.3% for the same period, outpacing the 3.2% earnings gain.

At the same time, I am not a fan of the “official” consumer price index (CPI) measure because it was heavily manipulated over time (especially during the Clinton administration), with methodological changes that understate inflation. I prefer using the “traditional” measure of inflation (pre-Clinton), which can be calculated by adding 7% to the “official” CPI number (per John Williams’ Shadow Government Statistics), and leaves us with “real” inflation of around 11.3%. This high rate of inflation could explain why I am encountering comments like the following on a much more frequent basis in my everyday research:

I’m confused, everybody keeps telling me the economy is great and I’m not suffering by paying 50% more for my food, clothing and everything else while my pay stays the same. Who should I believe, all those experts or my empty bank account?

-Reader comment, USA Today, February 22, 2008

Where Have You Gone, Joe McCarthy?

“Our nation turns its lonely eyes to you.” Not really… but I wonder what the Senator would say if he found out the U.S. government may be taking a page out of the Soviet playbook when it comes to suppressing information from the American public. No, this isn’t conspiracy mumbo jumbo. On March 1, 2008, the federal government will be shutting down the Economic and Statistics Administration’s website EconomicIndicators.gov, due to “budgetary constraints.” Forbes awarded the site a “Best Of The Web” designation and said:

If you don’t want to pay the fees for The Dismal Scientist, this is your next best bet for up-to-date U.S. economic data. This site is maintained by the Economics and Statistics Administration and combines data collected by the Bureau of Economic Analysis, like GDP and net imports and exports, and the Census Bureau, like retail sales and durable goods shipments. The site simply links to the relevant department’s Web site. This might not seem like a big deal, but doing it yourself–say, trying to find retail sales data on the Census Bureau’s site– is such an exercise in futility that it will convince you why this portal is necessary. Site may soon offer data delivery to wireless devices.

Then again, maybe it won’t. So, why would Uncle Sam want to close down this website? Last Wednesday, the blog Think Progress had this to say:

The U.S. economy is faltering. Family debt is on the rise, benefits are disappearing, the deficit is skyrocketing, and the mortgage crisis has worsened. Conservatives have attempted to deflect attention from the crisis, by blaming the media’s negative coverage and insisting the United States is not headed toward a recession, despite what economists are predicting… The Bush administration’s latest move is to simply hide the data…

In its e-mail announcement on the closing of Economic Indicators, the Department of Commerce acknowledged the “inconvenience” and offered “a free quarterly subscription to STATUSA ®/Internet™” instead. Once this temporary subscription runs out, however, the public will be forced to pay a fee. So not only will economic data be more hidden, it will also cost money.

It’s ironic that the Economic and Statistics Administration is facing “budgetary contraints,” considering Bush recently submitted a record $3.1 trillion budget to Congress for FY ‘09.

Lee Russ at Watching The Watchers added the following on the same day:

Budgetary restraints. Before you laugh yourself to death, think about the fact that the site only presents data already being collected by the BEA and Census. And that data will continue to be collected. Without the web site, however, it will be much harder for entities like newspapers to ferret out troubling data, i.e., data that makes it harder for the public to swallow the “all is good” pabulum doled out by the freight car-full.

Steve Benen at The Carpetbagger Report also picked up on this story, and took it a few steps further. He wrote last Wednesday:

How expensive could it be for the Economics and Statistics Administration to keep a website online? Probably not much, but the political costs of making embarrassing data easily accessible to the public is probably quite high.

As long-time readers may recall, I started keeping track of instances in which the Bush administration would hide inconvenient data quite a while ago. Some of my favorite examples include:

* In March, the administration announced it would no longer produce the Census Bureau’s Survey of Income and Program Participation, which identifies which programs best assist low-income families, while also tracking health insurance coverage and child support.
* In 2005, after a government report showed an increase in terrorism around the world, the administration announced it would stop publishing its annual report on international terrorism.
* After the Bureau of Labor Statistics uncovered discouraging data about factory closings in the U.S., the administration announced it would stop publishing information about factory closings.
* When an annual report called “Budget Information for States” showed the federal government shortchanging states in the midst of fiscal crises, Bush’s Office of Management and Budget announced it was discontinuing the report, which some said was the only source for comprehensive data on state funding from the federal government.
* When Bush’s Department of Education found that charter schools were underperforming, the administration said it would sharply cut back on the information it collects about charter schools.

Benen concluded that:

When public information conflicts with the White House’s agenda, the Bush gang has a choice — deal with the problem or hide the information. Guess which course they prefer?

For me, perhaps the most significant example of the U.S. government not wanting to share economic data was the discontinuation of the M3 monetary aggregate by the Board of Governors of the Federal Reserve System in March 2006. Back on March 31, 2006, Jim Jubak at MSN Money wrote, “Fed kills a key inflation gauge,” and said that that the death of M3, the most-inclusive measure of U.S. money supply growth, deserved “headline treatment.” Why? According to Jubak:

Because inflation (unless you’re a strict monetarist) has two causes:

Cause 1: Prices go up when demand exceeds supply. This is the kind of inflation the Federal Reserve under Alan Greenspan and Ben Bernanke has targeted and is working to control with interest-rate increases that are intended to reduce demand in the economy to non-inflationary levels.

Cause 2: Growth in the money supply produces inflation as the price of money itself fluctuates with changes in the supply and demand for money.

Therefore, increase the supply of dollars, then each dollar is worth less, and more are required to buy the same amount of goods as before.

Jubak added:

This monetarist view of the link between growth in the money supply and growth in inflation was once part of mainstream thinking at the U.S. Federal Reserve. The great monetarist economist Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” That view was echoed in policy at the U.S. Fed when then-chairman Paul Volcker starved the inflation of the late 1970s by tightening the money supply.

But the Fed — under Greenspan, and so far under Bernanke — has behaved as if money supply growth didn’t matter and as if price inflation were all that mattered. Even as they have raised interest rates in an effort to slow the economy and reduce demand, they’ve continued to let money supply grow at close to double-digit rates.

That was March 2006. Where is M3 at today? Thankfully, economist John Williams has reconstructed M3, and his data reveals a 15%-plus level of annual growth in his ongoing estimate of M3, which he displays in a chart on his Shadow Government Statistics website. Whoaaa! Take one look at that chart, and you’ll see why the government wanted M3 discontinued.

Like I said before, I’m not one for conspiracies. Neither is Jubak. He said:

I’m not generally a believer in Federal Reserve conspiracy theories. But in this instance, the conspiracy theorists make an intriguing point. The Federal Reserve decided to kill off M3, they argue, because it is the measure that shows the fastest growth in the money supply… Certainly, getting rid of M3 makes it harder to argue that the short-term inflation fighters at the Federal Reserve are actually very soft on long-term inflation. Maybe so soft that you could say they love long-term inflation…

So, why would the Fed want to hide money supply data? Jubak explained:

Although the Federal Reserve may be correct when it argues that there isn’t a tight connection between inflation and growth in the money supply over the short-run, the data does argue, convincingly in my opinion, for a connection in the long run. In the long run, countries with faster-growing money supplies experience higher inflation.

And even worse, if the money supply grows fast enough, it provides the liquidity required for the runaway growth of asset bubbles, like the stock market in 2000. And, some would argue, like the U.S. real-estate or credit markets now.

Come March 1, don’t expect any headlines about the demise of EconomicIndicators.gov. Don’t look for any press conferences either— unless the “reporters” are federal employees. Do, however, be prepared to play hide-and-go-seek if you want to get a clearer picture of the U.S. economy.