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How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

U.S. Energy Policy Is All Smoke And Mirrors

With the price of crude oil now well above $100, how has the U.S. government responded? Well, last week Congress voted to halt the shipment of 70,000 barrels that were being sent on a daily basis to our emergency reserve of crude oil known as the Strategic Petroleum Reserve, or SPR. Never mind that this number represents only 0.3% of the 20 million barrels consumed by Americans each and every day, and might only shave 4 to 5 cents off a gallon of gasoline according to the U.S. Energy Information Administration.

And this week? Have you ever heard anyone tell you to stick with what you’re good at? Well, of the 435 members of the U.S. House of Representatives, 158 come from the legal profession, or more than one-third of the legislative body. So, it’s not surprising that in a day where crude oil surpassed the $129 a barrel mark in trading, Congress decided to sue the Organization of Petroleum Exporting Countries. OPEC, which produces 40% of the world’s oil, is comprised of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Qatar, the United Arab Emirates, and Venezuela. And we wonder why the rest of the world loves us so? According to the Associated Press today, the U.S. House of Representatives voted to let the U.S. Department of Justice pursue energy antitrust and price fixing cases against members of the OPEC oil “cartel.” The bill, which was approved 324 to 84, would create a special Justice Department task force to investigate energy markets to root out manipulation and unwarranted speculation. Democratic House speaker Nancy Pelosi was quoted by the Agence France-Presse as saying:

The House today with a strong bipartisan and veto-proof margin voted to hold foreign oil cartels and Big Oil accountable… Instead of using a veto threat to shield cartels and Big Oil companies from accountability, the Bush Administration should work with the Congress to protect American consumers.

However, AP reporter H. Josef Hebert noted this afternoon:

Many energy experts and legal scholars doubt that such an enforcement action would be successful.

Earlier today Bob Tippee, editor of Oil & Gas Journal, told News Radio 590 KLBJ in Austin, Texas, that:

It will work against, rather than for the interest of oil consumers. It’s a wrong move. I think it’s more of the silly policy-making we see in Washington D.C. these days…

It shows a gross misunderstanding of the oil market and OPEC’s role in it. It sets up a false dragon display. The supposition is that OPEC is producing far less than it could be producing, and that is blatantly false.

Short of calling this legislative body a “House Of Fools,” it appears this is yet another display of “smoke and mirrors” by Capitol Hill politicians. As with the SPR situation, the U.S. House of Representatives is only making it appear like they are doing something to deal with the energy crisis of 2008. The sad thing is, a number of Americans will probably buy into the farce. Earlier today on CNBC, legendary oil investor T. Boone Pickens, Jr., had this to say about Washington and our energy “policy”:

You’re talking about reducing taxes on gasoline for the summer? Is that an energy plan? Hell no, it’s not an energy plan. It’s no plan at all. And, you know, it’s just amazing to me what politicians focus on. They ought to step back and look at the $600 billion a year that it’s costing this country to buy oil…

Well, I still say politicians, I mean, what they think about, is getting re-elected, or getting elected, one or the other. They’re not thinking about how to solve the problems for energy in America.

Sources:

“House action targets OPEC”
H. Josef Hebert
Associated Press, May 20, 2008

“US House passes anti-OPEC bill”
Agence France-Presse, May 20, 2008

“Texas Oil Analyst Says OPEC Vote Flawed”
KLBJ News Radio, May 20, 2008

“Pickens: Oil Going to $150, So Move to Gas”
CNBC, May 20, 2008

Twin Deficits, Twice The Pain

It was all bad news today with the release of the latest data on the “twin deficits”— the U.S. budget and trade deficits. The Associated Press reported Thursday that the federal deficit through the first half of the budget year is at an all-time high. The U.S. Treasury Department said Thursday that the budget deficit through the first six months totaled $311.4 billion, which is up 20.5% when compared to the $258.4 billion deficit through the first six months of 2007. The previous record of $302 billion was set in 2006.

Back in February, the Bush administration was projecting that the deficit for the whole year would total $410 billion. The Associated Press wrote today:

However, private economists are forecasting a much bigger deficit, reflecting the country’s current economic problems and a $168 billion stimulus package that Congress has passed in an effort to jump-start growth.

While the trade deficit data released by the U.S. Department of Commerce today didn’t set any records, it wasn’t much rosier. MarketWatch senior reporter Greg Robb wrote:

The U.S. trade deficit widened unexpectedly in February, painting an even gloomier picture for the economy.

The 5.7% increase wasn’t even caused by the two factors usually cited as culprits — imports of oil from the Middle East and imports of inexpensive goods from China. Rather, the widening of the deficit came about as a result of record imports of food, industrial supplies, capital goods and consumer goods.

The nation’s trade deficit expanded to $62.3 billion, broader than the revised figure of $59.0 billion for January, the Commerce Department said.

February’s gap is the largest and the biggest one-month worsening in the deficit since November.

Sources:

“Mid-year budget deficit at all-time high”
Associated Press, April 10, 2008

“U.S. trade gap widens unexpectedly”
Greg Robb
MarketWatch, April 10, 2008

Father of Reaganomics: Nothing Can Be Done To Save Economy

This morning I came across an interesting article by Paul Craig Roberts in the Coastal Post. Who is Dr. Roberts? He is an economist who served as an Assistant Secretary of the Treasury in the Reagan Administration, and is known as the “Father of Reaganomics.” Outside of the public sector, he was a former editor and columnist for the Wall Street Journal and Business Week.

What initially caught my eye was the title of the article- “The Impending Destruction Of The U.S. Economy.” No use beating around the bush. But he did manage to beat up the Bush administration and other policymakers in Washington for their mishandling of the U.S. economy. Dr. Roberts wrote:

Hubris and arrogance are too ensconced in Washington for policymakers to be aware of the economic policy trap in which they have placed the U.S. economy. If the subprime mortgage meltdown is half as bad as predicted, low U.S. interest rates will be required in order to contain the crisis. But if the dollar’s plight is half as bad as predicted, high U.S. interest rates will be required if foreigners are to continue to hold dollars and to finance U.S. budget and trade deficits.

Which will Washington sacrifice, the domestic financial system and overextended homeowners or its ability to finance deficits?

The answer seems obvious. Everything will be sacrificed in order to protect Washington’s ability to borrow abroad. Without this, Washington cannot conduct its wars of aggression, and Americans cannot continue to consume $800 billion dollars more each year than the economy produces.

Nice job, Washington!

However, this line of credit is threatened. According to Roberts:

No country wants to hold a depreciating asset, and no country wants to acquire more depreciating assets. In order to reassure itself, Wall Street claims that foreign countries are locked into accumulating dollars in order to protect the value of their existing dollar holdings. But this is utter nonsense. The U.S. dollar has lost 60 percent of its value during the current administration. Obviously, countries are not locked into accumulating dollars…

Japan and China - indeed, the entire world - realize that they cannot continue forever to give Americans real goods and services in exchange for depreciating paper dollars. China is endeavoring to turn its development inward and to rely on its potentially huge domestic market. Japan is pinning hopes on participating in Asia’s economic development.

The dollar’s decline has resulted from foreigners accumulating new dollars at a lower rate. They still accumulate dollars, but fewer…

Foreigners have continued to accumulate dollars in the expectation that sooner or later Washington would address its trade and budget deficits. However, now these deficits seem to have passed the point of no return.

Faced with the realization that the twin deficits will not be addressed, will foreigners finally stop accumulating dollars and/or significantly reduce dollar holdings, causing a dollar crash?

Dr. Roberts explained why the twin deficits could no longer be fixed:

The sharp decline in the dollar has not closed the trade deficit by increasing exports and decreasing imports. Offshoring prevents the possibility of exports reducing the trade deficit, and Americans are now dependent on imports (including offshored production) for which there are no longer any domestically produced alternatives. The U.S. trade deficit will close when foreigners cease to finance it.

The budget deficit cannot be closed by taxation without driving up unemployment and poverty…

In the 21st century, the U.S. economy has been driven by consumers going deeper in debt. Consumption fueled by increases in indebtedness received its greatest boost from Fed chairman Alan Greenspan’s low interest rate policy. Greenspan covered up the adverse effects of offshoring on the U.S. economy by engineering a housing boom. The boom created employment in construction and financial firms and pushed up home prices, thus creating equity for consumers to spend to keep consumer demand growing.

This source of U.S. economic growth is exhausted and imploding. The full consequences of the housing bust remain to be realized. American consumers lack discretionary income and can pay higher taxes only by reducing their consumption. The service industries, which have provided the only source of new jobs in the 21st century, are already experiencing falling demand. A tax increase would cause widespread distress.

The old-school Republican had this to say about our precarious position:

Superpower America is a ship of fools in denial of their plight. While offshoring kills American economic prospects, “free-market economists” sing its praises. While war imposes enormous costs on a bankrupt country, neoconservatives call for more war and Republicans and Democrats appropriate war funds, abroad….

We have arrived at the point where it is no longer bold to say that nothing now can be done. Unless the rest of the world decides to underwrite our economic rescue, the chips will fall where they may.

Greenspan On Recession, Stagflation, And Rescuing Homeowners

This morning, former Federal Reserve Chairman Alan Greenspan appeared on the ABC program “This Week” and talked with host George Stephanopoulos about the risks of recession and stagflation, and what could be done, if anything, to prevent more homeowners from losing their residences.

On the probability of an economic recession in the United States:

Well, that the probabilities of a recession have moved up to close to 50 percent — whether it’s above or below is really extraordinarily difficult to tell. I think that’s correct.

On the prospects for stagflation in the U.S.:

Well, I’m most concerned about it… and the evidence is clearly there in rising export prices coming out of China. It’s coming out — it’s showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not stagflation, but the early symptoms of it.

The former head of the Federal Reserve also discussed the current housing crisis in the United States, the problems associated with subprime and other classes of mortgages, and foreclosures:

Greenspan: There are going to be significant losses [on Subprime and Alt-A mortgages]. And there are loss ranges, now — the minimum, now, is $200 billion. But it’s easy, by some calculations, to get to $400 billion.

Stephanopoulos: The political world is now looking at the immediate pain. And Senator Clinton looks — has called for a freeze on foreclosures. Senator Edwards called for a rescue fund to be set up by the government for people who are facing these kind of foreclosures. What do you think about those ideas?

Greenspan: It’s important to help those people without affecting the mortgage rates and without affecting the structure of markets. Cash [from the government] is available and we should use that in larger amounts.

… It’s far less damaging to the economy to create a short term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.

Stephanopoulos: But by infusing cash, it sounds like you agree, then, with former Treasury secretary Larry Summers, who says that, right now, given this crisis, there has to be a bias toward activism.

Greenspan: It depends what you mean by activism. If you mean doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.

The Financial Times (UK) noted afterwards that Alan Greenspan’s remarks about supporting the use of public cash to help struggling U.S. homeowners would likely “fuel growing political pressure for a more radical response to the housing crisis.”

Sunday Edition: October 14, 2007

It’s great to be back from my “fall break.” While out, I managed to keep on top of the latest financial news, so I have lots of material for upcoming posts in Boom2Bust.com. Now, let’s get down to business…

Import Prices Starting To Hit Home
Back on October 11, the Bureau of Labor Statistics of the U.S. Department of Labor reported that the U.S. Import Price Index increased 1% in September following a 0.3% drop in August. A 5.4% rise in petroleum prices for the month helped contribute to the September increase.

Another negative influence on import prices has been the weakening U.S. dollar relative to other currencies. Consider the following data from the Wall Street Journal’s MarketBeat Blog on the same day the BLS report was issued:

• Canada- change versus dollar +16.5%, change in import prices +5.3%
• Euro Zone- change versus dollar +13%, change in import prices +1.4%
• UK- change versus dollar +7.1%, change in import prices +3.3%
• China- change versus dollar +5.4%, change in import prices +1.6%
• Japan- change versus dollar +.1%, change in import prices -.5%

Luckily, import prices haven’t mirrored the gains of the producer country’s currency against the dollar. Perhaps foreign companies are willing to settle for lower profits to maintain a presence in the massive U.S. marketplace. As an American consumer, I hope the present situation can last. As a realist, I’m inclined to think that it’s wishful thinking.

Wall Street As An Economic Barometer
The Wall Street Journal’s Economics Blog caught up with Merrill Lynch economist David Rosenberg back on October 2 as he examined the effects of Federal Reserve interest rate cuts on the U.S. stock market. Rosenberg found that the stock market always rises in the first month after an initial interest-rate cut, and the average increase is almost 4%. It’s interesting to note that since the federal funds rate cut back on September 18, the Dow Jones Industrial Average and the S&P 500 are up 2.6% and 2.8%, respectively.

Rosenberg also looked at whether or not recessions happen while the stock market is booming. In looking at the 1990-91 recession, he saw that the S&P 500 peaked on July 16, 1990, after rising 3.4% over the previous month. The recession also happened to start that July. Looking back further, Rosenberg studied the recession of the early 1980s and found that the stock market peaked on February 13, 1980, even though a recession had started the month before. He said, “From our lens, the stock market is doing what it always does in the month after the first cut in the Fed funds rate — and that is to rally on the sugar rush of the liquidity infusion.” Yet, Rosenberg also noted that the performance of equities further on down the road depends more on how the real economy responds. On the present situation, he says, “What we do know is that the economic backdrop has become worse, not better,” and put the probability of a recession in the next 12 months at 70% in a recent Journal survey.

Speaking About Recession…
According to Reuters on October 11, about half of all U.S. states are collecting less from their sales taxes than expected, which could signal a recession lies ahead. Philippa Dunne is a co-editor with the New York-based Liscio Report, which was founded by veteran bond-market reporter John Liscio in 1992 on the belief that real time information on monthly state tax receipts is crucial to understanding the state of the United States economy. Ms. Dunne said that, “There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels.” She added that about 25 states are seeing disappointing sales tax revenues. How sales taxes perform is one way to judge a region’s economy since the data is released promptly and reveals consumer spending trends that are otherwise hard to discern, according to Goldman Sachs in a July 2007 report.

Parting Shot
Last Thursday, U.S. Treasury Secretary Henry Paulson said ahead of an October 19 meeting of finance ministers and central bankers of the Group of Seven major industrial nations that, “A strong dollar is in our nation’s interest and the currency values should be set in a competitive marketplace based upon underlying economic fundamentals.”

It just so happened that the U.S. dollar hit a lifetime low against the euro last week and has recently plummeted to record lows against a basket of major currencies.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com