Posted by Michael A. Kamperman on February 22, 2010
The Core CPI index was reported as minus .1%. This is the first time since 1982 the core rate has been negative. It won’t be the last. We are in store for many more negative Core CPI readings over the next couple of years. Housing costs in the form of rent and owner’s equivalent rent make up over 40% of the Core CPI rate. While the government should be using an estimate of actual home prices to calculate the cost of home ownership, it remains wedded to the concept of using owner’s equivalent rent which was introduced in 1983. While housing prices were falling dramatically for over 2 years, the CPI calculated the cost of home ownership as rising because rents were rising. Now the lag effect of the deep contraction in the housing market has spilled over to rents and rents are declining. Vacancy rates for apartments are now over 8%, and these units are having to compete with recent foreclosures and short sales purchased by investors and turned into rental units. Hence, the pressure on rents will remain relentless over the next couple of years unless there is a dramatic uptick in employment. Too many young men and women are graduating from college without the prospect of a full-time job that can cover their living expenses and they are being forced to move back home with Mom and Dad. Additionally, many pe0ple who are financially strapped are moving in with friends or relatives. The glut in housing will take a lot longer to work off than most experts expect.
The Core CPI is actually reflecting where we have been. But troubling to my mind is the more the government reports the country is experiencing deflation, then the more it will become a reinforcing self fulfilling prophecy. First of all many wage negotiations are tied to the CPI rate, as is Social Security. This will lower incomes. Additionally, as people see and perceive that prices are actually falling they will do the rational economic thing which is to delay purchases. Fewer purchases will lead to fewer jobs and fewer people capable of buying or renting a house. It is ironic that the Fed wanted to signal to the markets a return to normalcy by raising the discount rate last week only to have a negative print in the Core CPI rate bring in to question any attempt to tighten. It is only a matter of time before the Fed reverses and resumes its program of quantitative easing, just as it has been only a matter of time before the housing price declines would turn the Core CPI rate negative. Our country has too much debt, and now it has falling incomes to service that debt.
We are not alone. In fact we are legion. Most of Europe shares our fate. We now share Japan’s deflationary fate of the last 20 years. Japan sent a clear signal that when economic calamity hits the worst thing to do is to be too timid and then compound the error by propping up too-big-to-fail-too-broke-to-lend Zombie Banks. The history book on the shelf is always repeating itself….Waterloo. The Greek led euro crisis indicates deflation is inevitable in Europe as well. It also has sparked a significant rally in the dollar which is killing any hopes of an export led recovery. Message to Lawrence Summers, the whole world cannot adopt the Chinese model of selling four times as much as it buys from everyone else. There is an upside to the negative Core CPI rate. It will highlight the dramatic decline in the velocity of money and focus attention on the need for the Fed to print more money.
Posted by Michael A. Kamperman on February 18, 2010
It’s chic to be against increases in the federal deficit these days. People on the right are clamoring for spending cuts without tax increases. People on the left are clamoring for raising taxes on the rich to support more social spending. These positions come from natural responses to either the impulse that Washington is taking too much of my money and I don’t want to send them anymore, or the impulse that people in our community are suffering and the federal government needs to step up and help them. I find myself drawn to both positions. I certainly don’t want my taxes raised one more damn dime, and I don’t care what reason they’re wasting way too much of my hard earned money right now. Also, I think it is unconscionable that the federal government is not doing more to help those that are down and out through no fault of their own. For example, the average adult on foods stamps qualifies for $144 per month, which means they have to eat on less than $5 per day. It costs more than $5 to get a Big Mac value pack for lunch at McDonalds. So many who are either sympathetic to both positions, or who want to play chic anti-deficit politics, are talking about the importance of pay as you go rules. Put simply, pay as you go means Congress is not supposed to pass additional spending for a new program unless they either cut spending for some other program, or raise revenue by closing some tax loop-hole. All three of these positions represent a false paradigm. If we were still on the gold standard and couldn’t print money, or if we had a growing mild inflationary economy like the one that existed up until recently in the post World War II era, then yes these simple rules would represent good guidelines. But we are in the midst of a deflationary depression and the federal government can print money. The phrase “you can’t spend your way to prosperity” may apply to micro-economics, but it doesn’t apply to macro-economics. Economic growth by definition is spending. Someone somewhere spends money and those transactions make the world go round. Spending is good. Spending gives people jobs, businesses profits, and governments tax revenues. Being against spending not only places one as opposed to big governemnt, it also places one in oppposition to consumers having jobs and to small businesses having profits. The consumer is tapped out and it is imperative the federal government become the spender of last resort. Otherwise, get used to seeing anemic weekly jobless claims numbers that continue to leave the so called experts scratching their heads.
Don’t just take my word that the consumer is tapped out and home budgets are under pressure. “Customers remain cautious, especially in discretionary spending,” Vice-Chairman of Walmart Mr. Castro-Wright said, adding that sales of discretionary merchandise were softer compared to the period a year ago. “Personal finances remain the top concern facing consumers in our latest monthly research report. Concern about unemployment remains much higher compared to last year, followed by concerns about the cost of living and the economy.” Unfortunately it is about to get a lot worse. Congress cannot get its act together on a job creation bill and unemployment benefits for millions will expire over the next few months. What will spending patterns at Walmart look like then?
A recession has been defined as when your neighbor loses their job and a depression has been defined as when you lose your job. But what do you call it when the one losing their job is your brother, or your mother, or your significant other? The reason Pay as You Go rules represent a false paradigm is because they are based on the concept that the federal government is like you and me. We make so much, we can borrow so much, and therefore we can only spend so much. But the only entity in the world with the capacity to spend more money without impunity is the federal government. Yet the entity entrusted with this magical power acts as though it doesn’t know it is a Genie in the Bottle and can grant us three wishes. The federal government can end the depression by lowering our taxes, by spending more money, and by eliminating the need for Pay as You Go by monetizing the debt. Sadly, that is not the trajectory we are on. Today, President Obama announced a bipartisan commission tasked with the responsibility of finding ways to cut spending, raise taxes, and cut entitlements like Social Security and Medicare. Has anyone in Washington asked themselves why we want people working longer in life when we don’t have enough available jobs now? President Obama’s get tough on the deficit rhetoric will only lead to more than one in eight Americans on food stamps, more than one in seven mortgages delinquent, more than one is six working adults unable to find a full time job, and more than one in five men aged 25 to 55 out of the workforce. Where there is no vision, the people perish.
Posted by Michael A. Kamperman on February 12, 2010
The time has passed to think in terms of temporary and targeted stimulus bills to create jobs. While gimmicks like cash for clunkers or the first time home buyers tax credit create a temporary boost in demand, they are simply too small to employ the 8.4 million Americans who have lost their jobs since the recession started. This doesn’t even count the additional 3 million Americans who have graduated from High School and College and entered the labor force. The country is down over 10 million jobs. To create jobs we need to start thinking big, not small. Employers in for-profit, not for-profit, and in government need a sense of permanency to be able make plans to expand. Aid that is here today and gone tomorrow will not encourage serious job creation efforts that involve spending money on buildings and new equipment. No one knows when the temporary stimulus will end. No one knows what the rules will be a year or two from now. Planning requires confidence, and confidence requires a sense of permanency. The New York Times pointed out that 15% of the nations workforce work for state and local governments, which includes schools. Another 15% are employed in the healthcare sector. In one fell swoop the federal government could stabilize one third of the workforce by taking over all Medicaid funding from the states and raising the bar on the quality of medical care provided to participants in most states.
According to the New York Times “Without more aid, states will have to cut spending and raise taxes to close an estimated $142 billion budget gap for fiscal year 2011, which starts on July 1 for most states. Last year’s gap was $125 billion. Next year’s is anticipated to be $118 billion.” The state budget gaps will not magically end in 2011. In fact, the more the states cut the worse the economy becomes. States are set to spend over $150 billion for Medicaid in 2010. By having the federal government assume all Medicaid spending the states would be able to divert those funds to close budget gaps, cut taxes, and fund local economic stimulus programs. The federal government could lower the eligibility requirements for Medicaid providing medical care and insurance to more low income Americans. While they are at it, Congress could pass a bill allowing anyone with a pre-existing condition who is denied insurance an option to buy in to Medicare. And, they could pass a law with criminal penalties for any health insurance company that attempts to skip out on paying from someone they collected health insurance premiums on. Every state would benefit.
The federal government can run budget deficits and most states are required to balance their budgets. The federal government can print money and the states cannot. The states are simply not able to provide economic stability in a depression as severe as the one we are in. State governments are being dragged down with the rest of us. The federal government can fulfill this function. The absurdity of the situation is Washington is not thinking big, it is thinking small, smaller, and smallest. The House wanted a $154 billion jobs bill, the Senate negotiated an $85 billion bipartisan jobs bill, but for some reason (re-election) majority leader Reid decided a $15 billion jobs bill that is targeted and paid for with tax and spending savings elsewhere is the right way to go. This is no way to instill confidence in employers to run out and hire more workers. We cannot cut our way to prosperity. We cannot cut our way to a balanced federal budget. Medicaid is an existing program and the state workers in the program can be transferred to the federal government. All that would happen is the Medicaid partner with the deep pockets that can handle the liability would handle it.
Posted by Michael A. Kamperman on February 8, 2010
The Dow Jones closed below 10,000 as investors are becoming increasingly nervous about the ability of governments to step forward and solve the economic crisis. Global economies cannot revive unless significant amounts of additional government spending continue to take the place of private sector spending. However, governments cannot cut deficits and support the global economy with higher spending at the same time. The crisis surrounding the debts and deficits of Greece, Spain, and Portugal expose Europe as leaderless and rudderless. Now is not the time to ask Greece, Spain, and Portugal to accept fiscal austerity and more economic pain. Yet that is exactly what Europe’s leaders are doing. The U.S. remains equally leaderless and rudderless as the states are asked to swallow the same type of bitter fiscal austerity pill by the Whitehouse and the Congress. Global governments appear frozen and incapable of stepping up and meeting the challenges that face us. Confidence is always fragile. No one in a leadership position is capable of putting Humpty Dumpty back together again. Money is heading back under the mattress. Let’s be clear, nothing has been fixed. The credit markets remain broken. Sleight of hand statistics like those used in the unemployment report are not working any more. People are waking up and realizing that the unemployment rate went down to 9.7% because we have thrown more workers out of the want to work bad enough category, not because we actually created jobs. The Labor Department reported we have the same number of Jobs in January as we did in November, yet the unemployment rate dropped from 10% to 9.7% despite population growth. Weekly unemployment claims started rising again before the loss of confidence even swept the markets. Now there is a very good chance the momentum to fire more workers will gather steam.
Our country has over 6 million people that have been out of work for over 6 months. Where is the plan to put all of them, that’s right all of them, back to work? Cutting taxes isn’t going to do it. A feeble $100 billion jobs bill isn’t going to do it. Faith in the markets isn’t going to do it. We need to see a real plan. So far no leader in Washington has put forward a comprehensive plan to put America back to work.
In 1931 there was false optimism the economy stabilized and the worst was over, then the next big leg down in the economy hit and eventually drove the unemployment rate to 25% in 1933. It appears the next leg down in our economy has begun. The global economy cannot be sustained without significant increases in global government spending. Spending cannot continue without large deficits. The solution is to print money to reduce government debts and increase government spending at the same time. No leader is currently advocating this. Both the Bank of England and the Federal Reserve have naively backed away from quantitative easing. What our leaders fail to see is first they came for the Gypsies, then they came for the Jews, then they came for us. First the deficit hawks are coming for Southern Europe, then…
Posted by Michael A. Kamperman on February 4, 2010
Today the Bank of England announced they are ending their quantitative easing program for the time being. They will no longer print money and buy their own government bonds. The Federal Reserve has already announced they will stop printing money and purchasing mortgages. The Japanese Central Bank remains lost in translation. The ECB remains clueless. This week the Australian Central Bank back-pedaled and backed off raising interest rates, which shocked the markets since all 20 analysts predicted they would continue raising interest rates. The Australians came to their senses and stopped the madness. It is only a matter of time before the Federal Reserve, the Bank of England, the Japanese Central Bank, and yes even the European Central Bank begin to aggressively print money to stop the debt-induced deflationary depression in its tracks. How long it takes and how much more global unemployment pain will be endured before they come to their senses is anybody’s guess. There is no doubt this will happen, for there is no other way out. The unemployment crisis, which will be highlighted by the U.S. unemployment report tomorrow, is a global crisis. Unemployment rates in Spain are officially 19%, which are Great Depression levels. Yet the ECB and the bond vigilantes are demanding that Spain join Greece and initiate significant cutbacks in government spending including firing more government workers and cutting wages. Even Herbert Hoover increased federal government spending in the 1930’s, though not by much. Cutting government spending will lead to a decline in aggregate demand which will further depress the global economy leading to more firings of private sector workers. The time for euphemisms like “layoffs” is over. Workers are being told to hit the streets. The global economy is suffering from a lack of demand due to ridiculously tight credit conditions for consumers and small businesses. Tight credit conditions have once again spread to corporate borrowers and now they are being inflicted on sovereign nations. The world is still in the midst of global deleveraging because there is simply not enough money in the world to support all of the debts.
The nations in the euro will either share their debts or they will be forced to break the euro up and return to their own currencies. My advice to the Europeans is to have all 15 nations in the euro guarantee the debts of all other 15 nations, true monetary integration. While this was not part of their original treaty it either gets added now or they can kiss the euro goodbye. Then, the ECB should embark on an aggressive quantitative easing program to make sure the debts do not require cutbacks in government services and do not fall on the backs of the taxpayers. The only risk would be the euro might depreciate against other currencies. If this happened it would only make European exports much more competitive improving their balance of trade.
What is needed now is global leadership, sadly it is lacking. A money printing solution to the economic crisis exists and yet politicians are cowered by false prophets preaching the limits of money creation and the anachronistic worship of gold. Those concerned about high unemployment rates need to understand those rates will trend higher and higher unless and until the world central banks come to their senses and re-inflate the money supply. Helicopter Ben needs to rev up the engines or forever sacrifice his reputation as having avoided another Great Depression. In order to solve a crisis you have to understand it first.
Posted by Michael A. Kamperman on February 1, 2010
President Obama’s 2010 budget is not only a jobs killer, it is heartless. The military has a motto that no man should be left behind. If a comrade in arms falls, then you do everything possible to save them. Apparently this motto does not extend to the unemployed. If they fall they are on their own, just as if they were in the streets of Pamplona running with the bulls. The President’s new budget cuts unemployment benefits by $75 billion, which is almost a 50% reduction. Yet the Whitehouse estimates the unemployment rate will only fall to 9.8% by the end of 2010. The only explanation is the President is willing to let unemployment benefits run out for those who are unable to find work. This despite the fact that there is still only one job opening in America for every six applicants. Furthermore, the budget cuts over $10 billion from federal construction projects ranging from the military to schools. Construction spending in the U.S. was reported to fall by 1.2% for the second month in a row. Construction projects equals jobs. Cutting construction projects is equivalent to cutting construction jobs. Furthermore, unbelievably the budget cuts Medicaid expenditures by more than 10%, or $33 billion. Surely the President is not in favor of cutting health care to the poor. The only explanation is the President is willing to let the states pick up more of the tab for Medicaid. Never mind of course that the states are broke and they cannot print money like the federal government.
The federal budget deficit faces a paradox. There is no way to cut the deficit unless spending is cut. Alternatively, there is no way to significantly raise tax revenues unless unemployment rates are significantly lowered and people are put back to work. So there are two paths to lowering the deficit; by cutting spending or by putting people back to work. Growing the econ0my will benefit both the employed and the unemployed. Cutting federal spending will not benefit the unemployed and it will not benefit anyone else. It will ultimately raise the taxes of those still working while austerity measures are put into place.
Unemployment is the number one issue in America, not deficit reduction. People want and need jobs. The President will not succeed by rhetorically expressing a concern for the unemployed while deploying policies that do not create jobs. Yes, the President’s budget includes $100 billion worth of job creation measures. But consider that we have lost several million jobs since the $787 billion stimulus bill was enacted. If we lost several million jobs spending several hundred billion dollars, then is it plausible we will create millions of jobs if we simply spend $100 billion more? What we need is a one trillion dollar jobs bill that includes construction spending and aid to the states. Instead, we get not only a cut back in unemployment benefits but a cutback in federal construction spending and a cutback in Medicaid spending, which means a cutback to the states. Both FDR and Reagan focused on economic growth. They arguably had the most successful Presidencies of the 20th Century. Herbert Hoover focused on the limitations of the federal government during an economic crisis and he arguably had the least successful Presidency of the 20th century. It’s not that Hoover didn’t try. He didn’t try hard enough. History will only judge President Obama by the outcomes of his Presidency, not his intentions. Like Hoover he will be remembered by whether or not he created jobs, not by whether or not he cut the deficit.
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