Posted by Michael A. Kamperman on September 28, 2010
In yet another return to the 1930′s, a Beggar-Thy-Neighbor style global trade war has broken out. Right now the war is mainly focused on currencies, with the exception of a few trade spats between China and the U.S. Switzerland’s central bank has been intervening in currency markets all year to try and hold down the value of the Swiss Franc, which has come into great demand ala gold from Europeans trying to get out of the Euro. Japan has drawn a line in the sand and has printed money to buy other currencies to hold down the appreciation of the yen. Brazil is now saying it too will defend the Real from unwanted appreciation. The Fed’s plan to print enmasse after the election is driving down the dollar on world markets. Now, the Bank of England says it too is ready to return to quantitative easing. All of this is causing a surge in of all things the soon to break apart Euro, because they refuse to print….so far. The bottom line is every nation in the world is looking to export its way out of the global depression. This of course leaves unanswered the question of where is the nation willing to be the net importer? It used to be the U.S., but the Obama adminstration is wanting to become a net exporter by doubling current U.S. exports within 5 years….fat chance.
The crisis is being driven by a combination of unacceptably high levels of unemployment throughout the globe and bloated deficits throughout most of the globe. Quantitative easing can ease the deficit crisis and help with internal demand, but it cannot solve the thirst to look to others via exports to solve broken domestic economies. Unfortunately the Whitehouse is a leading proponent of wanting to solve the U.S.’s problems on the backs of others. With a chance to bring in outsiders as his new advisors the President is content to promote from within and remain insular. Don’t hold your breath for a change in policy near term. In fact, look for an escalation into an all-out trade war with China sooner rather than later.
The Whitehouse’s failure to promote aggressive policies to create jobs is making the depression worse. At the end of this week 240,000 people will lose their jobs as the part of the stimulus plan that paid employers to hire workers expires. The economy never recovered sufficiently for the companies to afford the extra workers. Where is the Whitehouse plan to extend the program or start a new one? It seems that the professorial-law-review-editor side of President Obama lacks conviction on what method is best to restore America’s economic prosperity. He has tried Keynesean stimulus spending and hasn’t seen the return he expected on his investment. Now he appears ready to try the Austrian School prescription of austerity and time. Clearly he doesn’t realize the time it will take to the end the depression could be decades if he sticks to the Tea-Party call to just stop the spending. Just ask Japan, they are about to embark on the third decade of their debt induced deflationary depression. Lacking a clear idea on how to solve one’s own problems makes it easy to look to others to solve them, but Mr. President there is no big buyer waiting to scoop up U.S. goods. The solution is to return to the consumer demand driven economy of the last 65 years. Yet the President believes this is irresponsible and that we should invest, produce, save, and export.
Posted by Michael A. Kamperman on September 21, 2010
In a not-too-shocking-poll 60% of Americans believe that cutting federal spending will create jobs by freeing up the private sector. They could not be more wrong. It is true raising taxes will hurt the economy. But increasing spending and raising taxes are not synonymous, a fact lost on many. And since interest rates are near zero federal spending is not raising borrowing costs. For discussion purposes I will ignore Social Security, because there is no chance the Congress will vote to cut current Social Security checks no matter who wins the election. We will also ignore interest on the debt, which will not be cut by Congress. I will place everything else on the table. If Medicare is cut it will cost good-paying private sector health-care jobs. If defense is cut it will cost good-paying private sector manufacturing jobs as well as government jobs (soldiers and support staff). If we close the Department of Education it will cost government jobs. The point is no matter what the federal government cuts it will cost jobs. Increasing unemployment and lowering aggregate demand in a depression will simply not create jobs. It is a myth the populous will become more confident if federal spending is cut spurring private sector job creation. More foreclosures and more unemployment will make almost no one more confident. The real question is why have so many Americans come to believe such a false-hood?
The blame rest squarely at the feet of the Whitehouse economic team. They botched the stimulus plan making it poorly targeted and entirely too small. Then, they botched communicating its benefits by over-selling job creation and then claiming that saving jobs is equivalent to creating jobs. Furthermore they failed to articulate the need for further signifcant stimulus. Everything they now propose is at the margins.
The reason is President Obama, law professor from the University of Chicago, is a closet disciple of the austrian school of economics. At yesterday’s town hall meeting on CNBC he revealed his true beliefs. He believes everything needs to run its natural course and that only time will heal the economy. He balances this view with the political reality that people are hurting and he needs to be seen as trying to do something. He is wrong. The power of the Presidency could change the outcome of the economic downturn if the office-holder believed that it could. There is no limit to how much the federal government can spend, or print, if need be. He doesn’t believe that. He believes the deficit is more important than unemployment. Actions and attitudes speak much louder than words. President Hoover-Obama has thrown in the towel on having the federal government do anything significant to revive economic growth. He believes we should be patient. Maria Antionette said ”let them eat cake” and President Obama says let them eat off food stamps. Meanwhile, he enjoys the creations of the Whitehouse Chefs.
Posted by Michael A. Kamperman on September 16, 2010
The people of Delaware have spoken and the country listened intently. A candidate once considered a gnat knocked off a 35 year state-wide office holder thought to be a shoo-in for nomination. Christine O’Donnell’s Delaware coup has ended any chance Republicans in the next Congress will agree to another round of significant stimulus, almost no matter how bad the economy gets. It doesn’t matter if a Republican thinks they can win the general election, they’re petrifried they won’t survive their own primary if they compromise on more federal spending. Gridlock in an economic depression is not a good thing, but that’s what we’ve got now. The Obama Administration has done such a poor job of managing the economy, and explaining how federal spending helps fill a lack of demand from the private sector, that the general populous has come to believe that federal spending is hurting the economy. In the Middle Ages people believed in Trial by Drowning. They would throw an accused Witch into a lake with rocks and ropes tied around her. If she sank she was innocent, but if she floated she was guilty. Naturally almost everyone sank and most were not pulled out in time to live once their innocence was ‘verified.’ Just because a majority of people believe something doesn’t make it true. And economically speaking austerity in a depression for a country that can print its own money and owes all its debts in its own currency is economic alchemy.
Fortunatley we still have monetary policy to bail us out. It is not perfect and it cannot do the complete job by itself. But a concerted effort by the Fed to boost employment is not only a possibility, it is a probability. Wall Street is coming around to this reality and several major firms now predict the Fed will move to a second round of signficant quantitative easing within months. The open ended question is will the Fed move aggressively enough to head off what now seems like an almost certain double-dip in the economy.
For those like the Obama Administration, thinking we can lower the value of the dollar and export our way out of our problems, think again. The Bank of Japan has gotten the message and is determined the yen will not fall below 82 to the dollar come hell or high-water. At least some people in Japan understand the global predicament. Not only did they intervene in the currency markets this week, they printed the money they used to do it. Welcome to the world of competitive printing. It’s O.K. because there really is no other way out of this debt-induced depression. Yet the Summers/Geithner led Whitehouse economic team still has the Presidident walking to the podum saying the secret is to double our exports in the next five years. They still haven’t answered the question export to whom? It seems the only person in the country who still has confidence in them is the President. Like it or not this is the hand we are dealt. In 2011 most of the stimulus will end. In 2011 no one is getting a tax cut despite the rhetoric. The battle is over leaving the current tax rates in place rather than sun-setting them. We won’t be getting tax cuts or stimulus spending from Washington to aid the economy in 2011. We will be getting the President’s long-term Austerity Commission suggesting how to make things worse, not better.
Posted by Michael A. Kamperman on September 8, 2010
Today the President gave a speech on the economy purported to build support for his new economic initiatives. In fact he focused on politics. I know there is an election in a few weeks. There are also a couple of million ’99ers’ that will run completely out of their unemployment benefits between now and then. There is still only 1 job opening for every 5 people unemployed. If the President were serious about helping the unemployed he would have the Congressional leadership from both parties in his office negotiating a deal. He has asked Israel and the Palestinians to negotiate, yet he seems incapable of showing grown-up leadership and cutting a deal with the Republicans. I know they’re far apart. They’re not as far apart as people are in the Middle East. His economic proposals are minimalist and seemed designed for political positioning, not for actually putting millions of people back to work. Let’s face it, $50 billion for infrastructure spread over 6 years is a drop in the bucket. And, making the “temporary” R&D tax credits permanent will add little to economic growth. The reason is Congress has annually passed this R&D tax cut on a temporary basis to avoid budget scoring it since 1981. No one thinks the tax credit is ending and making it permanent will not end uncertainty and restore confidence. It’s time for the President and the Republican leadership to sit down and cut a deal, which means some for you and some for me. It’s time for both sides to drop Supply-Side vs Keynesean idealogical purity and cut a deal to get millions of people back to work.
The President should offer to make all of the Bush tax cuts permanent in exchange for a one trillion dollar two year stimulus bill with $250 billion going to infrastructure each year and $250 billion going to aid to the states. Plus, he should demand unemployment benefits be extended for an additional 52 weeks beyond the current 99 and out-of-luck program. If Republicans don’t take teh deal he can blame them for letting the tax cuts expire. They can blame him for more spending. But both sides can claim they cut the best deal they could for their constituents. Importantly, they can claim they have stepped up to protect the American economy. The only way to solve the debt and the deficit is to grow our way out of it.
Sadly, this is not what I see coming. I see a real possibility that the President will not agree to extend the tax cuts for the wealthiest Americans even after the election. I also see the possibility the Republicans will refuse to agree to an agenda that includes more spending and more debt. If my fears come true we could witness the biggest economic policy error by Wahsington in our Nations history. Imagine what the economy will look like if taxes go up in 2011 and stimulus spending ends. The states will be forced to slash and burn their budgets and millions more will end up on the unemployment lines. This game of chicken has to end. Neither side is going to get everything they want. Grown-ups would accept this and move to do the best they can under the circumstances for the American people. Children pout if they don’t get their way. Grown-ups work things out. Are there any grown-ups left in Washington D.C.?
