9/14/02 Posting #2 Hands Off The Economy
In Greenspan's speech last Thursday he was taking a page from the late Austrian economist Ludwig von Mises, who developed his theories in the 1910s and 1920s. Mises said that, once the depression (he didn't use the term recession) arrives, the government must cease inflating, cease bailing out unsound businesses, cease encouraging consumption spending, and must reduce the government budget.
Coolidge's intervention helped to fuel the depression of 1929, which Mises correctly predicted. In 2002 we need not a new deal but rather a new government hand- Hands Off the economy, cut government spending, and reduce the budget deficit.
Saturday, September 14, 2002
9/14/02 The Bottomline Is Dwindling
Economists and analysts extol the recent retail sales numbers which grew .08% in August. Without autos the rise is 50% less. So the auto industry in August sold at a 17 million car rate. Ford is making $8 a car or possibly a ticket to see a movie. There isn't any inflation. Prices are coming down and so are profits- if there are any.
It's not just Lucent, Honeywell, and Hitachi having trouble. So far, of the S&P 500 companies pre-announcing earnings for the third quarter, 52% of them said they would not meet earnings projections, and many of those projections were modest in the first place. In other words, profits are trending down faster than anticipated.
You can go to the bank that Japan and China will continue to export into the US and lower prices as necessary to move merchandise. To the greatest extent business today is a matter of price. The consumer wants 0% financing and 70% off sales. With our current job malaise you can't blame the consumer for wanting a bargain. It's been a long time in coming, and that trend will be here for a very long time.
Fasten your seatbelts. Deflation is around the corner. The recession is here. The question is whether the big D is looming. We need to be making provisions for more soup kitchens. That's not a joke!
Economists and analysts extol the recent retail sales numbers which grew .08% in August. Without autos the rise is 50% less. So the auto industry in August sold at a 17 million car rate. Ford is making $8 a car or possibly a ticket to see a movie. There isn't any inflation. Prices are coming down and so are profits- if there are any.
It's not just Lucent, Honeywell, and Hitachi having trouble. So far, of the S&P 500 companies pre-announcing earnings for the third quarter, 52% of them said they would not meet earnings projections, and many of those projections were modest in the first place. In other words, profits are trending down faster than anticipated.
You can go to the bank that Japan and China will continue to export into the US and lower prices as necessary to move merchandise. To the greatest extent business today is a matter of price. The consumer wants 0% financing and 70% off sales. With our current job malaise you can't blame the consumer for wanting a bargain. It's been a long time in coming, and that trend will be here for a very long time.
Fasten your seatbelts. Deflation is around the corner. The recession is here. The question is whether the big D is looming. We need to be making provisions for more soup kitchens. That's not a joke!
Friday, September 13, 2002
9/13/02 Posting #2 The Clock Is Winding Down On Attracting Foreign Capital
Yesterday I touched on our record quarterly current account deficit of $130 billion. This deficit now has reached a 5% level of our GDP, a very dangerous position. Japan's account surplus is 36% of their GDP, Norway's is 14.7%, and Switzerland's is 9.9%. If I were a foreigner looking at alternative places for my money, Norway may be a good stopping off spot. They are large exporters of oil and their interest rates are attractive at 7%. There are alternatives for foreigners. We can no longer be nonchalant about attracting foreign capital in order to bridge our deficits.
Yesterday I touched on our record quarterly current account deficit of $130 billion. This deficit now has reached a 5% level of our GDP, a very dangerous position. Japan's account surplus is 36% of their GDP, Norway's is 14.7%, and Switzerland's is 9.9%. If I were a foreigner looking at alternative places for my money, Norway may be a good stopping off spot. They are large exporters of oil and their interest rates are attractive at 7%. There are alternatives for foreigners. We can no longer be nonchalant about attracting foreign capital in order to bridge our deficits.
9/13/02 Excerpts From Greenspan's Testimony To The House Budget Committee
I am providing these excerpts because the tone and subject matters of the speach were different from the past, and he touched on areas I have discussed in my past blogs, such as, gov't spending, the looming budget deficit, and the aging of our population. The following excerpts are Greenspan's personal views and not necessarily the views expressed by the entire Federal Reserve.
" A year ago, the Congressional Budget Office expected the unified budget to post large and mounting surpluses over the coming decade. As you know, CBO is currently forecasting that, if today's policies remain in place, the unified budget will post deficits through fiscal year 2005. For the fiscal year just ending, CBO now projects a budget balance that is more than $300 billion below the level it had projected a year ago.
To a degree, the return to budget deficits resulted from temporary factors, especially the falloff in revenues and the increase in outlays associated with the economic downturn. But some of the factors accounting for the weaker budget outlook will have longer-lasting effects. A large portion of this year's decline in individual income tax revenues is clearly related to the retrenchment in equity markets. The sharp decline in stock prices appears to have markedly reduced final settlements for the 2001 tax year, as well as receipts on 2002 income. This effect works directly through less tax revenue from capital gains realizations, and indirectly through less revenue collected from the exercise of stock options, from stock-price-related bonuses, and from withdrawals from IRAs and 401(k) plans that have been augmented by capital gains.
The budget enforcement rules are set to expire on September 30. Failing to preserve them would be a grave mistake. For without clear direction and constructive goals, the inbuilt political bias in favor of budget deficits likely will again become entrenched. We are all too aware that government spending programs and special tax benefits can be easy to initiate or expand but extraordinarily difficult to trim or shut down once constituencies develop that have a stake in maintaining the status quo. However, spending and tax-cutting restraint are not symmetrical. While there is no upside limit to spending, taxes cannot go below zero. In any case, the bottom line is that if we do not preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard effort could be squandered.
Besides the near-term budgetary shortfalls that we currently face, the aging of the population presents a daunting long-term fiscal challenge. Indeed, the extent of that challenge is not adequately reflected in conventional measures of the federal budget.
Scoring the budget on an accrual basis--the private sector norm and, I believe, a sensible direction for federal budget accounting--would better underscore the tradeoffs we face. Under accrual accounting, benefits would be counted as they are earned by workers rather than when they are paid out by the government. This method allows us to keep better track of the future obligations that the government has incurred. Under full accrual accounting, the social security program would have shown a substantial deficit last year, rather than the surplus measured under our current cash-accounting regimen.
Such accruals take account of still-growing contingent liabilities, which currently, under most reasonable sets of actuarial assumptions, amount to many trillions of dollars for social security benefits alone. The contingent liabilities implicit in the Medicare program are much more difficult to calculate--but they are also likely in the trillions of dollars. These liabilities are fast approaching their due date. With the baby boom generation beginning to retire in just six short years, cash benefits will soon begin to rise rapidly, exerting pressure on the unified budget.
Given the imminence of these demographic pressures, we need to begin deciding exactly how to reform our retirement programs to close the gap between unified budget outlays and revenues. In essence, we will have to decide how to allocate available resources. All possible policy solutions should be on the table.
More fundamentally, the way to prepare for the challenges ahead is to increase the real resources that will be available to meet those looming needs. The greater the resources available --that is, the greater the output of goods and services produced by our economy--the easier it will be to provide real benefits to retirees without unduly restraining the consumption of workers and without imposing large tax increases that would damp incentives and reduce economic growth.
Returning to a fiscal climate of continuous large deficits would risk returning to an era of high interest rates, low levels of investment, and slower growth of productivity. . But history suggests that an abandonment of fiscal discipline will eventually push up interest rates, crowd out capital spending, lower productivity growth, and force harder choices upon us in the future. "
.
I am providing these excerpts because the tone and subject matters of the speach were different from the past, and he touched on areas I have discussed in my past blogs, such as, gov't spending, the looming budget deficit, and the aging of our population. The following excerpts are Greenspan's personal views and not necessarily the views expressed by the entire Federal Reserve.
" A year ago, the Congressional Budget Office expected the unified budget to post large and mounting surpluses over the coming decade. As you know, CBO is currently forecasting that, if today's policies remain in place, the unified budget will post deficits through fiscal year 2005. For the fiscal year just ending, CBO now projects a budget balance that is more than $300 billion below the level it had projected a year ago.
To a degree, the return to budget deficits resulted from temporary factors, especially the falloff in revenues and the increase in outlays associated with the economic downturn. But some of the factors accounting for the weaker budget outlook will have longer-lasting effects. A large portion of this year's decline in individual income tax revenues is clearly related to the retrenchment in equity markets. The sharp decline in stock prices appears to have markedly reduced final settlements for the 2001 tax year, as well as receipts on 2002 income. This effect works directly through less tax revenue from capital gains realizations, and indirectly through less revenue collected from the exercise of stock options, from stock-price-related bonuses, and from withdrawals from IRAs and 401(k) plans that have been augmented by capital gains.
The budget enforcement rules are set to expire on September 30. Failing to preserve them would be a grave mistake. For without clear direction and constructive goals, the inbuilt political bias in favor of budget deficits likely will again become entrenched. We are all too aware that government spending programs and special tax benefits can be easy to initiate or expand but extraordinarily difficult to trim or shut down once constituencies develop that have a stake in maintaining the status quo. However, spending and tax-cutting restraint are not symmetrical. While there is no upside limit to spending, taxes cannot go below zero. In any case, the bottom line is that if we do not preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard effort could be squandered.
Besides the near-term budgetary shortfalls that we currently face, the aging of the population presents a daunting long-term fiscal challenge. Indeed, the extent of that challenge is not adequately reflected in conventional measures of the federal budget.
Scoring the budget on an accrual basis--the private sector norm and, I believe, a sensible direction for federal budget accounting--would better underscore the tradeoffs we face. Under accrual accounting, benefits would be counted as they are earned by workers rather than when they are paid out by the government. This method allows us to keep better track of the future obligations that the government has incurred. Under full accrual accounting, the social security program would have shown a substantial deficit last year, rather than the surplus measured under our current cash-accounting regimen.
Such accruals take account of still-growing contingent liabilities, which currently, under most reasonable sets of actuarial assumptions, amount to many trillions of dollars for social security benefits alone. The contingent liabilities implicit in the Medicare program are much more difficult to calculate--but they are also likely in the trillions of dollars. These liabilities are fast approaching their due date. With the baby boom generation beginning to retire in just six short years, cash benefits will soon begin to rise rapidly, exerting pressure on the unified budget.
Given the imminence of these demographic pressures, we need to begin deciding exactly how to reform our retirement programs to close the gap between unified budget outlays and revenues. In essence, we will have to decide how to allocate available resources. All possible policy solutions should be on the table.
More fundamentally, the way to prepare for the challenges ahead is to increase the real resources that will be available to meet those looming needs. The greater the resources available --that is, the greater the output of goods and services produced by our economy--the easier it will be to provide real benefits to retirees without unduly restraining the consumption of workers and without imposing large tax increases that would damp incentives and reduce economic growth.
Returning to a fiscal climate of continuous large deficits would risk returning to an era of high interest rates, low levels of investment, and slower growth of productivity. . But history suggests that an abandonment of fiscal discipline will eventually push up interest rates, crowd out capital spending, lower productivity growth, and force harder choices upon us in the future. "
.
Thursday, September 12, 2002
9/12/02 Posting #2 The Way It Really Is
US initial jobless claims for the week ended Sept 7 climbed by 19,000 to 426,000, and it was the highest level since April 20.
US account deficit widened to a record $130 billion in the second quarter. We're on a roll. I feel confident the number can get larger.
US initial jobless claims for the week ended Sept 7 climbed by 19,000 to 426,000, and it was the highest level since April 20.
US account deficit widened to a record $130 billion in the second quarter. We're on a roll. I feel confident the number can get larger.
9/12/02 16B
This is not a typo describing a bra size. It's an SEC regulation covering stock options, and, is in my opinion the root of much trouble. The regulation states that a stock option purchase occurs when the option is granted rather than exercised. This is significant because risk for holding the stock can be avoided. For example, an option could be granted(that does not mean it's vested then) on Jan 2, 2002 but not exercised until July 2, 2002 at 9:30am EST and then sold 10 seconds later on the same day. Hundreds of millions of gains were realized via this method during the 1998-2000 period. The rest of the stockholders, who did not have options granted to them, were at risk the moment they purchased stock, and this problem continues to exist. I believe this inequality is a more important matter than the expensing of stock options.
There was a 10.8% increase in credit card debt in July.
Fifty five percent of 50 economists just surveyed believe there is only a 25% chance of a double-dip recession. At the same time two thirds of those polled believe the unemployment rate hasn't peaked. For some reason the two statements don't appear to go hand in hand.
The beige book expressed "widespread concern about the effect that rising health care costs might have on labor costs." They didn't address my concern about 40 million Americans not having health care coverage, and this number rises daily.
This is not a typo describing a bra size. It's an SEC regulation covering stock options, and, is in my opinion the root of much trouble. The regulation states that a stock option purchase occurs when the option is granted rather than exercised. This is significant because risk for holding the stock can be avoided. For example, an option could be granted(that does not mean it's vested then) on Jan 2, 2002 but not exercised until July 2, 2002 at 9:30am EST and then sold 10 seconds later on the same day. Hundreds of millions of gains were realized via this method during the 1998-2000 period. The rest of the stockholders, who did not have options granted to them, were at risk the moment they purchased stock, and this problem continues to exist. I believe this inequality is a more important matter than the expensing of stock options.
There was a 10.8% increase in credit card debt in July.
Fifty five percent of 50 economists just surveyed believe there is only a 25% chance of a double-dip recession. At the same time two thirds of those polled believe the unemployment rate hasn't peaked. For some reason the two statements don't appear to go hand in hand.
The beige book expressed "widespread concern about the effect that rising health care costs might have on labor costs." They didn't address my concern about 40 million Americans not having health care coverage, and this number rises daily.
Wednesday, September 11, 2002
9/11/02 Proverbs 3:25 Do Not Fear Sudden Terror, Nor The Destruction Of The Wicked When It Comes.
Psalm 29: The Lord will give strength to His people. The Lord will bless His people with peace.
Josephus stated that free-will is granted to every man. If he desires to incline towards the good way, and be righteous, he has the power to do so; and if he desires to incline towards the unrighteous way, and be a wicked man, he has the power to do so. Additionally, we see in Exodus that God has given the reins of man's conduct altogether into his hands.
Bruce Lee, Enter the Dragon: " We need emotional content- not anger."
Psalm 29: The Lord will give strength to His people. The Lord will bless His people with peace.
Josephus stated that free-will is granted to every man. If he desires to incline towards the good way, and be righteous, he has the power to do so; and if he desires to incline towards the unrighteous way, and be a wicked man, he has the power to do so. Additionally, we see in Exodus that God has given the reins of man's conduct altogether into his hands.
Bruce Lee, Enter the Dragon: " We need emotional content- not anger."
Tuesday, September 10, 2002
9/10/02 Quotes For Tuesday
Bank for International Settlements: "The recent decline in share values might forshadow some downward pressure on house prices...that to a greater extent than before, share prices indicated a loss of confidence in the financial sector... every previous recession has been accompanied by at least a slowdown in housing price increases."
Tim Loughran and Jay Ritter, Why Has IPO Underpricing Changed Over Time? : "Average first day gain in IPOs was 7% during the 1980s, 15% during 1990-98, but 65% during 1999-2000."
Sir Edward George, chairman of G10 central bankers: "It is not a strongly negative situation. I do not think there was anybody talking in terms of double dip...the wages developments in the eurozone plus very slow productivity growth in this more modest growth environment could have an upward effect, not a huge upward effect, on inflation."
Rand Institute: "Asbestos lawsuits affect 85% of the US economy... the longest-runing mass tort litigation in US history."
Bank for International Settlements: "The recent decline in share values might forshadow some downward pressure on house prices...that to a greater extent than before, share prices indicated a loss of confidence in the financial sector... every previous recession has been accompanied by at least a slowdown in housing price increases."
Tim Loughran and Jay Ritter, Why Has IPO Underpricing Changed Over Time? : "Average first day gain in IPOs was 7% during the 1980s, 15% during 1990-98, but 65% during 1999-2000."
Sir Edward George, chairman of G10 central bankers: "It is not a strongly negative situation. I do not think there was anybody talking in terms of double dip...the wages developments in the eurozone plus very slow productivity growth in this more modest growth environment could have an upward effect, not a huge upward effect, on inflation."
Rand Institute: "Asbestos lawsuits affect 85% of the US economy... the longest-runing mass tort litigation in US history."
Monday, September 09, 2002
9/9/02 The Colors On Our Flag Do Not Run. They Fly.
As we begin the week of September 11, I give thanks for living in this great country of ours. On September 11 thousands of innocent Americans died along side hundreds and hundreds of freedom fighters, our every day heroes. Wars have been fought for centuries in this country. We will win this war just as we have defeated Hittler and other demons before him. As Americans stand together, we get stronger and our collected will rings with increasing resolve. Our flag flies with honor, grace, and strength.
As we begin the week of September 11, I give thanks for living in this great country of ours. On September 11 thousands of innocent Americans died along side hundreds and hundreds of freedom fighters, our every day heroes. Wars have been fought for centuries in this country. We will win this war just as we have defeated Hittler and other demons before him. As Americans stand together, we get stronger and our collected will rings with increasing resolve. Our flag flies with honor, grace, and strength.
Sunday, September 08, 2002
9/8/02 Sunday's Thoughts
Stock brokerage firms employ roughly the same number of people as live in San Francisco- 727,000. The comparison ends there.
"Nothing has come to anybody's attention that we have done anything wrong," proclaimed Citigroup's Sandy Weill. Just to be charitable Citigroup is paying a $200 million fine to settle alleged FTC charges of predatory lending practices. Imagine the fine were it an accounting scandal. Someone could have been indicted.
Crude oil is back to a one year high of $30 a barrel.
We have a $10 trillion U.S. economy. The 2 year bear market has wiped out $7 trillion in wealth. This might be an indication of how inflated the values really were. Ben Graham would argue they still are overvalued.
When Williams Companies took down a one year loan from Buffett's Berkshire Hathaway, the interest rate was set at 19.8%. Williams must have put the loan on its Visa or Mastercard.
Stock brokerage firms employ roughly the same number of people as live in San Francisco- 727,000. The comparison ends there.
"Nothing has come to anybody's attention that we have done anything wrong," proclaimed Citigroup's Sandy Weill. Just to be charitable Citigroup is paying a $200 million fine to settle alleged FTC charges of predatory lending practices. Imagine the fine were it an accounting scandal. Someone could have been indicted.
Crude oil is back to a one year high of $30 a barrel.
We have a $10 trillion U.S. economy. The 2 year bear market has wiped out $7 trillion in wealth. This might be an indication of how inflated the values really were. Ben Graham would argue they still are overvalued.
When Williams Companies took down a one year loan from Buffett's Berkshire Hathaway, the interest rate was set at 19.8%. Williams must have put the loan on its Visa or Mastercard.
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