Friday, May 29, 2009

Paul Krugman doubts Inflation

Paul Krugman, who constantly congratulates himself on predicted the housing collapse, is putting his reputation on the line in his belief that the U.S. is living out the Keynesian model.

He writes:

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.


Oil has gone from $32/barrel to $66/barrel (WTI morning of 5/29). The dollar keeps dropping. The 5yr TIPS-Treasury spread (a market indicator of inflation) has risen from -0.7% to +1.4% over the last few months and its growth shows no signs of abating.

Then, in his standard style he throws up a straw man:

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Find me one libertarian economist who had no problem with Bush's profligate spending. Right now, it's the libertarians making the most noise about inflation, not the middling "conservatives" like Greg Mankiw who is all for massive money printing.

Someone is going to be gloating over the next few months, we'll just have to wait and see.

Tuesday, May 26, 2009

Moderates are Opening Their Eyes

David Brooks, who can only weakly be considered a conservative in my opinion, pinned a nice column at the New York Times today on Obama's recent forays into fascism-lite.

An excerpt (note his sarcastic tone):

These events have heralded a new era of partnership between the White House and private companies, one that calls to mind the wonderful partnership Germany formed with France and the Low Countries at the start of World War II. The press conferences and events marking this new spirit of cooperation have been the emotional highlights of the administration so far.

Wow. He likens Obama's relationship to corporations to Nazi Germany's relationship to Vichy France. Didn't expect to see the day where I thought David Brooks would use stronger terms than I.

At this, the C.E.O.’s behind him don frozen smiles, exuding the sort of spontaneous enthusiasm often seen at North Korean pep rallies.

Double Wow. Now it's a comparison to Kim Jung Il's North Korea.

David, you need to leave some hyperbole on the plate for the blogosphere. That's our niche, you're treading on our turf.

Tuesday, May 19, 2009

Great Column

This column by David Limbaugh iterates the things I loathe most about President Obama. His overuse of straw man arguments and other blatant distortions that stretch my ability to consider him something short of pathological.

An excerpt:

I'm sorry, but I believe Obama calculatingly employs this approach mainly as a smoke screen to hide his real agenda, which resides anywhere but on common ground. He specializes in paying superficial respect to his opponents' arguments while proceeding to bury them. The examples are endless.

He calls forced union membership "free choice." He masquerades as a fiscal disciplinarian while authoring nationally bankrupting budgets in perpetuity.

He endorses capitalism as a superior economic system while undermining it with other words and actions. He condemns it as "unfair" and decries achievers as "selfish" and "greedy." He's set on restructuring our economy away from the free market and toward government control, from taking over private businesses to setting executive salaries to subsidizing mortgages to nationalizing health care. But he knows better than to condemn capitalism outright, because if he did, the American people finally would wise up to his endgame.

Saturday, May 16, 2009

On the Origins of Political Bias

I am not an anthropologist, but I’ve been mulling over some thoughts that came to me after watching a show on gorilla behavior. It has changed my thinking about society rather dramatically.

I have thought for a number of years that proper education and enlightenment would lead to the inevitable adoption of free market principles. If we are truly rational beings, how could society, over time, not accept what is true and beneficial. In chemistry, physics, and biology, we seem to be progressing all the time. However, I have now come to reject this concept as it applies to politics and propose that we are in never-ending oscillations between shades of freedom and tyranny.

Underlying many of our motivations, as is the case for gorillas, is the desire for status. It is not just a desire to be rich, but to be richer than our friends and neighbors. Wealth and status can be gained through virtuous means like hard work, through immoral ways such as theft and murder, but also through manipulation. The homeless man on the street is not stealing from passersby, he is merely manipulating people to give him money.

This manipulation is a constant force around us. A pretty girl will get a boy to do favors for her. A slick salesman will sell an item for far more than the going market rate. A politician will tell tear jerking stories to get votes. For those who seek power, but live in a civil society, manipulation is the most powerful tool at their disposal because violence is rarely tolerated.

At given points in time, societies around the world endeavor to pursue a new course. Much like England and it’s Magna Carta, and the U.S. with it’s Constitution, weak societies decide to try something different that improves on previous frameworks that don’t seem to be working anymore. If these new frameworks are truly better, the society will flourish and thrive. Clearly, America’s framework has worked spectacularly by growing a small group of colonies into a singular world power.

What works for societies are limits on individual power. There is no mistaking the strong correlation between free markets and high growth/high incomes around the world. Individual freedom to calculate one’s own actions leads to the best outcomes. However, this framework of individual freedom does not allow for the kind of power that certain individuals wish to wield. Manipulation is the pathway back to that power.

When one individual is able to successfully manipulate others to give them power, still others who desire power or status will adopt these techniques and employ it themselves. The manipulators, over time, must destroy the logic and tenets of the framework of individual freedom. Slowly, but surely, these manipulations begin to weave together a narrative that does reject freedom and offers some “more perfect” alternative. Successful manipulators use these narratives to get elected to office in a democracy.

Young and old, smart and dull, all start to fall sway to the romance and the Utopian possibilities promised in the narrative. A whole army of intellectuals will dutifully build a "science" around it, unknowing that they are greater victims of manipulation than the dullards they pity. The masses begin to reject old traditions and the fundamentals of individual liberty. The manipulators compete endlessly to perfect the power of the narrative and raise their status.

Finally, the day arrives when the old ways appear to fail (usually because it has been corrupted by a weaker narrative) and the new way is given a chance. It’s not that the narrative is invincible, but all that needs to happen is the appearance that it “works.” Under Mussolini, the crippling strikes by communist labor organizations ended and things “worked” much better. Under Hitler, the hyperinflation and sky-high unemployment of the Weimar Republic ended and things “worked” again. Under Hugo Chavez, oil prices soared and more than mitigated the horrible economic policies he has instituted.

The narrative that gave credence to government power does fail eventually because an oversized government is the downfall of a civilization. Communism failed. Monarchies failed. Jimmy Carter’s Statism failed. All led the pendulum to swing back to something different, and often times the manipulators got their just desserts.

Hopefully, our current leaders get stuck holding the bag when the music stops.

Thursday, May 14, 2009

Obama Defines Audacity

Audacity - Propose and pass a "stimulus" spending bill over $700 Billion. Propose a budget that will push the deficit to over $1.8 Trillion next year, with years of deficits over the $1 Trillion mark. Then after you have single-handedly muscled through this incomprehensibly huge spending bonanza you have the gall to say this:

From Bloomberg:

President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Are you kidding me? How can you stand up there and claim that "WE" can't keep borrowing when it is "YOU" who are using every possible avenue to spend TRILLIONS of dollars and drive us into these wretched levels of debt.

This is like a man beating his wife to a pulp and then lecturing her that "WE" need to stop fighting like this.

Friday, May 8, 2009

Deflation is Dead

In recent months I have seen two sets of forecasts cross my desk from the chief corporate economist from two of the largest financial companies in the world. Both predicted deflation or near zero inflation. Both predicted falling long term interest rates. Both were noticeably Keynesian in their viewpoints of the economy. Both are quickly getting egg on their faces.

Unfortunately, their materials were copyrighted so I don't know if I can give you many specifics.

First, let's look at long-term interest rates.

Prediction by the first: Long term rates sliding down to 2.75% by year's end.
Prediction by the second: 30-yr rates falling to 3.5% during 2Q09

Let's go to the chart:

Hmmm...30-yr rates seems to have climbed to 4.3% as of 5/8 closing. These rates are almost up to the pre-crash rates of early 2008. 30-yr Treasuries tend to be an implication of the market's beliefs of long-term inflation.

Now, let's examine the whole deflation thing. How about the price of oil? Sorry for the ugly chart, but it gets the point across. Data here, along with Friday's close from Bloomberg.

Or perhaps the fact that the dollar is now at a 4-month low? If we're stuck in a liquidity trap like the Keynesians believe, then why is the world beginning to not hoard dollars?

Since, I am mocking their predictions, I will make some predictions of my own. And, since my ego is still drunk on my previous success, I'm going to make some bold ones.

1. 30-yr Treasury yields break 5.00% by year's end. 10-yr Treasuries break 4.00%.

2. WTI Oil Price will break $80/barrel before year's end.

3. Bloomberg's Dollar Index, will drop below 70 before year's end. (Currently 82.53)

So remember, buy some eggs on December 31st. My face is ready!

Saturday, May 2, 2009

Vulgar Threats from the White House

In this interview, (HT EPJ)at radio station WSJ in Detroit, Frank Beckmann interviews Tom Lauria, an attorney who represents a group of lenders that object to the term of the White House deal with Chrysler. The White House is bullying these bond holders to give up their contractual rights and take far less money than traditional law would give them in bankruptcy court. The bond holders also object to the UAW being handed ownership of Chrysler.

I am transcribing the words of this attorney, so forgive me any errors starting at around the 1:30 mark.

"...cause let me tell you, it's no fun standing on this side of the fence, opposing the President of the United States. Uh, in fact, let me just say, you know, people have asked me who I represent..and that's a moving target. I can tell you for sure that I represent one less investor today than I represented yesterday. Uh, one of my clients was directly threatened by the White House, uh and, in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight..."

I guess what der leader wants, der leader gets. Hail Victory!

UPDATE: A nice article from the Financial Times explains how dangerous this behavior by the White House is to financial markets. Likening it to Machiavelli.

"More importantly, the Chrysler saga sets a dangerous precedent for US capital markets. For once, the law is unambiguous: senior secured creditors should be paid before junior unsecured creditors and employees (the words “senior” and “junior” are a bit of a give-away on this point). By turning legal wisdom on its head – and vilifying investors that opposed the move – the administration is signalling the principle is no longer sacred.

While that, in itself, will not cause a massive capital flight away from the US, it will have some serious repercussions."

Friday, May 1, 2009

Housing Boom and Bust in France

The amicable Vincent Benard has posted his presentation from the American Dream Coalition conference in Seattle, Washington. This post is in English! (No cutting a pasting into translators required!!).

Housing booms and busts are nothing new to Europe. If you want to understand the seeds, read his post. He boils it down to two necessary ingredients: Credit expansion by a central bank and too much land use regulation. On these points I completely agree.