Brad DeLong's Semi-Daily Journal (2004)

"In its most practical sense, macro is best at identifying risks. And in my view, the balance of risks in the US economy has shifted. It was just about a year-and-a-half ago when I first sounded the alarm on deflation (see my 14 August 2002 dispatch, “A Deflationary Mosaic”). Today, I am more worried about inflation. But it’s inflation with an important twist — not the CPI-based inflation of product markets but the asset inflation of financial markets."

Asset inflation is indeed a crucial problem. The remedy he proposes - raising interest rates to move money from capital markets to actual consumption or savings - might not be the best one.

Checking forward P/E's on the S&P 500 indicates that stocks are still heavily overvalued, and the recent VIX bottom would indicate that the level of implied volatility is still much higher than is sustainable - id est, there is a secondary bubble.

"Monetary policy is a very blunt instrument. The authorities can set the overnight bank lending rate, but they have little say on the channels of the policy transmission mechanism. In particular, there are no guarantees that policy stimulus goes directly into the real economy or into the financial markets."

It seems that, while your opinions on the output gap may differ, that both you and Roach believe fundamentally the same thing: that current stimulus efforts are not producing effective support for labor demand, but, instead, are headed to the capital markets.

His analysis of property markets is, if anything, conservative in stating the risks of a property bubble and its effects on the long term health of the mortgage credit market.

The employment-to-population ratio has nothing to do with aggregate demand unless you posit a particular class of income/demand distribution that is becoming more counterfactual every day.

The employment-to-population ratio does, however, have a *huge* amount to do with the output gap--which is the gap between aggregate demand and aggregate supply.

If we have an asset bubble (I believe we do and that the market is overvalued) then shouldn’t the Fed raise the margin rate? Why don’t they do this? Why didn’t they do this during the obvious bubble in the late 1990s?

People are getting jittery because the Fed has gone so long without moving the interest rates. At least until the November election, the Fed will keep interest rates low because employment is low, just as a matter of politics. Look at how long Japan has stayed the course with low interest rate and no sign of inflation.

First we need a true jobs program. It needs to be in place for about 1 year. Then employment will go up enough to start thinking about moving the interest rates up in the 1-2% range.

One reason why the gap between supply and demand is not closing is productivity increase. Until the gap between economic expansion and productivity increases, we won't see the gap between supply and demand close.

What would you consider a true jobs program bakho?

I'm inclined to agree with Zarkov that if the idea is to cool the market, raising margin requirements makes more sense - and avoids the possibility of spiking the housing boom/bubble.

True jobs program
#1 Give money to the states so they quit going backward with jobs and stop cutting projects and employees.
#2 Put money to projects that utilize excess demand
#3 Put money into worker retraining so when employment does come back, the trained workers will be available
#4 Invest for the future in smart energy, nanotech, get rid of stem cell restrictions
#5 Fix health care so adding employees is not as great a burden on industry.

Also rescind Bush tax cuts to wealthy to pay for the programs and close loopholes to collect more revenue. We should not have to deficit spend $400+ billion to get a decent jobs program.

Can we concentrate on the basic economic fact of the Bush Administration?

American wealth is growing *only* if you measure it in American dollars; by all other measures Americans are much poorer than they were four years ago.

That's why I've been telling people to be long the Euro and the DAX for some time. Print those Bush Bucks baby!

More seriously - Dr. Delong's point is that the "labor capacity utilization" means that there is still a great deal more aggregate supply than aggregate demand. Otherwise, they would be hired doing something. Until people are working again - regardless of what the headline unemployment number is - interest rates have to be low.

The failure of CPI to pick up in aggregate, however, is because there are two economies. The competitive one, which has seen wages and prices fall as it works to both implement technology and outsource jobs - and the protected one which has seen tremendous inflation. The ECI for bankers has gone up by 5 times the rate for the rest of the bls survey - and sticks out like a sore thumb in the rest of the ECI by occupation break down. Health care has seen hiring and inflation. As has government.

Roach is looking at asset inflation and sees japanification - the stock market becoming a "dollar sink", and thus pyramiding profits. Investor buy Microsoft, that puts that money into stocks to "earn" revenue - which turn around and invest in stocks. He's also looking at the housing bubble - which Greenspan has said needs to be dealt with as well. When Roach and Greenspan agree on something - it is worthy of note.

"If we have an asset bubble (I believe we do and that the market is overvalued) then shouldn’t the Fed raise the margin rate? Why don’t they do this? Why didn’t they do this during the obvious bubble in the late 1990s?"

Because the asset inflation was the cushion of liquidity against the Asian financial crisis. Greenspan couldn't have raised margine requirments without tanking, for example, the LTCM bailout.

The ugly truth about the late 1990's boom was that neither monetary policy - nor allocation of monetary and fiscal policy - could fix the problem. Which is a short way of saying that neither Greenspan, nor Clinton, could fix the problem without help from Congress.

Congress could have made the necessary changes to siphon off money from the asset boom and kept the economy on a more even keel.

And in 1996-1998, they were busy running an impeachment over a blow job and proving that they could abuse discretionary authority and get away with it. They were allowed to do so, because many Americans were under the delusion they would be rich by next week, and America is now paying the price for that.

bakho writes:
"One reason why the gap between supply and demand is not closing is productivity increase. Until the gap between economic expansion and productivity increases, we won't see the gap between supply and demand close."

There are others beside me who are unable to swallow this ( the productivity increase bit, and citing productivity as a cause):

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=30889

Richebacher writes:
"In consideration of these and other facts, we feel flatly unable to buy America's trumpeted productivity miracle. There is one obvious statistical source: artificially low inflation rates."
His view, comparing US and Euro (real and nominal GDP growth rates) is that the US GDP figures are too high and hence productivity numbers over-stated.
He also states the obvious that political pressures, (including AG), are behind the low rates.

Stirling I agree. One way to attack the "asset bubble" is to tax high incomes at a higher rate. This would bring the budget back toward balance and keep the lid on assets. If this were coupled with an increase in state spending, then we could address both the asset bubble and the employment problems simultaneously. Since the Fed Govt is unlikely to act, the states need to reassess their revenue collection. A progressive surtax on income over $100,000 should do the trick. The wealthy should be able to make back their tax losses from the overall improvement in the economy.

If you could make $2 million / year but pay 40% in taxes or you could make $1 million / year and only pay 20% in taxes, which would you choose. The GOP would always choose the 20% taxes. That is why their policies hurt the economy.
For the math challenged in the GOP $1 million - 20% taxes = $800K. $2 million -40%taxes = $1200K. The GOP would rather pay less in taxes even if they don't make as much money.

calmo- No No No. Productivity gains are real, especially in mfg. Computers are now capable of doing useful works. Computer can drive robots to do setup in minutes that used to take a skilled worker hours. A robot can drive a .0001% tolerance to exact specs if needed. A human would have difficulty reproducing that. Computers store records that used to take armies of clerks to file. Computers can log in messages that used to require a secretary to open a paper envelope, stamp, make copies, file, etc. There are still mfg operations that use humans as assembly robots. These are the operations that as advances in robots (better/cheaper) become are replacing workers with robots, dozens at a time. Robots don't need health benefits, don't call in sick, don't vary the process from unit to unit, etc. Productivity gains are real. It has taken time to restructure and utilize computers to their full capacity. This is happening because computers finally have enough oomph to do useful work, the replacement of precision code entry with "point and click" and the workforce consists of sufficient numbers of computer literati to reduce training costs. The revolution was started long ago by the deep pocket automakers, but now it is filtering down to the smaller shops.

Stephen Roach's approach to economic policy is always no-pain-no-gain. Of course the pain is never Stephen Roach's, always ours. The economy is growing too fast, interest rates are too low. Imagine, if we keep up the policy stimulus there might be more jobs created and there might be better wage and benefit increases. Imagine, low interest rates might be contributing a bit to rising home prices. Wooo, more jobs and better wages and even rising home prices. Wooo.

There have been several go rounds on the "good productivity versus bad productivity" debate. Let me point out that there are really several kinds of productivity improvment:

1. Labor productivity - reducing cost of labor inputs.

2. Commodity productivity - reducing cost of inputs.

3. Capital productivity - reducing cost of money.

4. Infrastructure productivity - cutting the "footprint" of the industrial system.

Right now, labor productivity is where the game is, since money is cheap, and commodities, while rising in price, still make only a fraction of the cost of making most things. In a service economy, cutting labor is where it is at. Business is fairly good at 1-3, since the pay these directly, but is constantly trying to externalize 4. They can't do much about it themselves - except move to a cheaper state - or nation. Which is why most business are anti-tax, they want someone else to pay for the road that leads to their store.

What's wrong with the productivity growth currently is that there is an excessive focus on (1) and an attempt to externalize (4). Outsourcing, while a small problem currently, is the poster child for both of these processes. Some of the nominal productivity growth of late has been merely being prodigal with capital to save on labor.

What we should be focusing on is changing the relative prices of the four kinds of productivity improvment.

This leaves aside what we are going to do with the resources freed up by productivity - which afterall, is the name of the game: do what you can do now, with less, and one has more surplus to apply to other goals.

Funny how conservative economists are suddenly in love with the idea of the Federal Reserve regulating asset prices. We must have regulated stock and bond and commodity and real estate prices from Boston to San Diego, especially in San Diego. Of course, there must have free floating currency prices in Asia. There are bubbles bubbles all over and we must squoosh all bubbles.

Stirling Newberry

Nicely developed points on productivity. I would only change the tone a bit by adding that the more rapid productivity growth, the faster an economy can grow over time. Faster growth over time can allow us all to faster improve our living standards. The need is for fiscal policy that insures high employment as productivity growth occurs. We would make a grave mistake to limit productivity growth. We need fiscal policy that adds to employment and wages.

bakho
Where are you? I am, sadly or gladly, in a back-water by comparison. The farmer stills sits in the tractor here ( Yes, that would be Patrick on his 26 acres). No robot. The computer I sit at has a paltry 700MHz CPU from nearly 5 years ago. It is only marginally slower than my son's 3.0GHz multi-threading unit.
This is real marginal productivity that is registered as a ~5 fold increase ( not say, 10% over those 5 yrs). It demands your immediate scrutiny.
Maybe you in the big city see these robots. But way out here, they're a rarity. You paint the picture of an office tower teeming with robots, a manufacturing plant where the workers have to elbow their way through the increasing number of robots. I can only imagine what the public transit is like.
Out here, I am embarassed to report that speech recognition has not made it's appearance yet. No, not even a glimmer. So I am still punching those neanderthal keyboards as I write this. Have pity.Where are those productivity gains when you ( I mean very slow-typing me) really need them? Please send me your old computer so that I can dispense with this typing.
The 0.0001% tolerance capability, software enhancements in the programability of these robots, etc are all well and good.
But let's ( I mean me, wrt GDP calculation) not get distracted, these productivity growth numbers are inflated. And have little to do with the increase in computers.
I find the Richebacher article persuasive.

Also, does anyone havce a clear idea of why Alan Greenspan appeared to endorse variable rate mortgages 10 days ago? What happens if interest rates trend up? Does the idea make sense if rates only trend up moderately? I am puzzled.

Perhaps a variable rate mortgage makes sense if a home owner can always afford a higher mortgage??? Still....

The idea of using margin requirements to stop a
stock market bubble is out of date and will not work any more.

Even in the 1950s, 1960s, and again in 197? -- do
not remember the exact date -- when it was attempted it did not work. Interestingly, if you put a dummy variable in a PE equation for margin requirements you get the wrong sign on the results.

But, as an old friend who was a stockbroker in the 1950s said, it took us about a week back then to figure out how to get around margin requirements. But since then the number of stock market futures, derivatives, etc., that allow you to play the market without actually buying a single share have grown exponentially.

I believe the evidence is overwhelming that margin requirements would have essentially no impact on the stock market. All it would do is demonstrate to the world the inability of the Fed to control the market, thus giving speculators
more confidence.

Evidence that inflation is bottoming is very strong, although it may be due as much to the weak dollar as the output gap. If you use the official CBO estimate of potential GDP the output gap is actually very low by historic standards.
It is less than 1% of actual real GDP. If you assume that trend productivity since 1995 has been 3%, rather than the official CBO estimate that assumes 2%, than the output gap is quite large and comparable to what it was in the early 1980s. But since import prices are often the marginal price that determines the price domestic producers are able to get, an inflation forcast based on only the output gap is looking at the economy as if it were a closed system so the forecast becomes very suspect.

However, saying that inflation has bottomed is a very different conclusion than saying inflation will be a significant problem in the short run.
Interestingly, one of the best leading indicators of inflation is nominal income growth and it bottomed over a year ago. It is why deflation is no longer a significant short run threat but it is not enough to reach a conclusion that inflation is a short run threat.

so I am left with the conclusion that inflation has bottomed but it is unlikely to accelerate significantly in 2004.

If the dollar continues to fall, won't American companies automatically gain price leverage? But mostly overseas? Where, if they take advantage of it, their actions will help shrink America's trade deficit?

bakho: "#2 Put money to projects that utilize excess demand"

You mean excess supply, right? Or do you mean _generate_ excess demand?

"One way to attack the "asset bubble" is to tax high incomes at a higher rate."

It would contribute, but I'm not sure it would alone do the trick, at least when talking about _personal_ income tax. I suspect (as a layman) that much of the easy money goes into tax-sheltered activities. All those trust funds, and corporate asset funds have ways to avoid (high-rate) taxation as long as money is not taken out by individuals. There are not only rich or high-income individuals, but even more corporations of that description.

If you want to deflate asset prices, you have to close the easy money spigot a bit.

But what does deflation of assets mean? Here in the SF Bay Area so many people have committed themselves to major loans, mostly adjustable-rate mortgages, lately, and whoever I talked to told me right away that they have figured mortgage interest deduction, inflation (i.e. rising incomes), and appreciation (rising house prices) into the calculation, and have taken out a low-interest ARM because they plan to buy a new place in 5-7 years anyway.

That is, their financing strategy critically depends on continued easy money several decades into the future. Turn off the spigot, and the whole overleveraged house of cards will come crashing down. And you are not talking about paper (stock) prices, but people's homes. Either many homeowners will be bankrupted, or the mortgage companies (S&L, anybody?), or Freddy and Fannie.

There is no question that propping up lackluster demand can only be done by siphoning asset money into the real economy. But how do you do that without pulling the rug from under the current system? Taxes or not, these people have to pay off their mortgages. Take away the easy money (i.e. no raises and no refis) or tax them, and they will scale back their consumption to the bare-bones minimum. (Hey, many of my coworkers bring their lunch to work for years.)

How do you deflate the asset bubble without effectively bankrupting many of the people who are committed to this? And those are not fat cats, but regular working people. Unless you are willing to screw a significant part of the population, I don't see a solution. Do you?

Maybe some combination of taxing "hot-air" financial activities more but leaving earned income alone? Any suggestions?

bakho wrote, "Since the Fed Govt is unlikely to act, the states need to reassess their revenue collection."

The problem with that, alas, is that there are always a few states who don't - then you get the familiar rush to the bottom effect. It's really a problem that the feds have to deal with.

As for productivity - outsourcing what tend to be your lower productivity processes out of the country does increase productivity in country. The argument is always that we get rid of those jobs and replace them with higher productivity jobs. But do we? The idea of using the number of workers as the divisor rather than the number of citizens or the working age population can give a misleading indicator of the effect on the economy as a whole. To take it to the ludicrous extreme - if everyone was laid off except the single most productive person in the economy the US'd have the most productive economy in the world.

I want to repeat Calmo's link:

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=30889

And quote what I think is the key paragraph:

"Considering the U.S. economy's parabolic credit excesses, the relationship between inflation rates should be the opposite. But pressured by politicians and in particular by Mr. Greenspan to produce the lowest possible inflation rates, America's government statisticians have worked hard to comply, in particular by counting quality improvements as price reductions. Understating inflation rates, in turn, overstates real GDP. A more accurate GDP deflator would lower real GDP growth to a rate that would certainly correlate better to the poor employment performance. :

bakho: "Robots don't need health benefits, don't call in sick"

Actually they do; it's called maintenance and repair. I'm not sure it's much cheaper than human "repair", but with an existing infrastructure it's a marginal cost thing. It's also a perception issue -- the price for maintenance and repair infrastructure is figured into the robot, whereas in the human case it is perceived as an extra cost factor. (And no robot "employer" in their right mind will skimp on it.)

anne: "Imagine, low interest rates might be contributing a bit to rising home prices. Wooo, more jobs and better wages and even rising home prices."

The problem is that too little of the stimulus ends up in the real economy. What does it help if all your raises go towards a higher mortgage? You pay your earned money to the mortgage company, it changes hands a few times, end then ends up in the eternal stock market transaction cycle. The effect on the real economy by people leveraging their equity is too little to show for the price (inflation).

calmo, bakho: phony computer improvements

I agree with calmo, but only partially. (Which does not imply that I disagree with bakho.)

Your son's unit is 5X faster on many relevant industrial tasks, but not in office-type activities, where the bottleneck is still the human input and brain processing of stuff appearing on the screen.

I suspect that the vast majority of this class of computers is used for office applications. To the extent that I can witness the efforts of the marketing people at work, the Powerpoint slides have become more fancy in appearance (this is where the 5X helps), but not in content. That a faster computer will help you to create better content is bullshit.

Even for my R&D work, of course the ability to compile my programs and do test runs 5X faster (that's stuff that scales pretty well with processor speed) greatly helps. But it does not speed up my thinking and problem-solving processes. (Don't tell my boss though.) It does, however, make larger and more complex programs feasible that previously would be out of the question. The same is true in industrial applications (bakho's 0.0001%): for a specific task (like actuator control) the robot's control unit has let's say 10 milliseconds time. What complexity algorithms can be executed during those critically depends on the processor speed. And speed is only one complexity measure. Memory consumption is another. With more working memory you can execute more sophisticated algorithms, and with larger disks you can store more data or new categories (images, sound clips) of those.

Bottom line, faster computers do not vastly speed up most existing applications (other than in specific compute-bound areas), but enable new categories of applications.

But bakho, price-indexing computer sales by processor speed and disk size is bullshit. This will lead (and arguably has led) to GDP and productivity inflation in times of massive computer inventory turnover. Same goes for questionable "improvements" in other product categories.

anne: ARMs

ARM rates for a 7/1 are supposedly around 4.5% now. I have heard it suggested to make the smallest possible down payment, and invest the rest in the stock market, arbitraging the higher returns. I was not quite sure whether he was serious or joking.

When the easy money dries up, this guy would go bust faster than you can say "LTCM".

I also pointed out earlier that almost everybody is telling me they don't worry what happens after the 5/7-year rate lock ends, as by that time they will sell their place, or refinance in the meantime. The end of easy money would break their neck as well.

Lawrence Krubner: "If the dollar continues to fall, won't American companies automatically gain price leverage? But mostly overseas? Where, if they take advantage of it, their actions will help shrink America's trade deficit?"

That's right, but only if their overseas sales constitute a de-facto export of US labor and (natural) assets priced in nominal dollars. That means their _real_ product price has to drop. If they just raise their price 10% to adjust for 10% devaluation, all is the same viewed from overseas.

The reduced _real_ US income will in the aggregate mean that for US people and companies, foreign products become more expensive (if the underlying exchange rate is not pegged, like with China, that is), and they can afford fewer of them. But this is what reduction of the trade deficit means.

In Roach's parlance, it also means that the "growth engine" US slows down. For many countries, the US is a very considerable part of their export market. (This is how the trade deficit came about.)

Steven Roach is an arrogant ignorant bonehead.

The Bush recovery hasn't created a single job, in fact, even today, in the fourth quarter of the game, he's producing jobs at *less* than the growth of the population plus ageing retirement.

The decline of the American dollar, now over 40% since it started falling a year ago, has not changed our foreign trade deficit one tittle. In fact, the trade deficit is *increasing*, because China currency is hard-linked to the US$ on trade, but wired into Australia on investment, riding our backs like the proverbial monkey, while hedging their risk with their natural resources and recreation neighbor, Australia.

Net-net, we are hemorraghing jobs like a muthah,
will continue to, and are tied to foreign trade policy End Times that nobody could've foreseen.

47% of Americans haven't seen any real increase in the value of their wages, in purchase power or monetary value, for almost twenty five years!

50% of Americans hold less than $15K in equity, basically, one paycheck, and the repo of their motor vehicle, from living in a cardboard box.

49% of Americans aren't paying down their credit debt, only making interest payments, staying in a perpetual penalty box of indentured slavery.

Now comes this Herr Roach saying jack interest?
Is he insane, or is it lead-in-his-tap-water?
Ladder that wack notion up the chain into the White House. Sure'n begorn, they're Leadites!

Economists seem particularly dense to me these days on two points:

1. Where are the jobs more than two years after the last recession ended? Lost to fearmongering. People will play it close to the vest until the politicians and pundits stop scaring the bejeebers out of them. This is bad news for Bush who seems determined to run for re-election on his "permanent war" platform. Doesn't do much for the economy.

2. Stop it with the improved productivity nonsense. Businesses have fired a lot of workers and flogs the remaining work force to exhaustion. This is something to brag about?

Pardon my ignorant intrusion on this very interesting conversation here. But I have been under the impression these last few years that part of the intention of Bush's tax cuts for the rich was precisely to reflate the stock market and thus secondary asset markets that go with it and thereby revive demand deriving from the "wealth effect". Am I wrong about that? But the much ballyhooed "wealth effect" never made much sense to me: increased paper "wealth", based on marginal asset prices, leading to a decline in real net private savings?

"Steven Roach is an arrogant ignorant bonehead."

This wasn't necessary and doesn't advance your case.

"The Bush recovery hasn't created a single job, in fact, even today, in the fourth quarter of the game, he's producing jobs at *less* than the growth of the population plus ageing retirement."

Roach agrees with your dismal assessment of the job market, and, in fact, says, in his finance geek sort of way that labor has no pricing power currently, and hence will not be a source of inflation.

"The decline of the American dollar, now over 40% since it started falling a year ago, has not changed our foreign trade deficit one tittle."

The devaluation of the dollar is a direct result of unsustainably low interest rates. Roach is addressing the same problem you are.

"Now comes this Herr Roach saying jack interest?"

Because, as Roach correctly points out, the distortion caused by low interest rates is costing in job creation more than it is saving.

I don't think you disagree with him as much as you would like to. Roach's statement to jack up interest rates is a conversational gambit. *If* we want to have monetary policy fix the asset inflation problem - which is, indeed, costing job growth and creating forward risks for both the property and equity markets - then we need to take rather drastic action. That such drastic action is unpalatable indicates that some other course must be taken - for example slashing the US federal budget deficit, its current account deficit so that low interest rates can go back to work.

Roahc makes a case, I believe a convincing one, that monentary policy is, at present, "pushing on a string" - that it is not generating new economic activity, but merely paper activity, and is doing so in an unsustainable fashion.

"How can the gap between aggregate supply and aggregate demand even begin to close without a shrinkage of the pool of idle workers? It seems to me that substantial rises in the employment-to-population ratio..."
~~~~~

Here's an interesting fact to chew on that I haven't seen reported or considered here:

The famous plunge in the labor force participation rate of the last few years that everyone is always talking about *hasn't happened* for workers over age 25.

The unemployment rate is low because workers have left the job market??

Not true for workers over age 25! Their labor force participation rate reamins the very same 67.1-.4% it's been for the last four years.

Fourth quarter 2000, *before* the recession: 67.1%.
Fourth quarter 2003, *after* the supposed big plunge: 67.1%.

The *entire* drop in labor force participation has been among those age 16 to 24. The school-age and just out of school. Hmmm....
http://www.bls.gov/cps/home.htm

Perhaps our host would care to comment on the implications of this? They seem interesting to me, both as to policy implications and otherwise.

Stirling Newberry write:
"Congress could have made the necessary changes to siphon off money from the asset boom and kept the economy on a more even keel."

Stirling, for my benefit (I know little of political economy), please explain how Congress could accomplish that?

All those people that are going to sell their houses in 4or 5 years time. Sounds like the people who lived by taking each other's washing.

The reason the 16-24's can't find work, and the 24-37's are holding their own, and the 38-45's are riding the wave, and 45-55's are dropping like flies, is that net job creation, after the demand in working population growth and supply growth of jobs as people retire is factored in, is decidely *negative*, and no light at the end of the tunnel, either. Even retirement rollover jobs aren't being replaced, much less population growth, or new economy growth.

Then consider 49 out of 50 states are *still* bankrupt, with budget cuts and employee RIF's just now working through the fiscal system, and as many cities in every state are bankrupt too. Not just income tax states, even the sales tax states are hurting, the only thing keeping the economy going is property tax off real estate inflation, and deficit spending ala Arnold:Bush.

To raise US interest rates in such a scenario is suicide, pure and simple, Roach notwithstanding. Interest rates are low since there's no demand. The invisible, international hand of the market.

Read this:

Imperial Over-Stretch Marks
The Daily Reckoning
Paris, France
Friday, 5 March 2004

--------------------

*** Does it matter yet? Mr. Mizoguchi will decide when the end comes...

*** Slow news day... Dow down (or was it up?)... Gold up... dollar up...

*** Buy a Hummer... Take out a mortgage... Have a good weekend...

--------------------

The half-a-trillion dollar trade deficit?
Doesn't matter.

The $1.5 billion-per-day federal deficit?
Doesn't matter.

Consumer debt-to-income levels the highest in history?
Doesn't matter.

Total debt levels at 350% of GDP?
Doesn't matter.

Jobs outsourced to India... lost to China... ?
Doesn't matter.

Dollar down 25% last year?
Doesn't matter.

Gasoline rising 3 cents/gal. per week?
Doesn't matter.

Does anything matter?

Nothing matters now, according to the Financial Times, thanks to largely to one man, Zembei Mizoguchi. Without Zimbei... or someone like him... the dollar would have fallen a lot more than 25%... gasoline would be much more expensive than it is now... the U.S. wouldn't be able to finance its trade and federal deficits, homeowners wouldn't be able to refinance their houses, and consumers wouldn't be able to continue borrowing and spending... and
George W. Bush would be sweating re-election far more than he is now.

"Mr. Mizoguchi is not a campaign strategist, U.S. Federal Reserve chairman or even an online pundit," the FT explains. But he is the man who matters more to preserving Americans' self-delusions than the president himself.

"He is vice-minister in Japan's Ministry of Finance... " the report continues. "Mr. Mizoguchi decides how many American dollars Japan will buy each week. Every dollar he buys has a direct impact on long-term interest rates in the U.S. And long-term rates this year will go a long way towards deciding who walks into the Oval Office next January.

"If you think this is an exaggeration, consider that, in January alone, Mr. Mizoguchi bought a record $70bn and poured nearly all of it into the U.S. bond market. He has the authority to buy $100bn more this year and a bill moving through Japan's parliament would double that figure - more than enough to cover even the wildest estimates of next year's U.S. budget deficit.

And that is exactly what is happening. Without Mr. Mizoguchi, U.S. rates would have to rise sharply in search of other buyers."

Last year, Mr. Mizoguchi spent $250 billion. His goal was merely to keep the yen down... so Americans would continue buying Japanese products. The effect was to coax them further into debt and stimulate a hiring boom in China.

Of course, the debt doesn't matter now. Nor the dollar. Nor the job losses in America. None of it matters... until Mr. Mizoguchi decides that it should matter. Then, it will matter a lot to a lot of people.

More thoughts... from Addison...

---------------

Well, you have to subscribe to read the rest.
http://www.agora-inc.com/reports/PSI/WPSIE303/

Here's Weiss's final summation:

"The Mortgage Bankers Association guesses that overall mortgage issuance will fall nearly in half this year, to $2 trillion from last year's $3.8 trillion."

"Countrywide Mortgage took $1.9 billion in write-downs in the first nine months of 2003. Washington Mutual aren't much better guessers. They took $1.1 billion worth of write-downs in the past two years, about 18% of its $6.2B in 2002 mortgage assets."

And the latest US economic figures show fully *half* of all Americans are now unable to pay down their credit card debt.

If you understand the current US economy, then you already know exactly what's going to happen. Sell your car and buy a lease-back. Sell your house and move to the country. People commute for their entire lives to save as much as the values of US real estate are likely to decline.

Or ... not!
Raise prime interest rates and see what happens!

The reason bubbles are bad is they distort the difference between present and future - in a situation where values are at unsustainably high levels there is a tremendous incentive to claim "earnings" - even if fraud is used.

Thus congress should have acted to take the frothiness out of the bubble. The first thing that should have been done, and should have, in any reasonable political environment, been non-controversial, would be to engage in a series of financial reforms which have been on the list for some time, but no one ever wanted to take the hit on. Full funding of pensions, alteration of the historical valuation rule for asset performance, expensing of stock options, closing corporate tax loopholes, ending special tax breaks. These would have dented the froth in the boom.

Slightly more controversially, the Congress could have authorized "cleaning the books" - including foreign debt forgiveness, paying moneys owed to international agencies, set aside money for debt write-offs for the inevitable bust and so one.

The next, more controversial tier, would have been to make changes to the capital gains tax structure. Capital gains could have been indexed - I prefer CPI since it would remove some incentive for the asset owning classes to understate inflation - and the nominal rate hit with a surcharge which could have sunset in 5 years.

What this money could have been used for is to shut down unproductive industries, with the government taking the necessary costs to do so while money was relatively easy to come by. To take some examples - buying out aging ships in the fishing industry, setting aside money into the "superfund" for clean ups and so on.

In otherwords - remove liquidity from the speculative marketplace, and put it into other sectors of the economy, many of which were not sharing the very high gains in employment and salary which the productivity producing sectors were.

The list of what could have been done is quite long, and a healthy political process would have been spent squabbling over what would be done and to whose benefit.

"Nothing matters now, according to the Financial Times, thanks to largely to one man, Zembei Mizoguchi."

This is an example of "it works, until it doesn't"

Stirling Newberry writes,

The list of what could have been done is quite long, and a healthy political process would have been spent squabbling over what would be done and to whose benefit.

Stirling, I am been to your web site and you seem to be a nice, bright fellow.

Where on earth this you come to believe that the good ole USA is ever going to have a healthy political process again. You forget, "Abortion" We don't elect people to govern. We vote on Abortion and will continue to do so for the next 100 years. The truly wealthy, like Bush, thank their lucky stars, every night.

Stirling Newberry writes "The reason bubbles are bad is they distort the difference between present and future"

But there -is- a demographic distortion between present and future. The markets are reflecting this. We would first have a problem if they weren't.

The markets are telling us there is a penalty for saving now, as there are lots of people in the US, Japan and Europe which would like to stop working in the next couple of decades and spend down their retirement savings. So if you want a new house you better build it now, and if you would like to expand capacity or improve productivity, now is a good time to do it before workers are diverted to caring for the retirees. What would be the point of having stable interest rates and markets which return exactly 8% per year if that does not reflect the reality of the situation we face.

Stirling,
Thanks for the explanation. Much appreciated.

What a thread.
Excuse me while I return to The Base.
Stephen Roach thinks the output gap is shrinking and therefore he can continue badgering AG for an instant 2% hike in the prime rate. He thinks we need to do it now before another bubble wafts off and he thinks it's safe to do it now. He thinks it won't precipitate a crash. A correction maybe, but one that we can handle.
Brad doesn't see the shrinking output gap. But with the falling dollar sooner or later someone will buy our exports, no? So it looks like it's a bit early in Brad's view.
SR seems to want the rate hike in part because he believes that at 1%, the Fed doesn't really have any ammo. Time to re-load. (He doesn't think much of the touted "unconventional methods" that AG refers to).
Meanwhile AG is all over the map lately as if the crunch was coming tomorrow. Roach has traded his bear suit in for something a little more zippy. He thinks the economy is strong enough to handle a 2% hike (just to let the commodity crowd know that the dollar is still a player). The fact that he even mentions the possibility of a "spontaneous inflation" as a result of the hike again surprises me. What can he be thinking? He knows the fraction of ARMs in the housing market. He knows how many people refinanced their houses last year. But does he know what a 2% hike will do to the residential housing market? My guess is that Fannie and Freddie would not be too happy about Any hike.

But are they happy, or irrationally exhuberant is the question?

The real story is restructuring.

There is no such thing as "the output gap" in a rapidly restructuring economy.

"Output" is not homogeneous.

I agree with Jim Harris' above comment. Such high productivity should cause enough temporary dislocation to raise the natural unemployment rate. There is always some adjustment lag, and some will be even slower to or unable to adjust.

Also, how about the effect of commodity prices? How much is the sharp rise in energy and metals prices affecting employment? Is the economy on partial hold until these sectors catch up with demand?

Productivity changes in greater Chicago mfg- think auto and other vehicle parts
Auto plants went robotic over the last 2 decades.
That technology has only recently filtered down to parts suppliers.
Not all gains are computer hardware.
SOFTWARE changes are huge. Think replacement of exact code programming with point and click.
The auto giants developed core technologies. Those are now being made versitile enough to fit requirements of parts mfg.
Think computer controlled arm with precision x/y/z movement. The devices that can be attached to the arm (core technology) are practically unlimited. The combo of core technology + miniaturization of devices attached to the arm + software changes make development of new types of robots cost effective. In the past, they were not necessarily cost effective.
Think sign making. It used to be faster to make a sign by hand than with a computer. Now the letters can be scanned into the computer and the software exists to translate pixels into robot arm movement. Same technology, different device on the arm is used for parts mfg or to mfg the molds/tools for making the parts.

Skilled machinists are being replaced by computers that require less training.
There are still boatloads of tiny mfg shops that use workers as human robots, performing repetitive tasks. These are turning into distributors for same parts made elsewhere. Steel tariffs accelerated this process by making US steel parts uncompetitive.

As for calmo's tractor, small hobby farms still have Green Acres technology. Big MW farms will soon all have tractors with computers and GPS and laser for leveling and guidance for "precision agriculture". Technology is there to plant and harvest crops (boring job) by robots.

Structural changes abound. What is not being offshored? Big items like steel beams with high transport costs. (Although steel tariff made concrete more competitive.) Computer driven operations where on time delivery and rapid setup and mfg are important. What is being offshored? Human robot jobs. There are a lot more of these than one can possibly imagine. There are enough of these to support high productivity gains over the next decade.

cm- thanks for the correction. My earlier post was to suggest support to reduce excess supply.

#1 in job program is still money to the states. There are so many infrastructure impediments to economic expansion. For instance CÅ has water problems. Why not invest in desalinization? Many MW cities and towns cannot attract industry because sewage treatment is inadequate to serve the present population. Why not money for new facilities? Govt. builidings could be fitted for energy savings or alternative energy. This would stimulate the economy today with an investment that would pay for itself. High speed rail in Chicago area. Employ massive numbers of people. Reduce traffic congestion on highways and airports. Improve our schools physical plants. Hire more teachers to reduce class size. There are lots of constructive uses for money at the state level and projects that are underfunded.

I am in agreement with snserling and Harris about productivity related dislocation. The states could use these excess workers to build infrastructure. Unfortunately, the GOP and Mr Bush are opposed to doing this.

cm

Agreed.
Thanks.

bahko
Let me say that I am not a Ludite. I think there is a measure of progress. Even productivity gain. Even productivity gain that can be accrued to computers/ software development. But those of us ( I mean you) who think that the productivity numbers for Q3 of 03 are accurate are dozing.
Richebacher, and earlier, Gross point to other ( facets of "productivity growth" that dispell the Miracle notion. But only for me I guess.

The world is a beautiful book for those who can read it.

There's a fine line between genius and insanity. I have erased this line.

People are exponentially funnier when they're in rant mode.

Seekers of truth invariably turn to lies.

I like long walks, especially when they are taken by people who annoy me.

Newness is relative.

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