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Fun Week, learn about economics! Part V
It's the end of our week of learning, and you've been a very good class! But mostly quiet. It's OK. I understand. On a fundamental level, people really don't want to know the full scale of the economic disaster unfolding in the United States. There are very powerful forces at work to keep happy faces on grim statistics.
For instance, the US equity markets seem unfazed by the credit crisis. Any bit of news that is not as bad as it might have been is seen as a cause for optimism.
And yet, in this election year, consumers are facing the highest energy prices since the 1970's. Food inflation is beyond alarming. (Neither energy nor food costs are directly reflected in core inflation numbers reported by the federal government). Housing prices are falling at a rate and volume with no historic equivalent. Not to mention what is happening to the cost of insurance. If you are feeling poorer, it is because you are poorer -- and for that, you have to thank the policies of the Bush White House.
Still, the headlines are mostly good: it is now claimed that big deals are starting to get done again, after banks stopped mistrusting each others' balance sheets chock full with toxic debt, mostly formed of mortgage backed securities representing suburban sprawl in the fastest growing parts of the nation.
But it turns out that people, consumers, voters are not getting the whole picture. Partly that is a result of the federal government hiding or eliding the truth: for instance, the poor quality of inflation statistics and the failure to report accurate money supply numbers that would indicate the extent to which currency printing presses are masking the economic crisis.
So, after a week of posting charts you are unlikely to have seen anywhere else but on our blog, I'm going to end our week of fun learning with two charts that are very dramatic and point in the direction of an economic picture more frightening than at any time since the Great Depression.
This chart shows the relative scale of the Federal Reserve intervention in the credit crisis: as a daily average of billions offered directly to banks who were allowed to use toxic debt on their balance sheets as collateral. In other words, the entire mess of the housing bubble has already been foisted off on taxpayers, a form of nationalization that may yet become more apparent by the supposed political party of fiscal conservatism. The intervention is so upsetting that it caused Paul Volker, the former Fed chairman who wrestled the US economy out of its last major economic crisis, to say that the new policies of the Fed had pushed the edge of the law.
But don't expect anyone to go to jail, for what the next chart shows:
Let see if I can get this right, to sum up five days of posts on the economy: at the very moment in time, when globalization has hollowed out the US industrial sector and created conditions of virtual borders for growth through technology, the US is badly lagging its major trading partners in educational standards. The massive asset bubble, first in dotcom stocks and then in housing prices, papered over systemic problems in economic growth, problems also masked by the dramatic fall in value of the US dollar. To respond to the crisis and keep the US banking system solvent, the Federal Reserve -- meaning, the US taxpayer-- absorbed hundreds of billions of toxic debt, embarking on an even more dangerous course: to accept inflation as better medicine than allowing "free" markets to reach an equilibrium.
Here is a representational image of the solvency crisis:
So, we have inflation, political corruption, AND no end in sight to a gathering perfect storm. We can go on a while longer, hobbled by policies that introduced so much risk to our economy. The big difference between now and the 1930's is the extent to which the monetary system can move at the speed of light to plug holes in the dam, so to speak.
But the fact remains, the United States is poorer. We face unprecedented threats to our national security, of which climate change is the most serious. The next president of the United States must find the right words to communicate with Americans: how change requires a commitment to sacrifice. So listen carefully: it is going to be a very interesting election season in America.
Fun Week, learn about economics, Part IV
Changing economic conditions around the world are pushing the US to rethink its role. Other countries are insisting that we consume less, pollute less, save more and coordinate national security actions. Oh why can't we just go back to the way it was, when the stock market was headed to 20,000, when houses were bankable lines of credit, and terrorists hadn't blown up the World Trade Towers?
The problem is, the good old days were funded by low cost labor in other nations. We spent and consumed while others saved and built. In the new flat world, productivity and technology hops from Cleveland to Singapore in a nano-second. Yesterday, I uploaded a new version of software on my computer and my anxious phone call to customer service ended up in New Delhi. In the past, I dreaded customer service in New Delhi. This time, the woman helping me was trained exceedingly well, knowledgeable, and more efficient than any I had talked to in Omaha. Clearly, the software company had improved its productivity. But you have to dig a little deeper to understand why the costs to the US economy of such competitive advantage to India are so severe.
Not only has the US depended on the kindness of strangers to fund our national debt, we have sold our investors stuff that turned out to be worth not nearly as much as we claimed. It would be one thing is this were a couple of billion dollars. But in fact, the risk to our investors is in the trillions.
From the worm's eye view, Americans are deeply worried about foreclosures and what government can do to help. From the bird's eye view-- of investors burned by buying hundreds of billions in mortgage backed securities-- the entire growth model of the US has been called into question by the very investors we need to fund our national debt.
While Americans worry about the price of gasoline and whether we can buy sacks of rice at Costco, the bigger problem is that investors have lost confidence in what we are selling. Unless, of course, we are selling assets at deeply discounted values. I don't know about you: for my part, I don't like living in a nation that feels like the remainder bin at Walmart.
So, now that we are approaching the end of the week-- our fun week on economics!--it is time for a little feedback. Imagine for a moment that you are President of the United States: what would you do to prevent the US economy from sliding into an even deeper economic crisis?
Fun Week, learn about economics! Part III
As the graphs from Monday and Tuesday's posts showed, investors aren't stupid: if they are stupid, they don't stay investors, long. If 70 percent of the US economy is driven by domestic consumption, and 70 percent of economic growth is generated by housing, construction and related development, and if housing prices have fallen from 20 to 40 percent in the formerly fastest growing regions of the country, then investors are right to question whether risk is correctly priced. Investors in the US economy are pulling back: not just from US debt, but from all kinds of debt.
Fun Week, learn about economics! Part II
Yesterday, in Part 1, I showed a graph predicting trouble for the US in adapting to the opportunities of a global economy. The bright fact is that US educational standards are far below that of many of our trading partners. This is relevant in Florida, where the Republican legislature has slashed funds for public education and has put all its eggs in the basket of standardized testing, the FCAT, that reinforces low educational standards.
Today's lesson is about trusting the kindness of strangers to underwrite our economy. For more than a century, US power and authority was projected through our economic strength. We are the world's largest economy, fueled by consumer demand. But our growth is fueled by borrowing; borrowing surplus dollars generated by low cost labor nations that supply our goods and oil-rich nations that feed our insatiable desire for energy.
Today, Bloomberg reports (Rubenstein Says `Enormous' Bank Losses Unrecognized), "U.S. and European banks and financial institutions have ``enormous losses'' from bad loans they haven't yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said."
What this means is that the foreign nations that have been funding our debt, accepting the cost of a devalued dollar as a necessary evil, are retreating from the "necessary" part of the equation. It started with the subprime crisis, triggered by the massive overdevelopment of the housing and construction sector and the radical mispricing of assets. And it also has to do with the massive political instability in the Middle East, where there is significant pressure to diversify from the US dollar.
Argue as we will on the legacy of Bush policies, one thing we can agree about, of the nations that have pulled up their own economic fortunes by tapping the wealth of the American middle class: they are not dumb.
Carlysle Group's Rubenstein tells Bloomberg, with the understatement characteristic of financial titans who make money on both sides of the trade; ``sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide. Financial institutions worldwide have recorded $329.2 billion in credit losses and writedowns and raised $246.6 billion in capital since the beginning of 2007. Rubenstein said about $60 billion of that capital was provided by sovereign funds last fall, and their investments today are worth about $35 billion."
Rubenstein says, "Based on information I see, it will take at least a year before all losses are realized, and some financial institutions may fail... He didn't name any companies. ``The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,'' Rubenstein said. ``Many financial institutions aren't going to be able to survive as independent institutions.''
There is a problem with Rubenstein's scenario: financial executives were wrong, except for a talented few, in anticipating the crisis as it evolved. (Take BankUnited, for instance, the local publicly traded entity that was once a sweetheart of the mortgage and construction industries, and is now fighting for its life-- as reported in The Miami Herald today.)
Our so-called financial gurus are wrong to believe or to mis-state the problems we face as short-term. The structural deficits in the US economy have come home to roost, and the need for reform is more pressing than at any time since the Great Depression.
Fun Week, learn about economics, Part I
This week I'm taking a look at what is happening to the US economy. Every day, I'll post another chart or statistic of interest, that may have escaped your view in the mainstream press. While the price of oil is pushing toward of $150 barrel and the evident charade of core inflation failing to include the cost of food and energy, we can have a healthy dialogue about the real state of the US economy. Let's imagine for a moment, that we aren't hostage to despots because we won't change our habits of consumption, or make necessary investments in alternative, renewable energy and conservation adequate to the purpose. Let's believe, for a moment that the Bush White House is right: we've only spent $600 billion in wars that Nobel economist Joseph Stiglitz claims is not the six hundred billion but $3 trillion. Who do you trust? Furthermore, let's imagine we're all going to get a big payoff in the mail for our investment. But instead of imagining, let's go to some hard truth: while Florida mainstream newspapers obsess about FCAT scores and the Florida legislature eviscerates school funding, take a look at this chart. In a 24/7 world, where innovations flash around the globe at the speed of light, share with us your thoughts about American competitiveness and our ability to quickly respond as a debtor nation in the global economy where the upstarts may have a lower standard of living but a higher commitment to educate their children.
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