Financial topics

[maxpowers]

We pay interests with us dollars which we conjured up in the treasury and fed. In this sense, countries hold us bonds because they believe in the stability of the us political system and the productive capacity of the US economy. We don't pay interest or any other payments using gold, etc...Now the EMU is a different animal. It is a united currency without a unified political system or a single voice representing all the interests of the individual EMU nations. In this sense the individual nations can not fight deflation or inflation using standard monetary policies. Also since the individual nations issues their own bonds denominated in Euro, conflicts arose between those nations that are fiscally prudent (Germany, et al) with those who are fiscally reckless (Spain, Greece, etc) in so much that there fiscally reckless find their ever spirally debts denominated in Euro harder and harder to service unless the fiscally prudent give in and either forgive some of the debts or restructure it in ways that become manageable for the fiscally reckless. The political implications for the fiscally prudent nations of having to bail out reckless nations are immense. In the US, some states begrudged the constantly whining and potential bailout of reckless states such as Illinois and California. However since we all lived under a singular political system with one set of laws and one central banks, the political ramifications for bailing out reckless states are not as great. It is in this sense of unification that the US can still function as a single entity and issue a single voice in its fiscal matter while the EMU will have fractured voices in all its discussion. Whether PIIGS fly or die, the US will continue to exist and trade in US denominated dollars will continue to be accepted by much of the world.

[OLD1953]

Precisely. However our bonds/dollars are backed, in a sense, by the worth of US production. And that's why our infrastructure is absolutely critical to the economy, because it keeps our costs low.

http://online.wsj.com/article/NA_WSJ_PU ... 37746.html

What business will prosper on a gravel road? What happens to home values? How much extra for car repairs?

Inept management combined with nihilism. Sounds like the perfect description to me.

[maxpowers]

Do you truly believe that the US productivity will decline greatly? We are still one of the most industrious and imaginative nation in the world. While our wages are still high, the global wage arbitrage will continue to make sure that the US will maintained a strong foothold in the world economy. This mean that we will have to find ways for the corporations to find their ways home (to the US) again. The means to incentivize the corps are out there but the political wills to do so are not there yet. I suspect as the US continue to experience high and extended unemployment periods that the politicians will be force to choose between facing an increasingly angry electorate or maintenance of the corporatacy...

[John]

Apparently the Hindenburg Omen is still in play:

An Update on the Hindenburg Omen of August 2010
By: Robert McHugh | Sun, Aug 29, 2010

You are not going to believe this, but on Friday, August 27th, we got both a fifth official Hindenburg Omen observation and a 90 percent up day. Completely bizarre combination, which is the point. It is this sort of confrontational confusion inside markets which is the basis and background for all of the stock market crashes over the past 25 years. This does not mean we are definitely going to get a stock market crash, but it does mean the odds of getting one are far greater than the normal less than one-tenth of one percent on any given day.
http://www.safehaven.com/article/17994/ ... ugust-2010

John

[OLD1953]

Not so much that I expect productivity will in and of itself decline, but that chances to increase GDP by creating new business will become fewer over time. Until government is seen as capable of providing solutions to critical problems, the tax hate will continue, never mind the facts of the case.

I've said many times in many places that real world trends can't go to infinity, because infinity is not a real world concept. The question of "when does the trend break" is always critical. The Generational Dynamics concept says this trend will break when people are confronted with a crisis so huge they can't possibly imagine dealing with it as a fractured group, so cooperation and conformity become almost mandatory - and that's what attracted me to GD in the first place and why I'm here, because otherwise you've little basis for seeing the end of a trend line and the beginning of a new one. While there is a good and increasing chance this will happen each passing year, it's not possible to give an actual date, just guesses. (It's worth noting that October is coming up soon, and we've a strong tendency to have our worst market crashes in October.)

Too much infrastructure requires government assistance to build, because we just are not set up to do large projects in any other way. Imagine if you will, the interstate highway project, funded individually by each separate state. The mind simply boggles. It would never have been created. Yet that system is one of the USA's great strengths economically. Without TVA, the South would absolutely NOT be attractive to business/manufacturing as it is now. There would be power to the cities, and the rural areas would be running on generators. The backbone of the internet was built with federal dollars. When I was a kid, weather forecasts were a joke, because there was no overall system to track weather. With doppler radar and satellites, we are able to save lives and avoid billions in property damage just by being prepared, and that system would never be built by 50 states with a weak federal government.

I could go on and on, but the point is made. If the US is to be a competitive nation with high productivity, we critically need these systems. And they are currently being allowed to degrade because "the feds can't do anything right".

Degradation of critical systems is not something we can afford as a society. Stealing from the future by cutting costs and allowing them to run without proper maintenance is self destructive nihilism. And that's exactly what we've been doing.

So yes, as this continues, productivity gains (in real terms, goodness knows what the government will cook up for reporting that 'everythign's fine, no problems here') will decline or even reverse. There's only so much you can get out of a human worker (or even a robot), and when you push that limit, you have to look for further gains elsewhere. And that elsewhere is often infrastructure.

[xakzen]

...
So yes, as this continues, productivity gains (in real terms, goodness knows what the government will cook up for reporting that 'everythign's fine, no problems here') will decline or even reverse. There's only so much you can get out of a human worker (or even a robot), and when you push that limit, you have to look for further gains elsewhere. And that elsewhere is often infrastructure.

I agree that large infrastructure projects are exactly what the Federal government is good at or rather the only entity that can undertake such projects for the common good. Although I continue to have reservations about the source of this information, I have been following the info flow on the LaRouche PAC site and there has been quite allot of talk about a huge infrastructure project called the North American Water And Power Authority (NAWAPA):
http://www.larouchepac.com/node/15628

Again I am in no way endorsing this group or it's political views, but as has been said here before: credible ideas can come from incredible sources. I have always been a fiscal conservative, but had the stimulus money last year been spend on starting this project, I certainly would have supported it. Likewise I'd support an even larger package to start this project now. If we're going to print money anyway, we should at least get something useful in return.

[shoshin]

my current favorite headline, via Bloomberg...

Economy Avoids Recession Relapse as Data Can't Get Much Worse

http://www.bloomberg.com/news/2010-09-0 ... worse.html

[OLD1953]

Just out of curiosity, anyone besides me expecting a crash of 30 to 50% before the first of November? This last few days look awfully like the start of the final runup to a major drop.

Could be wrong, but this sure feels like the crap is about to hit the fan.

[John]

John, I am thinking back to that Richard Koo presentation you
posted a while ago. From what I read, Japan, over the past 20
years, has not tried just one approach that failed. So can anyone
say QE did not work or that debt reduction did not work, or
whatever-the-policy did not work?

it seems like Richard Koo was saying something like this; Japan
had rival political parties changing monetary policies OVER and
OVER during the past 20 years. Japan's PoliticalParty#1 did
stimulus and the enconomy began to recover, then PoliticalParty#2
came in and paid down debt and the economy faltered, then
PoliticalParty #1 was voted back in and applied stimulus again and
the economy began to recover. Then PoliticalParty#2 came back in
and paid down debt,and then PoliticalParty#1 did stimulus....

The link to the presentation has changed over time, and here is
the link;
http://csis.org/event/economic-outlook- ... ichard-koo

Thanks for another excellent thought-provoking post and for your
work with Generational Dynamics.

I was very impressed with Richard Koo's presentation when I first saw
it almost two years ago, but over time I've come to see it as failing
in many ways.

One thing that was a problem right off was that Koo was not taking
into account that Japan was able to dig its way out of its worst
problems by exporting to China and the US, both of which have been in
bubble economies. Since that kind of opportunity is not available to
the U.S., Koo's theories simply don't apply to the situation that the
U.S. is in.

But now we see other problems as well.

The second problem is that Koo's stimulus proposals have completely
failed in Japan, despite the availability of exports. During the last
17 months, Japan's economy has been deflationary every month.

So Koo excuses himself, as you point out, by saying that the stimulus
wasn't applied at all times. Well, how long does it have to be
applied before it will work? It's now been 20 years since Japan's
stock market crash, and even with no stimulus at all, you'd think that
the deflationary spiral would have ended, instead of worsening. His
excuse is that the stimulus wasn't applied long enough. But a
perfectly reasonable alternate explanation is that the stimulus did
nothing to solve the underlying problems, but simply postponed the
unavoidable pain to another date.

Now we see the same thing happening in the U.S. Obama's stimulus ran
out in March, and does not appear to have helped more than
temporarily.

What bothers me about Koo is that he's never said anything, to my
knowledge, to explain these things, except for the standard excuse,
"You haven't used enough stimulus." He's never adapted his theories
to the changed circumstances, as far as I know.

There are two conflicting ideologies today -- the stimulus ideology
and the lower deficit ideology. The problem is, neither of them as
any hope of working, but the stimulus ideology postpones the worst for
a while.

In 2008, I posted

** One, Two, Three ... Infinity
** http://www.generationaldynamics.com/cgi ... 25#e081125

in order to capture a concept: That the stimulus ideology could not
work unless the stimulus amounts grew until they approached infinity.

Do you remember what happened when the credit crunch first struck in
August, 2007?

** The nightmare is finally beginning.
** http://www.generationaldynamics.com/cgi ... 17#e070817

What happened was that the Fed lowered interest rates by a percent or
so, and that solved the problem for a while.

In 2008, President Bush implemented the first stimulus program which,
as I recall, was for about $60 billion. Do you remember when $60
billion was considered a great deal of money? Today, it's peanuts.

Then in 2009 there were major stimulus packages around the world,
culminating in the EU's "gobsmacking" bailout package in May.

** 11-May-10 News -- Europe's super-nuclear bailout
** http://www.generationaldynamics.com/cgi ... 11#e100511

I would guess that up to $10 trillion dollars has been put out in
bailout and stimulus programs around the world in the past three
years.

And so, at each step in this crisis, a bigger and bigger response has
been required, which is exactly the One, Two, Three ... Infinity
concept.

We're also seeing the Law of Diminishing Returns in action. It says the following: If you try to solve a problem by throwing money at it, then you need to throw more and more money at it each time.

[Actually, the Law of Diminishing Returns applies to any situation
where you throw any single resource at a problem.

** Fed's desperation move may be prompted by $50 billion Madoff swindle
** http://www.generationaldynamics.com/cgi ... 17#e081217

** UN expert calls biofuels a 'crime against humanity'
** http://www.generationaldynamics.com/cgi ... 07#e071107

Each time, you have to throw more and more of the resource at the
problem to get the same effect.]]

Getting back to Koo, what bothers me about him is that he never seems
to deal with any of these questions.

In addition, he never seems to deal with the question of the best way
to invest stimulus money. The Obama administration is accused of
wasting stimulus money by pouring into the coffers of labor unions.
Is that the right thing to do, according to Koo's theory? I don't
think it is, but Koo has been silent on the question.

So I've come to the conclusion is that Koo has a lot of good ideas,
but in the end he's just another ideologue advocating a political
position. Like all these other experts, all he really cares about is
that he keeps getting invited to give presentations and keep getting
quoted in the press, which gives him more prestige within his
employer, and allows him and his employer to charge higher consulting
fees.

John

[OLD1953]

Estimate of US calorie production in grain crops.


Projected production by USDA.

http://www.usda.gov/oce/commodity/wasde/latest.pdf

Wheat:

60lbs of wheat (one standard bushel) equals 42lbs of flour, which will make 42lbs of pasta. Therefore, the usable fraction (as flour) is 42/60, approximately 2/3. (The rest is animal fodder or "health" food.)

There are 455 calories (diet) in 125 grams of white flour. There are, therefore 455/125*1000 calories per Kilogram, and 3,640,000 calories in a metric ton.

Projected production for the US in 2010 is 61.6x10^6 metric tons. This converts to 43.1x10^6 metric tons of flour, which is 156.9x10^12 calories.

http://caloriecount.about.com/calories- ... ose-i20081

http://www.ag.ndsu.edu/pubs/yf/foods/fn560w.htm

Projected production of milled rice is 8 million metric tons.

Thre are 363 calories in 100gms of white(milled) rice, and 3630 per Kg, and 3,630,000 per metric ton. We produce 29.0x10^12 calories in milled rice.

http://www.bodyfatguide.com/foodcalorie100gms.html

The remainder of US grain production is "coarse" grains, ie oats, corn, rye, triticale and so forth. While all of us have eaten oatmeal, cornbread, and rye bread these are mostly used for animal feed or feedstock for ethanol production.

Given that the bulk is corn, I'm using the calorie information for whole grain cornmeal less ten percent, which is 400 calories per 122 grams or 3278 calories per kilogram or 3,278,000 per metric ton. Production is 349x10^6 metric tons, or 1144.0X10^12 calories.

Assume rationing due to war or other crisis. Assume an average ration of 2740 calories per day per person for convienence (it's an even million a year!).

The manyear calories produced by the US in grains would be:

Wheat - 156 millions

Rice - 29 millions

Coarse grains - 1,144 millions

Of course, we produce many crops other than grains, and animals/meat products as well.

My point is that, assuming rationing and a dollop of common sense applied by the government, there'd be little danger of actual food shortages in the continental US, sans direct attack on food transportation hubs.