InvestorCentric

Inflation May Help Economy, Expert Says

2012-05-09T07:49:00.000-07:00

At least one economist argues that allowing inflation to occur “naturally” could actually help the struggling U.S. economy. Mark Thoma notes the Federal Reserve is expected to implement controls if inflation approaches 2% and unemployment remains high by raising interest rates in an effort to retain “inflation credibility,” rather than keeping them low through 2014 as it had previously announced it would do. Thoma argues, however, that exerting control to hit a particular inflation target absent consideration of the other factors is unwise, and that inflation during a recession can encourage more activity in the market rather than restrain it. For more on this continue reading the following article from Economist’s View.

If inflation begins to increase before the economy has fully recovered, the Fed shouldn't panic:

Federal Reserve Policy: Exceptions Improve the Rule: At some point during the recovery, the Fed may face an important decision. If the inflation rate begins to rise above the Fed’s 2% target and the unemployment rate is still relatively high, will the Fed be willing to leave interest rates low and tolerate a temporary increase in the inflation rate?

Probably not. Even though higher inflation can help to stimulate a depressed economy, Ben Bernanke, Chairman of the Federal Reserve, is not in favor of allowing higher inflation because it could undermine the Fed’s “hard-won inflation credibility.” And recent Fed communications seem to be setting the stage for the Fed to abandon its commitment to keep interest rates low through the end of 2014. This adds to the likelihood that the Fed will raise interest rates quickly if inflation begins increasing above the 2% target even if the economy has not yet fully recovered.

As I’ll explain in a moment, that’s the wrong thing to do. But first, why does the Fed put so much value on its credibility? ...[continue reading]...

This blog post was republished with permission from Economist's View.

Krugman Criticizes Ron Paul

2012-05-02T07:17:00.000-07:00

Economist Paul Krugman, no lightweight when it comes to fiscal knowledge, recently debated sometime Republican presidential candidate Ron Paul on the issue of his Paul’s prediction of runaway inflation, and criticized the politician’s vague references to ancient history by way of response. Krugman contends that it is no accident that politician’s cite murky historical anecdotes as a way to establish credibility for positions on current affairs, despite having a century’s worth of well-documented knowledge from which to draw – if only it supported the desired conclusion. For more on this continue reading the following article from Economist’s View.

Paul Krugman comments:

Don’t Know Much About (Ancient) History: The things I do for book sales. I debated, sort of, Ron Paul on Bloomberg.Video here. I thought we might have a discussion of why the runaway inflation he and his allies keep predicting keeps not happening. But no, he insisted (if I understood him correctly) that currency debasement and price controls destroyed the Roman Empire. I responded that I am not a defender of the economic policies of the Emperor Diocletian.

Actually, though, appeals to what supposedly happened somewhere in the distant past are quite common on the goldbug side of economics. And it’s kind of telling.

I mean, history is essential to economic analysis. You really do want to know, say, about the failure of Argentina’s convertibility law, of the effects of Chancellor Brüning’s dedication to the gold standard, and many other episodes.

Somehow, though, people like Ron Paul don’t like to talk about events of the past century, for which we have reasonably good data; they like to talk about events in the dim mists of history, where we don’t really know what happened. And I think that’s no accident. Partly it’s the attempt of the autodidact to show off his esoteric knowledge; but it’s also the fact that because we don’t really know what happened — what really did go down during the Diocletian era? — you can project what you think should have happened onto the sketchy record, then claim vindication for whatever you want to believe.

It’s funny, in a way — except that this sort of thinking dominates one of our two main political parties.

This blog post was republished with permission from Economist's View.

Are Higher Tax Rates Really That Bad?

2012-04-25T08:00:00.000-07:00

The Laffer Curve is an economic theory that pinpoints a revenue-maximizing percentage for taxation; in other words, it prescribes a certain tax percentage beyond which tax revenues actually start to decrease due to tax avoidance, evasion and nonpayment. Economists Peter Diamond and Emmanuel Saez believe the percentage for those in the top 1% of U.S. earners hovers somewhere between 50%-70%, meaning the government could raise their tax rate up to at least 50% before seeing a drop in revenue. The wealthy heartily disagree, but there is no way to tell other than to look at historical data, which indicates the hike would not change behavior. For more on this continue reading the following article from Economist’s View.

Peter Diamond and Emmanuel Saez:

High Tax Rates Won't Slow Growth, by Peter Diamond and Emmanuel Saez, Commentary, WSJ: The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? ...

But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate? ...

According to our analysis..., the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70%... Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. ...

But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. ... Neither does international evidence support a case for lower growth from higher top taxes. ...

By itself, a suitable increase in the taxation of top earners will not solve our unsustainable long-term fiscal trajectory. But that is no reason not to use this tool to contribute to addressing this problem.

With the "taxes harm growth" and Laffer curve arguments undercut by research such as this, Republicans have fallen back on the argument that it's unfair to take income away from those who earn it. But that presumes that the system allocates income fairly, a claim that is hard to swallow given how much financial executives are paid relative to their contribution to the productive process (to name just one example). There's nothing unfair about using taxes to "clawback" misdirected income, and it won't harm growth to send income where it should have gone in the first place.

This article was republished with permission from Economist's View.

Election Year Spurs Small Business Giveaways

2012-04-19T07:57:00.001-07:00

The struggling U.S. economy during an election year means many politicians are crafting policy aimed at small businesses in the hopes of scoring points with voters; however, statistics from the Joint Committee on Taxation and the Tax Policy Center reveal these measures really don’t help. The estimated cost to government for the Small Business Tax Cut proposal is $46 billion, and experts say most benefits will go to those earning $1 million or more and will not help create any jobs. Economist Bruce Bartlett argues that money would be better spent on infrastructure, and politicians can spin it by saying infrastructure helps small businesses, too. For more on this continue reading the following article from Economist’s View.

Bruce Bartlett:

Do Small Businesses Create Jobs?, by Bruce Bartlett, Commentary, NY Times: ... Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by “emerging growth” companies. Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.

The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period. The linkage between a small business’s tax burden and job creation, however, is tenuous at best. ...

The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.

There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.

Instead, let's use the $46 billion this would cost (and mostly waste in terms of job creation) to build infrastructure. If it helps to sell it, make it infrastructure that would be useful to small businesses -- it can probably be argued that most infrastructure projects would help small businesses in one way or the other. This way, even apart from the better prospects for job creation from infrastructure spending, at least we'll have something to show for the money when all is said and done.

This blog post was republished with permission from Economist's View.

Examining Employment Recovery Cycles

2012-04-06T07:45:00.003-07:00

Economist Tim Duy examines compares recent job growth and losses with historical data to explain what is happening in the U.S. economy now and what can be expected in the future. He demonstrates a parallel between post-1990 employment recovery failures and manufacturing job recovery, which prompts him to consider whether job losses are structural or cyclical based on losses in supply jobs vs. demand jobs. Duy then ties capital and currency manipulation to job growth, and wonders how much Chinese financial policy and a global demand shortfall impacted U.S. employment in the ‘90s, and whether a similar explanation could explain the current employment fluctuation. For more on this continue reading the following article from Economist’s View.

Tim Duy:

Behind the "Trend is the Cycle", by Tim Duy: Via Mark Thoma, David Andolfatto finds evidence of a permanent component to recent job losses. Reviewing a recent paper (which I enjoyed) by Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia), Andolfatto notes:

The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions.

He further sees a smoking gun in this chart:

And again notes:

This last figure is quite dramatic. It shows how, prior to 1990, routine employment rebounded strongly following a recession. But since 1990, it appears not to rebound at all. Indeed, the pattern appears to be one of a precipitous decline in recession, followed by a period of relative stability in the subsequent expansion.

I have to admit that I was perplexed by Andolfatto's surprise with this result - the basic patterns of this chart should be easily recognizable as simply the path of manufacturing employment in the US:

That employment in this sector has not rebounded after the past two recessions is not exactly a secret (there is likely some construction element in the first chart as well, but I am putting that aside for the moment). That said, I think there is an interesting question here - should we define these job losses as primarily structural (supply) or cyclical (demand)? To be honest, I admit that I have gone back and forth on this topic.
If I am in a mercantilist frame of mind (see here), I would say this becomes an issue in the mid-1990's when China devalues and fixes the renminbi. This act of currency manipulation to gain a competitive advantage is ignored by the Clinton Administration, and the offshoring craze goes into hyperdrive. Non-durable goods manufacturing begins to slide immediately, and durable goods employment contracts during the 2001 recession and never rebounds as firms choose to restart production in China rather than the US. I anticipated the same after the 2007-2009 recession, a prediction that has not been entirely true.

Somewhere in here is also a construction story, in which the flow of capital into the US finds its way into the housing market, which in turn boosts construction jobs which are subsequently lost. The construction jobs would fall into the routine manual worker category that appears to have suffered from permanent dislocation.

Is this a structural story, or rather just an outcome of a global savings glut/demand shortfall? If domestic demand in China had been higher, wouldn't the Chinese current account surplus have been smaller? And shouldn't the same be true of Japan and Germany? And if this was the case, would the US current account deficit also been smaller, suggesting external factors were less of a drag on demand? And if that were the case, would job losses in manufacturing have been so severe? Would the housing bubble have erupted as it did? And would other sectors have grown more quickly to compensate for job losses in manufacturing?

What I am thinking is that in a world with a global demand shortfall combined with currency manipulation, international trade can become a zero-sum game that leads to dislocations that appear to be structural but are in fact largely cyclical or more broadly demand related.

Alternatively, rather than rely on the global imbalances story, you can argue that the drop in manufacturing is entirely the result of productivity increases. I really don't think this helps, as it doesn't explain why the displaced workers have not been entirely reabsorbed elsewhere in the economy. Remember, we used to argue that all those displaced workers would simply find jobs in the rapidly growing sectors of the economy. Apparently, this has yet to happen. It is kind of hard to argue that the problem is retraining or skills. Perhaps this is true in the short-run, but we are talking about trends that are nearly two-decades or more old. Surely a greater degree of adjustment should have happened by now. It is just as easy to believe that the demand is lacking to absorb the released resources (a euphemism, by the way, for fired workers), which fits with a global savings glut/demand shortfall story as well.

Moreover, a structural story doesn't answer the problem of sticky wages. If in fact the jobless recovery was simply an artifact of job losses for employees with routine skills, why is wage growth for remaining workers so muted? Why such a high proportion of zero wage gains?

Finally, I would add that if you believed that fundamentally a global demand shortfall and related imbalance story was at play, some rebalancing, due, for example, to a mixture of higher foreign wages and a weaker dollar, would have predictable impacts in stimulating export and import competing industries. Some evidence for this can be found in the upswing in durable goods manufacturing:

This is where I was wrong; it is more of increase than I would have expected given my mood in 2010. See also recent stories about the re-shoring phenomenon. For example, from the FT:

Jeff Immelt, General Electric’s chief executive, says the decision to put $1bn into the group’s domestic appliances business is “as risky an investment as we have ever made”.

He may well be right. The decision to bring back to Louisville, Kentucky, hundreds of jobs that had been outsourced to Mexico and China is emblematic of his strategy for GE. If it fails, it will be hung around his neck forever.

“Reshoring” production is a strategy being tried by many American manufacturers, as rapid wage growth in emerging economies and sluggish pay in the US erodes the labour cost advantage of offshore plants.

The US has added 429,000 factory jobs in the past two years, replacing almost a fifth of the losses during the recession.

Trend or fad? Too early to tell.

Bottom Line: I don't think the results Andolfatto cites should come as much of a surprise. If you were looking for a jobless recovery two years ago, the "routine" task sectors of construction and manufacturing were cause for concern. But I think the dynamics in those sectors can be explained in the context of a global demand shortfall rather than entirely structural phenomena.

This blog post was republished with permission from Economist's View.

So What Will Be The Next Financial Bubble To Pop?

2012-04-05T08:51:00.003-07:00

Now that it appears the real estate bubble has just about run its course, it is time to look for that next big bubble. Some financial analysts are pointing to Europe, and even the Euro currency, as the source of pending financial doom, but one analyst from Money Morning has another idea. He is pointing at student loan debt. With the costs of education rising, and wages not even remotely keeping pace, it seems to me that he has some valid points. For more on this, continue reading the following article from Money Morning.

Don't look now but there's another giant bubble out there. It's so big it rivals subprime.

I'm talking about the student loan bubble.

Recently, the outstanding volume of student loans passed $1 trillion. What's more bothersome is that the average individual amount owed by new college graduates has passed $25,000.

With college costs zooming upwards faster than inflation, this is rapidly becoming another subprime mortgage-like sinkhole.

Just like subprime, the problem is that people of modest means are being suckered by high-pressure salesmen into taking on too much debt.

The difference is that since student loans are government guaranteed and can't be released in bankruptcy, the burdens will be paid by the unfortunate ex-students and the U.S. taxpayer.

The standard justification for soaring higher education costs is a simple one.

The United States needs to maintain an educational lead in order for its wage levels to remain above those of its competitors.

I'm talking largely about emerging markets, which have been helped enormously by modern communications, making global sourcing much easier than it was.

There are two problems with this view.

First, the more esteemed colleges take great pride in not providing vocational training, and graduate large numbers of students with degrees that don't obviously qualify them for anything.

In what way is the U.S. being made more competitive by graduating students in (insert your favorite useless college major here)?

Second, even as the demand for a college education is increasing, the efficiency of providing it is declining. Both the Ivy League and state university systems increase tuition rates far more rapidly than overall inflation.

The Student Loan Bubble Drives Up Costs

In fact, there is considerable evidence that finance availability is itself pushing up college costs.

As college funding has become more readily available to the general population, it has reduced the financial pressure on colleges, since few of their students are today paying their way from part-time jobs and parent cash flow.

Huge endowments in the Ivy League, which allow those elite colleges to provide full scholarships for students, focus the competition between colleges ever more closely on league table "prestige" rather than costs.

The ranks of college administrators have also exploded since they are effectively insulated from market forces - not unlike those in medical professions.

So have their earnings - according to The New York Times, in the decade between the 1999-2000 and 2009-10 college years, the average college president's pay at the 50 wealthiest universities increased by 75%, to $876,792, while their average professorial pay increased by only 14%, to $179,970.

Meanwhile, the cost of tuition has increased by 65% while prices generally rose by 31% during the same decade.

That's precisely the opposite of what you'd want to happen, if you were concerned about college productivity and cost.

Buried in Debt by Student Loans

There are two factors pushing the escalation in student loan volume.

One is the nationalization of most student loan programs in 2009, providing government guarantees on most student loans.

That has altogether removed the risks of student loan provision from banks, as well as encouraging low-quality degree scams by for-profit colleges. For-profit colleges are a good idea, but not when combined with government-guaranteed student loans.

The other factor pushing up student loans is the Bankruptcy Act of 2005, which allowed consumers to relieve themselves of all debts in bankruptcy except student loans.

This special privilege for the student loan market has caused great hardship.

The Washington Post reported this week that Americans 60 and older still owe $36 billion on student loans, and gave one sad example of a 58-year old woman who had borrowed $21,000 to fund a graduate degree in clinical psychology in the late 1980s (which one would think was at least moderately useful), had never been able to earn more than $25,000 per annum and was now left with student loan debt of $54,000.

If government guarantees and bankruptcy exemption remain in place, the volume of student loans will continue soaring, as unscrupulous lenders provide them to naive students.

That will cause the cost of college to continue rising in real terms as college administrators pad their sinecures.

As with the subprime mortgage industry, an eventual crash is inevitable. But unlike subprime mortgage borrowers, student loan borrowers will be unable to start afresh after bankruptcy.

The solution is to eliminate the two unwarranted subsidies to the student loan industry. Student loans must no longer be guaranteed by the government.

And in bankruptcy, they must be treated like any other debt. The banks will scream, and student loans will be much more difficult to get.

For most students, that will return them to choosing a cheaper institution and working their way through college, in the traditional way - some of them might choose more marketable degree courses, too.

For the poor but brilliant, the Ivy League can continue providing full scholarships and the government can continue providing Pell grants - with their cost fully accounted for on-budget.

College costs will drop back to 1970s levels in real terms, as overstuffed bureaucracies are eliminated.

And for college administrators and student lending banks, life will get considerably harder - which is no bad thing.

All bubbles eventually burst. This one will be no different.

This article was republished with permission from Money Morning.

Stocks Up, Consumer Sentiment Down

2012-03-20T07:33:00.006-07:00

Rising gas prices are having a negative impact on U.S. consumer sentiment, although projections suggest the feeling is temporary according to the Reuters/University of Michigan consumer sentiment index. The Energy Department noted prices edged up another $0.04 in the past week, keeping more money in the pump and leaving consumers with less to spend elsewhere. Meanwhile, improvements in the stock market have some wondering about inflation, including Federal Reserve chairman Ben Bernanke, despite gains being propped up by a strengthening labor market. For more on this continue reading the following article from Tim Iacono.

The Reuters/University of Michigan consumer sentiment index dipped from 75.3 in February to 74.3 in the first of two readings for March in a sign that rising gas prices may now be having in an impact on the mood of the consumer.

Based in large part on a recently improving labor market, the current conditions component remains firm, up from 83.0 to 84.2, however, the expectations component more than offset that gain, down from 70.3 to 68.0.

It’s a good think that equity markets don’t have a gas tank to fill every week or they too might think about pulling back but, so far, they show little sign of doing so, though that could soon change given that inflation expectations show signs of stirring to life.

Survey respondents ratcheted up their one-year outlook on consumer prices from an increase of 3.3 percent to 4.0 percent in a delayed reaction to rising pump prices that the Energy Department said gained another 4 cents over the last week, rising to a national average of $3.83 per gallon.

Five-year inflation expectations (the measure watched more closely by Fed economists) rose just one-tenth to 3.0 percent, indicating that, like Fed Chief Ben Bernanke, most Americans see rising gas prices as being temporary, a belief that, unlike Bernanke’s, could prove to be temporary itself.

This blog post was republished with permission from Tim Iacono.

Defining ‘Fiscal Stimulus’

2012-03-09T11:08:00.005-08:00

Many people wonder why the much-touted fiscal stimulus did not do more to boost the economy, and some experts answer this question with another: what stimulus? Menzie Chinn, professor of Public Affairs and Economics at the University of Wisconsin, explains in a recent article how the stimulus package was not overly large when examined as a ratio of the GDP. Chinn breaks down the stimulus as it relates to Bush-era tax cuts, spending for the Iraq war and Obama’s health care legislation, demonstrating that in the face of such costs there was really no hope such a fractionally small stimulus package could have stimulated the economy. For more on this continue reading the following article from Economist’s View.

Menzie Chinn makes a point I've been trying to emphasize (with less than full success). When people ask why the fiscal stimulus didn't do more to elevate the economy, the right question to ask is what fiscal stimulus? When the federal efforts are combined with the contractions at the state and local level, there was very little net stimulus. That doesn't mean the federal efforts didn't do something positive and important -- if the federal government hadn't offset the state and local contractions things would have been even worse -- but it does mean that people looking for more than simply treading water as evidence that the fiscal stimulus had an impact are asking the wrong question:

Re-Examining that "Massive Stimulus", by Menzie Chinn: I keep on seeing references to "massive stimulus", so much I have this feeling of innumeracy everywhere. ...

Total nondefense spending at all levels rose from 27.2% of potential GDP in the last quarter of the Bush Administration (2008Q4) to a shocking 29.9% by 2010Q4, before declining to 28.4% in the last quarter for which data are available for.

That's not to say that the Federal government did not increase spending; merely that to a large extent it was offsetting the contraction at the state and local levels of government, as I pointed out in this March 2010 post. ...

Even if the state and local governments had not contracted expenditures, the fiscal stimulus arising from the ARRA (spending and tax provisions) would not have been particularly large, when expressed as a ratio of GDP. As I noted on February 6, 2009, as the bill was close to being signed:

I want to stress the adjectives "massive stimulus" conjoined to the noun "bill" is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.

But then, it was clear that many of the critics never wanted to do the hard work of long division. (Oh, and I still want to talk to all the critics of the bill who said the spending would kick in long after the economy had recovered...).

A parting observation. The impact on the budget (tax reductions and outlays) can be placed in context by comparing to other major undertakings.

Figure 3: Impact on budget balance, in billions of FY2010$, for EGTRRA; for JGTRRA; cumulative budget authorization for operations in Iraq (Operation Iraqi Freedom, not including incremental debt servicing costs) through FY2012; for Patient Protection and Affordable Care Act; for American Recovery and Reinvestment Act, all in billions of FY2010$, deflated using CPI. Source: CBO, Budget and Economic Outlook: An Update (August. 2001), Table 1-4; CBO, Budget and Economic Outlook: An Update (August 2003), Table 1-8 (revenue implications only); and CBO, "H.R. 4872, Reconciliation Act of 2010: Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010," (March 18, 2010), Nominal figures from Amy Belasco, "The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11," RL33110, Congressional Research Service, March 29, 2011, Table 3. Data for FY2011 Iraq operations is for continuing resolution, for 2012 is Administration FY2012 request (see notes to Figure 2 of this post for calculations); for ARRA, CBO Budget and Economic Outlook (January 2012), Box 1-1, page 9; for CPI, historical from FREDII, and forecasts/projections from CBO (January 2012), Table 2-1 (using calendar year forecasted inflation for FY inflation). ...

Just to decode: The EGTRRA = The Economic Growth and Tax Relief Reconciliation Act of 2001, JGTRRA = The Jobs and Growth Tax Relief Reconciliation Act of 2003, PPACA = The Patient Protection and Affordable Care Act.

That is, the first two entries are the Bush Tax cuts, the third the Iraq war, the fourth is Obama's health care legislation (which actually improved the budget outlook according to the CBO), and the last is the federal stimulus package.

The sum of the first three entries -- the Bush tax cuts and the Iraq war -- are approximately four times as "massive" as the stimulus package.

This blog post was republished with permission from Economist's View.

Critics Examine Buffett’s Gold Claims

2012-03-05T09:16:00.001-08:00

Legendary investor Warren Buffett has been making the financial news rounds with his claims that gold is “valueless,” and that the metal is experiencing an exaggerated bubble that is set to burst sooner rather than later. On the Edge host Max Kaiser asked Ned Naylor Leyland of Cheviot Asset Management on his opinion of Buffett’s gold rhetoric, and Naylor responded that Buffett must have an ulterior motive for the claim considering gold’s performance as compared to Buffett’s own Berkshire Hathaway. Kaiser went further, labeling Buffett a “financial terrorist” whose meddling in banking institutions and broader impact on the financial markets tinges the investor’s comments with dishonesty. For more on this continue reading the following article from Tim Iacono.

Max Keiser talks to Ned Naylor Leyland of Cheviot Asset Management about why Warren Buffett hates gold after the “Oracle of Omaha” devoted a considerable portion of his recent shareholders letter(.pdf) to discuss why the metal is not worth owning.

Among the many other interesting things you’ll learn from Ned is that Warren Buffett’s father was the “Ron Paul of his day”, meaning that, Buffett the Younger’s views toward the yellow metal are likely something he didn’t learn at home.

This blog post was republished with permission from Tim Iacono.

Fed Finally Getting Real?

2012-03-01T12:23:00.002-08:00

Macroeconomist Mark Thoma is wondering whether Federal Reserve Chairman Ben Bernanke is finally coming to terms with the Fed’s role in the national economic crisis based on recent comments Bernanke made before the House Committee on Financial Services that did not mirror the Chairman’s typical rose-colored pronouncements. As he related in a recent CBS News commentary, Thoma has been given hope by Bernanke’s sterner disposition that the Fed will continue to support the U.S. economy during the tender stages of its recovery, rather than resort to austerity before any improvements have a chance to take root. For more on this continue reading the following article from Economist’s View.

I have been pretty critical of the Fed throughout the crisis. I still don't think policy is aggressive enough, and the Fed has been behind the developments in the economy due to its propensity to see green shoots that aren't actually there. But at least it's leaning in the right direction:
Has the Fed Learned Its Lesson?, Mark, Thoma, CBS News: COMMENTARY Federal Reserve Chairman Ben Bernanke seems to have learned an important lesson. In his appearance before House Committee on Financial Services, Chairman Bernanke said the monetary policy committee does "not anticipate further substantial declines in the unemployment rate over the course of this year. Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate." In addition, "participants agreed that strains in global financial markets posed significant downside risks to the economic outlook." There were other cautionary statements as well.

That is quite a change from Bernanke's pronouncement that the Fed was seeing "green shoots" in the economy back in 2009, and similar optimistic statements about the prospects for recovery many times after that. Time and again, however, the green shoots withered and policy ended up in catch up mode rather than out in front of the economy as it ought to be. Policymakers were consistently behind.

I don't think either monetary or fiscal policymakers have been aggressive enough throughout the crisis, and I have also worried that policymakers in Congress and at the Fed would withdraw support for the economy too soon and harm the recovery. There's little chance that policy will march the aggressiveness I believe is called for, especially this late in the game, and I'm still very worried about Congress turning to budget balancing before the economy is ready to handle it. Premature austerity could damage our recovery prospects.

But I'm becoming less concerned that the Fed will withdraw support too soon. It has committed to keeping interest rates low through the end of 2014, an extension of an earlier commitment through mid 2013. However, the commitment has wiggle room, and there are voices on the Fed who are calling for interest rate increases now. But as Chairman Bernanke made clear today, the Fed as a whole remains cautious and monetary policymakers as a whole are not ready to conclude our troubles are over. I think that's exactly the right stance to take -- hope for the best, but prepare for the worst. In the past the Fed let its hopes interfere with its preparation, but this time does indeed appear to be different.

This article was republished with permission from Economist's View.

China's Central Bank Lowers Bank Reserve Ratio Requirements

2012-02-20T11:38:00.000-08:00

This past weekend, China's central bank reduced the reserve ratio requirements for banks. Even after the .5% reduction, China's reserve ratios are still twice what is required of banks in the United States. This move, however, shows that China is looking for ways to get their economy moving once again, and will have an impact on a global scale. For more on this, continue reading the following post from Tim Iacono.

China’s central bank cutting bank reserve ratios on Saturday in order to spur lending and boost economic growth was one of the weekend’s major stories, that is, along with more Middle East geopolitical turmoil and surging oil prices … perhaps they’re all connected.

Reserve requirements will be reduced from 21.0 percent to 20.5 percent for large banks, leaving China with what are still some of the highest bank reserve ratios in the world. Wikipedia provides a good discussion of this subject that includes the following caveat to the official reserve ratio of 10 percent here in the U.S.:

Effective December 27, 1990, a liquidity ratio of zero has applied to CDs, savings deposits, and time deposits, owned by entities other than households, and the Eurocurrency liabilities of depository institutions. Deposits owned by foreign corporations or governments are currently not subject to reserve requirements.

This blog post was republished with permission from Tim Iacono.

US Housing Market Finding Bottom?

2012-02-08T09:51:00.000-08:00

Economy watchdog Tim Iacono touts Bill McBride’s blog, Calculated Risk, as a reliable resource for housing market predictions, and McBride’s latest post – “The Housing Bottom Is Here” – has Iacono’s attention. Iacono notes that McBride’s blog was one of the few that identified and provided warning for the 2004-05 housing bubble that lifted Southern California home prices only to watch them plummet, giving supposed credence to more current predictions. Much like McBride in his own blog, however, Iacono stops short of suggesting that he, McBride or anyone else can predict what will happen in today’s U.S. housing market. For more on this continue reading the following article from Tim Iacono.

While the debate about whether the U.S. housing market has hit bottom is certainly heating up, hopefully it won’t rise to the current temperature of the brouhaha over whether last Friday’s labor market report was good, bad, indifferent, or just an outright fabrication by the Obama administration in an increasingly contentious election year.

I don’t know about you, but I can’t tell the politics from the statistics when trying to make sense of last Friday’s monthly jobs report and, at this point, I don’t care anymore.

As for the housing market, none other than Bill McBride at the wildly popular Calculated Risk blog weighed in on the subject yesterday declaring The Housing Bottom Is Here, a view that you find out at the end of the article isn’t quite as strongly held as you might think from just reading the title.

Bill notes there are two housing markets – new home construction and existing home sales – and, while the former has clearly made a bottom, the latter is likely to do so next month, though he qualifies that prediction with words like “I think that house prices are close to a bottom” and there being “a reasonable chance that the bottom is here”.

Now, caveats notwithstanding, this is still a big deal since Calculated Risk isn’t just an ordinary offering out there in the blogosphere. This particular blog happened to be calling the US housing market a bubble back when few had an inkling of the trouble to come and, for that reason alone, his is an opinion worth listening to.

It was back in late-2004 and early-2005 that a few people in Southern California – one of the many “ground zeros” for the late, great housing bubble – started writing about the remarkable rise in home prices and how it could not be sustained.

Yours truly was one of them and I’ve learned much from Bill over the years.

I recall reading commentary by Bill and Mish over at Silicon Valley insider as they set about creating what are two of the most influential financial blogs in the country today, so, it’s not as if any of us are “Johnny-come-latelies”.

Another of the original housing bubble bloggers was Rich Toscano at Piggington.com and, as long as we’ve begun to gather data points, it’s worth noting that Rich is in the process of buying a home in the San Diego area, something he characterized as Jumping the Shark.

Recall that San Diego was ahead of the crowd, housing-bubble-wise, over last decade and, today, it’s certainly no Las Vegas, where home prices just keep falling month after month, year after year.

According to the latest data from Case-Shiller, San Diego home prices are four or five percent above their recession lows in early 2009, and, when factoring in the Federal Reserve’s freakishly low interest rates and the reality that, to most people, it’s not the house price, but the monthly payment that is most important, a home purchased there at this time would seem to make good sense.

Of course, my wife and I purchased a home here in Montana just over a year ago, so, actions normally speaking louder than words, you have a pretty good idea about how we feel about property prices in this part of the country.

And if you go a few hundred miles or so east of here to where the shale energy boom is underway in North Dakota, you’d think it’s 2005 again.

In the Bay area, there’s Patrick Killelea of Patrick.net fame who has yet to fall in line with some of the other capitulating 2005-era housing bubble bloggers and, given his proximity to what appears to be another inflating Silicon Valley tech bubble, I wouldn’t expect him to do so anytime soon.

It’s funny to think back to about 12 years ago when I was working in Southern California and was visited by co-workers from Northern California who told tall tales of run-of-the-mill 1,000 square foot homes selling for a half million dollars.

Little did we know that large portions of the rest of the country would experience that same phenomenon just a few years later. As it turns out, Northern California seems to get a new bubble every five years or so, something that makes it particularly hard to call a housing market bottom there due to the spill-over effect of these non-housing bubble bubbles.

I don’t know – conditions are different depending on where you are and, in most cases, national home price trends have little meaning for an individual contemplating a home purchase.

Surely, with a couple years of home price history now in the books, housing bubble spotter Dean Baker was right to buy a house near Washington D.C. a few years back since the market there seemed to make a bottom just as the freshly printed and borrowed money started gushing from the nation’s capital.

One thing is certain, I’d much rather be writing about whether the housing market has hit bottom than whether the labor market has turned a corner as the November elections draw nearer because that discussion has become way too toxic for my tastes.

This blog post was republished with permission from Tim Iacono.

US Housing Market Bottom Not Panacea

2012-02-02T08:48:00.000-08:00

Many real estate forecasters tend to speak about the arrival of a bottom in the U.S. housing market as an answer to everyone’s woes, but a look to the past shows that may not be the case. Analyst Tim Iacono references economists Robert Shiller and Barry Ritholtz in a discussion about the dip in Los Angeles home prices in 1996. He notes that prices stayed low for four years following the dive, suggesting that any bottom that may come in 2012 will likely not be the answer everyone hopes it will be – at least in the near term. For more on this continue reading the following article from Tim Iacono.

Not surprisingly, I’m going to have to agree with both Yale Economist Robert Shiller in this Business Insider interview and Barry Ritholtz at his Big Picture blog in arguing that a housing bottom – if it does indeed arrive in 2012 – will prove disappointing for those expecting gains on their real estate investment in 2013 or 2014.

We happened to be living in Southern California at the time and had the good fortune to buy a house there in 1995, though, we were just looking for a place to live, not thinking of it as an investment.

I remember the price actually declined by another five percent or so in the year after we bought it and it wasn’t until five or six years later that we began to hear about rising home prices, a bit surprised to learn that the value of our place had increased by $100,000 or more.

But, for the first few years, you were better off not even thinking about home values.

Using the broad Los Angeles price index as an example, even if you had bought at the absolute bottom in February 1996, you’d have had less than a one percent gain a year later.

The index spent a full four years within five percent of the February 1996 low!

Anyone thinking that a housing market bottom in 2012 means that home prices will be higher next year or the year after that will probably be disappointed.

Moreover, given the size of the recent boom and the likelihood of the bust being of similar magnitude, I wouldn’t be surprised if home prices don’t post a substantive advance for the rest of the decade.

This blog post was republished with permission from Tim Iacono.

It's Time To Drop Those Money Funds

2012-01-30T11:33:00.000-08:00

If you are still invested in money funds, Bernanke's announcement that the Fed plans on keeping interest rates the same for the foreseeable future should help spur you into action. With returns near 0%, if you keep money in a money fund, you are simply losing buying power everyday to inflation. Tim Iacono from The Mess That Greenspan Made, takes a closer look at money fund investments in his blog post below.

More fallout from last week’s Fed announcement of a one-and-a-half year extension to their freakishly low interest rate forecast comes via this MarketWatch story about the dim prospects of money market returns between now and sometime in 2015 (or later).

Money funds are designed to be ultra-safe cash-equivalents, and traditionally they provided a bit more return than bank certificates of deposit or savings accounts.

But for about 18 months now, nearly two-thirds of all money funds have yielded under 0.01%. To see just how horrible that is, consider that if you had $1,000 and split it evenly between a money fund and a piggy bank, at the end of a year the fund would only be ahead by a nickel.

This is not a new problem, but the Fed paints it in a new light. Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take a bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising.

Even when rates rise, money-fund yields aren’t likely to go up. Financial-services firms have been waiving costs, basically operating them at a loss to keep assets in-house; many smaller firms have simply shuttered their money-market funds. When rates finally do go up — and the Fed forecast doesn’t mean it can’t happen, it just suggests that it won’t until 2014 — firms will first take much of any increase for themselves.

By the way, does anyone know how stable value funds are doing these days? I was tempted to not convert one of our 401ks to a self-directed IRA when we left our cubicle jobs back in 2007 in order to get the 3 or 4 percent these funds paid in the event that the early-decade low rate environment returned which, as it turns out, it did with a vengeance.

I regret that decision a little more each year…

This post was republished with permission from Tim Iacono.

Fed Economists Laugh It Off

2012-01-23T09:29:00.000-08:00

A new graph is making its way around the Internet that charts the amount of laughter recorded by Federal Open Market Committee (FOMC) stenographers during meetings between 2001 and 2006 – during the ramp-up to the recession. The graph shows that committee members had increasingly more fun as the years passed, and suggests they could have been doing more to keep an eye on the growing housing bubble that would soon burst. The FOMC is expected to announce a new initiative regarding interest-rate projections and future impact, and many are wondering how many will be laughing. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve transcripts from 2006 released ten days ago continue to reverberate around the internet as the central bank has become a laughing stock for being so unaware of the U.S. housing bubble that was inflating to dangerous levels throughout the year.

Dean Baker’s Alan Greenspan’s ship of fools from last week is well worth reading if for no other reason than to learn what former Fed governor Frederic Mishkin was thinking late that year and I recently came across this item at The Daily Staghunt blog that charted how much laughter appeared in the transcripts over the years.

While Fed economists are purportedly a funny lot, it does look pretty bad to see increasing joviality at a time when they could have been doing something about the housing bubble.

The FOMC (Federal Open Market Committee) meets this week and they are expected to announce of a new communication initiative with two key features – expanded interest-rate projections and an explanation of their objectives for inflation and employment. Fed Chairman Ben Bernanke will surely discuss these in detail in the press conference after the meeting and, though normally keen on audience engagement, he’ll probably be hoping that he’s not asked about the 2006 transcripts.

If we’re really lucky, someone will ask him about this chart.

This blog post was republished with permission from Tim Iacono.

Stiglitz Forecasts Financial Doom, Gloom

2012-01-13T10:20:00.000-08:00

Columbia University professor and Nobel laureate Joseph Stiglitz is not optimistic about the prospect of the American Dream as the country moves into 2012. Stiglitz waxes philosophical about the country’s growing wage gap, terminal unemployment and financial crises that have erupted in multiple areas of the world. He opines that working on long-term problems like fiscal debt could actually solve short-term problems like unemployment if the world’s power players were not rooted in politics as usual. The fear, Stiglitz says, is that the system will cataclysmically right itself before cooler heads prevail. For more on this continue reading the following article from Economist’s View.

I think it would be fair to say that Joe Stiglitz isn't predicting a return to general prosperity anytime soon:

The Perils of 2012, by Joseph E. Stiglitz, Commentary, Project Syndicate: The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. ...

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. ...

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. ...

I'm not sure it was intended as a joke, but this part made me laugh: "It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs..."

This article was republished with permission from Economist's View.

Fed Backs Conversion of Foreclosures into Rentals

2012-01-06T09:31:00.000-08:00

The Federal Reserve’s latest report on the U.S. housing market indicates its advocacy for the bundling and selling of government-owned foreclosed homes to investors who can then convert the homes into rental properties. The report notes that the market is not expected to improve and that interest in rentals will continue to increase, thereby opening the door to a government investment opportunity. Some critics believe, however, that the ulterior motive here is to neutralize an area (rental costs) that accounts the for the Fed’s “core” inflation rate by placing more rentals on the market, thereby providing more room to print money in the event of a new fiscal emergency. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve’s new white paper about the U.S. housing market released just yesterday – The U.S. Housing Market: Current Conditions and Policy Considerations (.pdf) – contains the following paragraph and a good deal of supporting rationale for their recommendation to sell GSE-owned foreclosed properties in bulk to investors so that they can be converted in bulk into rentals.

The price signals in the owner-occupied and rental housing markets–that is, the decline in house prices and the rise in rents–suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

While, on the surface, this makes a good deal of sense after the nation painfully learned a few years ago that home ownership wasn’t what it was cracked up to be and, ever since, home prices have been falling while demand for rental properties has grown, a massive conversion of REO properties into rental properties would also have the convenient side effect of helping the Fed keep inflation low, giving it more leeway to print up another trillion dollars or so for the greater good, should the need arise.

How so?

Recall that, part of the reason that the housing bubble grew so big was that the inflation statistics include rental prices as a proxy for the cost of home ownership, a change that was made all the way back in 1983 and that forever changed how inflation is reported and how high home prices could rise (see this Seeking Alpha article on the subject from a few years back that still ranks quite high on a search of “owners’ equivalent rent”).

After years of being subdued because everyone wanted to own a home (and nearly did), lately, rents have been rising – up about 2 percent over the last year – and, since rents account for 40 percent of the Fed’s “core” inflation rate, you can see why lower rental prices might be in the central bank’s interest.

This blog post was republished with permission from Tim Iacono.

Farmland Values Soar in Heartland

2012-01-04T10:22:00.000-08:00

Tim Iacono comments on a Brian Williams news segment detailing the rising prices of farmland across America’s heartland, particularly in Iowa, where Republican presidential candidates so recently debated. Prices in the area have risen more than 30% in Iowa and 25% on average throughout the Midwest. One land auction featured in the report resulted in a sale for more than $13,000 per acre – more than double the value from five years ago. Experts say the increases are driven by the rarity with which farmland comes on the market and the growing demand for agricultural products, particularly corn for the surging (and subsidized) ethanol market. For more on this continue reading the following article from Tim Iacono.

After today, we won’t be hearing much about Iowa anymore as aspiring presidential candidates pack up and leave town following today’s caucuses, but, this NBC report on the farmland boom there puts things in a slightly different perspective than you may have heard after listening to talking heads on MSNBC and Fox News for the last few months.

Visit msnbc.com for breaking news, world news, and news about the economy

There are some pretty impressive statistics associated with the boom – per acre prices in Iowa up over 30 percent from last year and, across the entire Midwest, up about 25 percent … and you thought the real estate bubble was over.

This blog post was republished with permission from Tim Iacono.

China Showing Signs of Economic Weakness

2011-12-20T08:13:00.000-08:00

Economist Paul Krugman takes an unflinching look at China’s current economic position, and believes what he sees is a mirror image of Japan in the 80s or the U.S. in 2007: a country that has relied on shady banking practices to sustain a boom in growth that now cannot be supported by domestic consumption or financing. Now, as the bubble is set to burst, the country seems ready to dig in its heels, particularly by issuing punitive tariffs on foreign trade partners. Krugman rightly notes that the last thing the global economy needs is another crisis point, but he also believes that is the direction in which the country is headed. For more on this continue reading the following article from Economist’s View.

Uh-oh?:

Will China Break?, by Paul Krugman, Commentary, NY Times: Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.

Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now. ...

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.

So who’s buying the goods and services China produces? Part of the answer is, well, us:... China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. ...

And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system..: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world? ...

For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing. ...

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

This blog post was republished with permission from Economist's View.

Eurozone Crisis Overshadows U.S. Debt Concerns

2011-12-15T07:48:00.000-08:00

The U.S. media and market analysts have been focusing so much attention on the Eurozone debt crisis that similar problems brewing at home in domestic credit markets are not getting any attention, say some critics. Now that the presidential election is in full swing, many argue that the growing U.S. debt debacle will go unattended as politicians focus all their time and energy on staying in – or getting into – office. With the Federal Reserve’s latest announcement that Treasury borrowing rates will remain at historical lows, it appears that policymakers are intent on letting the problem fester rather than making the tough decisions that represent sound fiscal sense. For more on this continue reading the following article from Tim Iacono.

Former Kansas governor Mark Parkinson appeared on CNBC yesterday and made the point that you don’t hear too much anymore these days with European credit markets being such a mess – that the U.S. will someday have a similar crisis.

Unfortunately, with the election season now well underway, officials in Washington are not likely to take any action to make the looming U.S. debt crisis any less menacing, in fact, with borrowing rates so low for the Treasury Department, you get the feeling that we’re whistling past the graveyard louder than ever.

This blog post was republished with permission from Tim Iacono.

Consumer Credit Trends Shifting

2011-12-12T08:21:00.000-08:00

Tim Iacono reviews data compiled on EconomPicData that reveals American consumers are ratcheting down their use of credit cards, dropping toward 15% of personal income. Consumer debt has been rising for decades, but now it is being replaced by student loan debt, which has increased dramatically in the last 10 years to approach 5% of personal income. Iacono believes this will likely cause problems in the long term as getting an education begins to look less appealing and eventually impacts U.S. competitiveness in the global market. For more on this continue reading the following article from Tim Iacono.

From this item at Jake’s EconomPicData blog the other day comes the graphic below depicting dramatic changes in consumer credit trends over the years. Racking up revolving credit (e.g., credit cards) is not nearly as popular as it was for decades, what I’ve long called “the real Reagan Revolution” as individuals dramatically increased their use of credit cards to fuel consumption (i.e., buying things you don’t need with money you don’t have).

Taking up the slack for falling credit card balances are higher student loan balances that, already, are further separating the nation into have and have-nots (a.k.a. debt serfs) while making the whole idea of higher education less appealing when this is one the the things the country needs most to remain competitive with emerging economies in Asia.

This blog post was republished with permission from Tim Iacono.

Eurozone Eyes Questionable Bailout Strategy

2011-12-07T08:01:00.000-08:00

Talks in the Eurozone turn on who is going to accept the loss in a debt restructuring deal, and now architects of the plan are saying private-sector bondholders may not have to take a haircut in the event of a bailout. The news has fueled a short-term rally, but experts criticize the measure as one that will result in the same kind of catastrophe that befell Ireland when it granted banks a blanket bailout that pushed the debt onto Irish citizens and resulted in a staggering collapse of the economy. As European countries scramble to guarantee one another’s debt and lenders seek to avoid paying for bad decisions, ratings agencies are poised to downgrade the entire region. For more on this continue reading the following article from Economist’s View.

Felix Salmon:

The eurozone’s terrible mistake, by Felix Salmon: The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

Right now, the commitment is still vague...

To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? ...

On Ireland, see: Despite Praise for Its Austerity, Ireland and Its People Are Being Battered.

This article was republished with permission from Economist's View.

Ron Paul Talks Gold Standard

2011-12-01T09:00:00.000-08:00

Presidential candidate Rep. Ron Paul (R-TX) spoke with Judge Andrew Napolitano, host of FOX Business News “Freedom Watch”, about his belief in the gold standard and the current state of U.S. monetary policy. Paul discusses the transition from fiat currency back to the gold standard by legalizing gold and silver tender without having a fixed exchange rate between the two currencies. Judge Napolitano questions whether there is a possibility of a true gold standard that allows exchange between the two, and Paul responds that while that scenario is a long way off, the current system cannot sustain itself and that an audit of the Federal Reserve is a good place to begin reform. For more on this continue reading the following article from Tim Iacono.

Rep. Ron Paul (R-TX) appeared on Fox Business News yesterday to talk about the nation’s money and a return to the gold standard in the unlikely event that he’s elected president.

His discussion of the U.S. dollar throughout American history reminded me of a Wall Street Journal book review yesterday by James Grant that, from what I could tell, was a lot better than the book – Greenback Planet by H.W. Brands. From the book review:

“Greenback Planet” is the story of this amazing monetary transformation. The narrative begins in the 18th century and races to the present, pausing to catch its breath at some of the great American monetary landmarks: Andrew Jackson’s veto, in 1832, of legislation rechartering a predecessor to the Federal Reserve; Abraham Lincoln’s recourse to greenbacks, or fiat currency, to finance the Civil War; resumption of the gold standard in 1879, with which it once more became possible to exchange gold for paper and vice-versa at a fixed and statutory rate; J.P. Morgan quelling the Panic of 1907; the Federal Reserve not quelling, never mind preventing, the Great Depression; the crazy-quilt monetary improvisations of the 1930s; the halfway gold dollar of the post-World War II era; and the creation, in 1971, of the pure paper (later digital) model of today.

Mr. Brands is a paper-money man, though the subtitle of his book—”How the Dollar Conquered the World and Threatened Civilization as We Know It”—seems to betray some reservations.

This blog post was republished with permission from Tim Iacono.

Economist Recommends Tax Increases

2011-11-29T08:34:00.000-08:00

Economist Paul Krugman writes in The New York Times that it’s a good thing the Congressional “supercommittee” has failed to agree on federal budget cuts. A more helpful approach, he says, is to raise taxes on the rich and to start taxing financial transactions. He takes on naysayers who argue taxing the rich will not help the bigger picture by pointing out that the combined income for the top 0.1% of earners is more than $1 trillion, and claims the vast increase in financial transactions over the years could result in a significant source of tax revenue. For more on this continue reading the following article from Economist’s View.

Increased in revenue from taxes on very high incomes and taxes on financial transactions should be part of the long-term deficit reduction plan:

Things to Tax, by Paul Krugman, Commentary, NY Times: The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?

And I don’t just mean a return to Clinton-era tax rates. ... The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?

Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest...: taxes on very high incomes and taxes on financial transactions.

About those high incomes: In my last column I suggested that the very rich ... should pay more in taxes. I got many responses from readers ... that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. ... The IRS reports that in 2007 ... the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and ... taxes ... would raise a significant amount of revenue...

For example,... before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. ... I’ve extrapolated ... using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. ...

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And then there’s the idea of taxing financial transactions... Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything,... to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing. ...

Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

This blog post was republished with permission from Economist’s View.

Ron Paul ‘Faces Nation’

2011-11-22T06:56:00.000-08:00

Ron Paul recently fielded questions from Bob Schieffer on Face the Nation, and critics of the interview point out mainstream media’s tendency to put words in Paul’s mouth and otherwise find ways to undermine the GOP candidate’s message. Schieffer questioned Paul on his stance on U.S. foreign policy and military presence, Iranian nuclear proliferation, and the closing of several government agencies. Paul explained and defended his position despite Schieffer’s clearly argumentative approach, demonstrating why Iowa numbers have placed him in the running with contenders Mitt Romney and Herman Cain. For more on this continue reading the following article from Tim Iacono.

GOP hopeful Rep. Ron Paul (R-TX) appeared on Face the Nation yesterday and host Bob Schieffer provided a very compelling display of how, for the most part, the mainstream media works against any fundamental reform for the U.S. government as Schieffer seems to only be interested in putting words in Paul’s mouth that, fortunately, are rejected.

Some media-watchers have called this a hit-job after Paul had risen to a statistical tie for the lead in some Iowa polls and it’s hard not to come away with that impression when you examine Shieffer’s words closely, as was done by Paul Mulshine of the New Jersey Star Ledger in the article No wonder these talking heads don’t like talking to Ron Paul.

This blog post was republished with permission from Tim Iacono.