Capital Commerce
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8 Bold Predictions for 2008
Continue reading… 21 CommentsHere you go, for what it's worth:
1) The economy expands at a greater than 3 percent pace in the second half, but polls will continue to show that most Americans think the economy stinks.
2) Greater supply, slower global growth, less geopolitical risk, and changes in consumer behavior push oil prices back toward $60 a barrel.
3) No presidential candidate gets 50 percent of the popular vote.
4) Healthcare is a big political issue, but not one voter in 20 will understand the plans of the various candidates.
5) The World Series will be the Chicago Cubs vs. the Detroit Tigers in a rematch of the 1945 championship. Cubs win, Cubs win, Cubs win.
6) The most profitable film will be the monster movie Cloverfield .
7) Both major presidential candidates will offer a "new social contract" for worried American workers.
8) Both major presidential candidates will offer "Apollo Programs" for energy independence/climate change costing more in inflation-adjusted terms than the original moon mission.
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Hillary's Surprising Top Priority: the Bush Tax Cuts
Continue reading… 12 CommentsI was poking about Hillary Clinton's website, and this is what she lists as her top priority for "strengthening the middle class."
Lower taxes for middle class families by: extending the middle class tax cuts including child tax credit and marriage penalty relief, offering new tax cuts for healthcare, college and retirement, and expanding the [earned income tax credit] and the child care tax credit.
Those tax cuts she is talking about are, of course, the Bush tax cuts. Yet a bit later on the same Web page, she talks about Bush's "fiscal irresponsibility," implying that the Bush tax cuts were fiscally irresponsible. Now letting only the tax reductions on wealthier Americans expire in 2010—as Clinton has said she wants to do—might bring in only an extra $50 billion or so, not counting any negative effects on growth. (Her adviser Dick Gephardt has implied she would keep the investment tax cuts.)
So when you put it all together, what is Clinton really saying? I'm not sure, but I am Googling "cognitive dissonance" right now.
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My Fantastic Four Favorite Books of the Year
Continue reading… 4 CommentsThese are my favorite economics books of 2007. Now, some of them did not come out in 2007, but I read them in 2007—and it's my blog, so I can do what I want, brother. Here they are, in no particular order:
1) Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas McCraw (2007). Who was the greatest economist of the 20th century, Joseph Schumpeter or Milton Friedman? I don't have to choose, so I won't. But this compelling biography of the man who created the intellectual framework for understanding the critical role that entrepreneurship and innovation play in economic growth certainly makes the case that Schumpeter deserves to be as well known to the general public as Friedman is.
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Sorry, al Qaeda, the Global Boom Continues
Continue reading… 0 CommentsSo how went the seventh year of militant Islam's war on globalization? Not so well, according to this economic analysis by Action Economics:
The global economy blasted through the 2006 U.S. housing downturn and 2007 market turmoil in high gear. World GDP in 2007 likely matched the 5.4% record growth of 2006, while a 4.0% 2007 global CPI gain will mark the largest since 2001. While advanced economies slow, we expect a solid 5.1% 2008 global GDP gain with a 4% CPI increase and a 2.5% advanced-economy CPI gain that will be the largest since 1996.
The jumbo gains in world GDP in 2006 and 2007 follow 4.8% growth in 2005 and 5.3% in 2004. This is, by far, the biggest four-year stretch of GDP gains since our dataset began in 1984 and quite possibly in the history of the global economy. The four-year global growth surge is being fueled by low short- and long- term yields and a rapid shift in the world's distribution of wealth to Pacific Basin and Middle East economies—which have both lofty savings rates and aggressive global investment strategies.
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McCain's Big (Government) Economic Idea
Continue reading… 3 CommentsJohn McCain’s left-for-dead presidential candidacy has been resurrected. Not only does he have a good shot at winning the New Hampshire primary, but the latest Intrade betting market data have Rudy Giuliani at 28 percent, Mitt Romney at 26 percent, and McCain gaining at 17 percent. That’s pretty good for a guy whose numbers were once down in Ron Paul territory. (It seems as if Giuliani’s hemorrhaging support is all bleeding over to McCain.)
Now the rap on McCain among Republicans is that while he’s great on the war on terrorism, he’s weak on domestic policy. He voted against the 2001 and 2003 tax cuts, for instance. So I couldn’t wait to read his just-released economic plan. Most of it is pretty standard stuff: Get rid of the alternative minimum tax. Extend the Bush tax cuts. Make it harder for Congress to raise taxes. But right toward the end of his agenda is this absolutely mind-blowing bit, especially for free-market types:
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Trade Deficits: Not So Bad, After All
Continue reading… 2 CommentsJohn Tamny of RealClearMarkets—an official F.O.B. (Friend of the Blog)—has a great post, "My Falling Deficit With Safeway," on the logic of free trade. A choice bit: "Broken down to individuals, we can see that falling trade deficits, far from being good, are usually signals of our not being able to purchase what we want, or our not being able to attract the investment that we need." Read it all.
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A Chat With Jack Kemp
Continue reading… 0 CommentsI am sick of the negativity out there right now. So what better way to dispel the gloom as we head toward Christmas than a few words from the always optimistic Jack Kemp, the 1996 GOP vice presidential candidate? (Efharisto to U.S. News superintern Matt Bandyk, who did the interview.)
What explains the period of sustained growth the United States has enjoyed over the past 25 years?
[Federal Reserve Chairman Paul] Volcker wringing inflation out of the economy, Reagan's tax cuts, bringing down the capital-gains rate, reduction of regulatory barriers. Those policies, coupled with growth of countries like China, Brazil, Ireland—you have a tremendous new world of opportunities that are helpful as markets for U.S. exports.... And Clinton, too.... He signed welfare reform, got NAFTA through. And he signed capital-gains-tax cuts. I can't understand why the Democratic parties seem so hostile to economic growth and business. Kennedy was pro-business and pro-growth. -
The Greatest Economics Film Ever
Continue reading… 8 CommentsLet's see, a former Clinton treasury secretary—and some members of Congress—want Uncle Sam to consider a temporary $50 billion to $75 billion tax cut and spending plan to boost the economy. And Alan Greenspan wants the feds to start cutting checks to struggling homeowners. I examined the wisdom and folly of such efforts here. But the 1979 film Being There, about a simple-minded gardener who somehow becomes an influential Washington insider with his gentle wisdom, does it a bit better:
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Can Aliens Help Us Fix Our Problems?
Continue reading… 1 CommentJohn McCain thinks we need a bipartisan panel, like the one created for military base closings, to come up with recommendations to reform the tax code. Hillary Clinton, Mitt Romney, and Rudy Giuliani want a panel to fix entitlement spending. If only the president and Congress could just pull together in the face of daunting challenges and do it themselves...Clinton apparently thinks an alien invasion might do the trick. Per the New York Post:
Call it Hillary's alien inspiration. The former first lady wants to take America back to the movie references of the 1990s. "Remember that movie 'Independence Day,' where invaders were coming from outer space and the whole world was united against the invasion?" she asked at a campaign event Saturday. "Well, why can't we be united on behalf of our planet?" In 1996, Bill Clinton mused about the movie, saying Americans could beat the aliens. "Yes, I think we'd fight them off. We'd find a way to win. That's what America does—we'd find a way to win if it happened."
But it's not just Dems who have an alien obsession. President Reagan at least twice remarked—as seen on this YouTube video that an "alien threat" would unify the nations of the world and, one might assume, Republicans and Democrats.
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Keep Cool About Inflation
Continue reading… 0 CommentsThe always cogent James Glassman of JPMorgan opines on inflation and why we—and the Fed—should not worry:
November CPI gains were slightly higher than analysts predicted, one of the rare upside surprises in a long time, and it was rightly dismissed as noise by most. For a moment, the upside surprise took many aback, because the core CPI rose 0.3% compared with forecasts of 0.2%. But in retrospect, the report was an issue only for those for whom life is always and everywhere an inflation phenomenon. The actual gain in the November core CPI was 0.27% compared with predictions of around 0.22%. Some indirect spillover from the fall's 50% spike in oil had to be expected. Virtually everyone around the world has been reporting slightly higher inflation readings. Oil's the common thread. The upside surprise in the November CPI came in women's apparel—not men's—implying that seasonal issues, not a weaker dollar was the issue. For those inclined to make a story out of one month's spike, risk takers will be thinking, "fool me once, shame on you ... fool me twice, shame on me" ... The popular quip that it's not fair to exclude food and energy from inflation measures misses the point. No one is pretending that food and oil don't matter. ... The economy is complex and relative prices change constantly in response to myriad factors. Economists devote so much attention to the trend component of inflation, because this has proven to be the most reliable way to determine the economy's underlying inflation tendencies. ... 2008 has the potential to underscore this point in dramatic fashion, if oil prices retreat, as expected. The Fed is being cautious when it forecasts that headline inflation will drop back to core inflation. All that is needed for that to happen is for oil prices to remain at the current $90 level. If they fall back toward $60, where they were in August, it will be much clearer why the Fed tends to focus on core inflation.
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The Market and Economy Are Strong Despite Housing
Continue reading… 0 CommentsOutside of housing, the economy continues to boom—as does the stock market. Ed Yardeni of Oak Associates makes a great point:
It's been a great year for the stock market as long as you didn't own any stocks in commercial and investment banks, thrifts and mortgage companies, housing-related firms, retailers, autos, and publishers. Indeed, as long as you avoided falling into these sink holes, double-digit gains have been widespread: Energy (27.9% ytd), Materials (19.6), Utilities (17.0), Information Technology (15.5), Consumer Staples (12.5), Industrials (10.3). Telecommunication Services (8.8) and Health Care (6.8) have recorded healthy gains too. Only two sectors have had losses this year so far and they've been in the double-digits: Financials (-20.8%) and Consumer Discretionary (-13.6). ... Will it be so lopsided again in 2008? It probably will be through the first half of next year. But Financials and Consumer Discretionary could broaden out the bull market I foresee during the second half of the year as their earnings comparisons turn very positive. This assumes, as I do, that the recession scenario will become increasingly less likely after mid-2008.
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Stop the Credit Crunch, and Let the Economy Grow
Continue reading… 0 CommentsThe Wall Street Journal and a good number of folks on Wall Street are coming to the realization that we're not in a recession, despite three years of housing turmoil and high gas prices and five months of credit market chaos. "Fourth Quarter GDP Back in the Black," is how the Journal puts it today as it notes Macroeconomic Advisers, Lehman Brothers, JP Morgan, and Morgan Stanley have all increased their forecasts for the current period by a percentage point or so. Yesterday's great retail sales news is a big reason for the renewed optimism. Now those firms are talking about growth in the roughly 1 to 1.5 percent range, hardly a boom to be sure. Yet the numbers do show the underlying strength in the American economy. We just need to get by this credit crisis. George Magnus, a senior economic adviser to UBS Investment Bank, put it well in yesterday's Financial Times:
What the financial system cannot deal with properly is a drying up of funding liquidity, reflected in exceptionally high interbank rates.... The longer this continues, the greater are the systemic and economic risks. Inflation risk is perhaps the main economic concern for central banks and investors. But whatever the inflation risks in the next few years, it seems unreal to worry about backward-looking food and energy price rises when a nasty deflationary credit crisis is just starting. No banking crisis has ever been followed by rising inflation (except the mid-1970s when oil prices quintupled). Core inflation in most countries remains tame and there has been little pass-through of prices from headline to core rates. Thanks mainly to globalisation, wage rises and pricing power remain subdued. As output growth slows in developed countries, commodity prices are likely to drop. ... As monetary policy must be forward-looking, it is appropriate to ease monetary conditions pre-emptively. This will not stop house prices and collateral values from falling. It can help, at the margin, to rebuild confidence and liquidity in the functioning of financial markets.
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Inflation Numbers Give Ammo to Gold Watchers
Continue reading… 2 CommentsToday's terrible inflation numbers—headline consumer prices jumped 0.8 percent in November, while the core rate (excluding food and energy) rose 0.3 percent—is sure to give comfort to those analysts who have been watching the price of gold and concluding that its ascent means higher prices are on the way. Other economists, though, think market-based measures such the difference between 10-year government bond yields and yields on inflation-indexed bonds are a better gauge of expectations. For a fair analysis of both positions, I urge you to check out this article written by my guy John Tamny, editor of RealClearMarkets, a sister site to RealClearPolitics. Although Tamny is a gold guy, he gives a good overview of the issue.
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Anti-Bernanke Sentiment Builds on Wall Street
Continue reading… 24 CommentsIf there were a national election next year for Federal Reserve chairman as well as for president of the United States, Eric Rosengren might be the dark-horse candidate to become America's next banker-in-chief, a position currently held by Ben Bernanke. Who is Eric Rosengren? He's the president of the Federal Reserve Bank of Boston—he's been in the job only since July—and the lone member of the Fed's policymaking committee to vote for a half-percentage-point cut in the federal funds rate at this week's meeting.
At the very least, Rosengren would seem a lock to win the all-important Wall Street primary. The Dow Jones industrial average plunged nearly 300 points after the rest of the 10-member Federal Open Market Committee, including Bernanke, voted to chop just a quarter point from the key short-term interest rate, lowering it to 4.25 percent. Moreover, the FOMC lowered the discount rate—what the Fed charges banks to borrow—by a less-than-expected quarter point and put out a statement that still seemed to be as much about inflation as about economic growth and troubles in the corporate credit markets.
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Skimpy Fed Rate Cut Irks Stock Market
Continue reading… 11 CommentsMy quick take on today's Fed rate cut: If Ben Bernanke ends up as a one-term Fed chief, this may have been the meeting that decided his fate. Not only did the Fed disappoint Wall Street with a quarter-percentage-point cut—and a particularly disappointingly meager cut in the discount rate— but its policy statement still seemed as worried about inflation as about economic growth. This was the statement from the Halloween Federal Open Market Committee meeting that unnerved the markets:
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.
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Wall Street's Latest Take on 2008
Continue reading… 6 CommentsGreg Valliere, politics guru at the Stafford Group, an institutional research firm, gives his quick take on the 2008 candidates:
Sen. Hillary Clinton: She can't quite close the deal, and that must worry her handlers.... We think Clinton will win most of the Super Tuesday primaries and, like her husband, be called the comeback kid. But she's no Bill Clinton.
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Democrats Push for Temporary Tax Cuts, Spending to Boost Economy
Continue reading… 6 CommentsTime to prime the pump? Democrats sure think so. "There was an overwhelming consensus that the time has come to stimulate the economy" is what Barney Frank, chair of the House Financial Services Committee, told Bloomberg News yesterday. This stimulus would presumably be done through targeted tax cuts, tax rebates, or increased government spending. All temporary measures to give the economy a quick boost. All quaint throwbacks to old-fashioned, Keynesian, demand-side, "put money in people's pockets" thinking. And all unlikely to give the politicians the "bang for the buck" they might hope for. Here's the deal:
1) Back in 1957, Milton Friedman proposed something called the "permanent-income hypothesis," which said that people spend money based on what they consider their normal level of income and what they expect to earn over the long term. Short-term fluctuations in income, whether for better or worse, are smoothed out by more debt or less spending if consumers perceive the fluctuation as temporary. People adjust slowly to changes in income—just as the economy adjusts slowly to changes in Federal Reserve interest rate policy—which makes it tough for the government to fine-tune the economy. Short-term moves simply don't have the oomph policymakers expect, especially when the slow movement of legislation puts them out of step with the actual business cycle.
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Anger Over Bush Mortgage Plan Is Misplaced
Continue reading… 2 CommentsI am still getting E-mail from many of my readers (especially the more libertarian-inclined) moaning about the Bush-Paulson subprime mortgage plan. In short, they view it as unnecessary government meddling in the economy that will serve only to insulate dumb/greedy borrowers and dumb/greedy lenders from their financial follies. And to some degree, they are certainly correct. (Some even accuse the White House of "buying votes" for the GOP's 2008 hopefuls.) But to trot out the old Clinton campaign mantra, "It's the economy, stupid." The impact of the credit crunch goes beyond individual borrowers and lenders. Consider this on-point analysis from economist Jim Glassman of JPMorgan Chase:
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No Recession Here—Move Along, Please
Continue reading… 2 CommentsBad Guy: "I thought you was dead?" Jacob McCandles (John Wayne): "Not hardly." That little exchange from one of my favorite films by the Duke, Big Jake, came to mind after I heard the new jobs numbers from the Labor Department. A solid 94,000 new jobs were created in November as average hourly earnings rose to $17.63, a 0.5 percent increase from the prior month—and the biggest monthly gain since June. Over the past 12 months, wages grew by 3.8 percent.
As Nigel Gault of Global Insight sums things up: "The jobs data is not flashing a recession warning." Nor were the recent ISM surveys of manufacturing and nonmanufacturing activity. And here is the kicker from John Ryding at Bear Stearns: "As an aside, we wonder if those economists who championed the household survey measure of employment as a sign that the economy is headed toward recession will draw attention to the strong 303,000 average increase in household employment [derived from talking to households rather than businesses] over the last three months." Is the economy dead? Not hardly.
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Bush Mortgage Fix Is Really an Insurance Policy
Continue reading… 7 Comments"Philosophical debates are great for college campuses. In our universe, they are irrelevant. What counts is politics. In this case, doing nothing is not a political option for the administration. They had to do something." That's how Jaret Seiberg, analyst at the D.C.-based Stafford Group policy research firm, sees the Bush-Paulson subprime mortgage plan to avoid some 1.2 million foreclosures through 2009.
Now an economist might icily argue that when you consider that subprime mortgages make up just 6.5 percent of some 50 million mortgages outstanding in the United States—and only one-sixth of those are seriously delinquent—the market should be allowed to play out the consequences and correct itself. The "no bailout" crowd includes plenty of free-marketeers and diligent "I saved up for my 20 percent down payment" homeowners. Conservative commentator Michelle Malkin, for instance, calls the Bush plan—and the even more ambitious plans offered by Democrats—big-government "Hillarycare for housing" and "a perversion of the American dream."
