Middle Class Can’t Afford Homes

January 31, 2008

http://money.cnn.com/2008/01/29/real_estate/Housing_unaffordability_persists/index.htm?section=money_mostpopular

This article is proof of what I’ve been saying about our current recession.  You have to look past the most obvious symptoms – like the burst of the housing bubble – to find what’s really going on if we want to take meaningful action. 

Even in spite of the decline in housing prices, the middle class still isn’t even close to being able to afford an average home.  Why?  Because incomes haven’t kept pace with inflation?  Why?  Because we’ve carved out much of the entire manufacturing sector of our economy and given it away to foreign countries for nothing in return. 

Labor obeys the law of supply and demand as much as any other commodity.  Take away a big piece of the labor demand and the price will drop.  Wages will go down.  Balance our trade equation with a tariff structure (one indexed to population density), and that demand for labor will come back home and restore wage growth. 

We can cut interest rates and pass stimulus packages until the cows come home; in the long run it won’t make a bit of difference in stemming our economic decline.  We have to take meaningful action to address real problems instead of treating only the symptoms.  You can’t cure the flu by wiping your runny nose.  Neither can we fix our economy with actions that don’t address the real problem.

Pete

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Chinese Travel Mess

January 31, 2008

Just a word about the mess that we’ve all seen in pictures from China this week:  take a good look, America.  This is where population growth can take us if we ever begin to approach the kind of population density they have in China.  It’s not a pretty picture.  Is that where we want to go or do we want to preserve the quality of life that we enjoy here?

Pete


The Recession Has Begun

January 30, 2008

Fourth quarter GDP was releasd this morning and it grew at an annualized rate of only 0.6%.  During the same time frame, inflation ran at an annualized rate of 2.6%. 

By the classic definition of a recession, which is two consecutive quarters of declining GDP, we’re not there yet.  But by my more meaningful definition – one that gauges the impact on average Americans, we’re already in a significant recession.  By my definition, a recession occurs when GDP doesn’t grow enough to keep pace with inflation and population growth.  Since inflation is running at 2.6% and population growth is about 1% per year – a total of 3.6% – then GDP needs to grow by 3.6% for Americans to keep pace.  With GDP growth of only 0.6%, Americans have fallen behind by 3.0%.  That is, the average American is now 3% worse off than he/she was just a few months ago.  That’s pretty significant! 

In fact, it’s even worse than that.  For all of 2007, GDP grew only 2.2%, 1.4% below the rate needed to keep pace with inflation and population growth.  So, by my definition, Americans have been in a recession for at least a year.   That’s not surprising since median wages and net worth have been in decline for over three decades. 

Stay tuned.  This is likely to get worse. 

Pete


State of the Union Address

January 30, 2008

A few words are in order regarding the President’s State of the Union address on Monday night.  The president raised two issues that are of particular interest to me, of course.  First of all, he raised the issue of free trade, imploring Congress to pass free trade agreements with Columbia and South Korea.  And he did some “cheerleading” for free trade in general, observing that exports are up and that we need to open more markets to American goods. 

Secondly, he implored Congress once again to pass immigration reform with features that make it easy for immigrants to arrive legally to do the work that “needs to be done.” 

I have no problem with a free trade agreement with Columbia.  With a population density of 103 people per square mile, they are very similar to the density of the U.S. (83 per square mile) and so they represent no threat to American manufacturers.  South Korea, however, is a far different story.  With a density of 1257 people per square mile, more than 15 times as densely populated as the U.S., their market is very badly stunted by over-population.  They have virtually no market to offer in return for access to ours.  This deal would be a guaranteed loser for American manufacturers.  If fact, it already is.  Cars from South Korea – Hyundais, Kias and even Chevy Aveos – have been pouring into this country for years, contributing to the devastation of our domestic auto manufacturers.  In return we get absolutely nothing.  It’s a crime against the American people to permit such a situation to persist. 

Regarding his general cheerleading for free trade, yes, exports are up a little.  As a result, our annual trade deficit is something like $710 billion per year instead of $720 billion.  The result is a loss of 14 million jobs.  Free trade cheerleaders like president Bush always conveniently ignore the import side of the trade equation.  Opening new markets is fine, as long as they are markets that are equivalent to ours, where their customers are likely to buy as much from us as we buy from them.  I am not opposed to free trade.  On the contrary, I believe that free trade in natural resources and between countries of roughly equal population density is truely beneficial.  However, free trade with countries that are much more densely populated than us is a sure-fire loser for domestic manufacturers and should never be pursued. 

Regarding immigration, we do need immigration reform.  We need to seal the border and then work to reduce legal immigration by 95%.  Rampant population growth is the number one challenge facing this country.  No progress on problems like energy independence and global warming is possible without first stabilizing our population, not to mention the damage done to Americans’ finances and quality of life by increasing our population density. 

We need a president who’s willing to face realities and take meaningful action to address the real problems instead of symptoms.

Pete 


Stewing in Their Own Juice?

January 23, 2008
See the following article about world leaders’ concerns about the financial crisis.  George Soros is quoted as saying that it’s the biggest financial crisis since the end of World War II.  I agree with him.  

It’s world business leaders who created this mess through their support of unbridled free trade, leading to the bankrupting of the United States through decades of enormous trade deficits.  Now they all want world governments to “do something,” but no one can really envision what will be effective.  It’s because the system they’ve created (globalization) is fatally flawed and only a reimplementation of tariffs by the U.S. can save the American economy.  They’re caught in a “Catch-22″ situation. 

It’s going to be fun to watch all of this unfold.  (Well, it’d be fun if it wasn’t so economically painful!) 

 —————————————————————————————————————–

Market plunge is storm warning for world leaders

10:21 a.m.  01/22/2008

By Mike Dolan DAVOS, Switzerland (Reuters) – This week’s stock market slide provides a stark storm warning for global business leaders and policymakers meeting in Switzerland, as pleas for some form of coordinated policy response rise.

 

Some of the biggest one-day losses in European and Asian equities since the September 11, 2001 attacks on the United States are set to make the mood at this year’s meeting of the world’s political and economic elite in the Swiss ski resort of Davos even icier than the weather.

 

A U.S. recession and global economic slowdown this year is now firmly in investors sights and Tuesday’s reaction on Wall Street, closed Monday for a holiday, is now anxiously awaited.

 

But what analysts fear most is that the latest equity lurch had few immediate triggers beyond rapidly evaporating confidence that the economic downturn can be avoided.

 

With financial market confidence at such a low ebb, investors can only hope for some united front from the massed ranks of central bankers, treasury chiefs and corporate executives in Davos this week. And even then, concerted action — more than words — may now be needed.

 

As the stock slide continued in Asia and Europe on Tuesday, market traders murmured of a possible emergency U.S. Federal Reserve interest rate cut and then of coordinated cuts from central banks across the Group of Seven top economic powers.

 

“Rate cuts are the only thing that are going to kick this market back up,” said one UK equities trader.

 

Spokespeople at the European Central Bank, Bank of England and Swiss National Bank, contacted by Reuters, would not comment on the rumors cited by traders. No one at the Federal Reserve was immediately available for comment, following Monday’s U.S. holiday.

 

Likely or not, there was little doubt some policy response in words or deeds was deemed necessary to halt the rout.

 

“To really help improve things, a truly positive surprise is necessary,” said Jim O’Neill, chief global economist at Goldman Sachs, adding that moves like a relaxation of the proposed Basel 2 international capital adequacy rules for banks might be needed to calm the worst fears for the stretched banking system.

 

As banks report eye-watering full-year losses from the credit and mortgage market shock since last summer, they are starting to rapidly scale back lending to businesses and consumers and the macroeconomic outlook is deteriorating.

 

The chances of something as detailed as changes to global bank capital rules materializing quickly may be low. But a coordinated line on the problem will be demanded.

 

Financial market veterans frequently note that one of the catalysts for the 1987 stock market crash was very public disagreements between the United States and Europe over the appropriate monetary and fiscal policy actions needed.

 

Billionaire investor George Soros, expected at Davos later, said the world was facing the worst financial crisis since World War Two and the United States was threatened with recession, according to an interview with the Austrian daily Standard.

 

“The situation is much more serious than any other financial crisis since the end of World War Two,” Soros was quoted as saying.

 

CRITICAL MASS AT DAVOS? Some of the policymakers necessary to form a critical quorum at Davos have dropped out of the event over the past week due to intense domestic demands.

 

U.S. Treasury Secretary Henry Paulson and British finance minister Alistair Darling have both withdrawn at short notice.

 

But top central bankers such European Central Bank President Jean-Claude Trichet, Bundesbank President Axel Weber and New York Federal Reserve chief Timothy Geithner will all be speaking between Wednesday and Saturday.

 

And the U.S. Treasury delegation still includes Under Secretary for International Affairs David McCormick, a key diplomat at next month’s critical G7 finance meeting in Tokyo.

 

International Monetary Fund chief Dominique Strauss-Kahn and the head of Organisation for Economic Cooperation and Development Angel Gurria both address the Davos meeting.

 

WHAT’S THE WORRY?

 

Even though the root of last year’s sudden reversal of global economic fortunes lies in a U.S. real estate bust, the financial seizure was essentially global.

 

But the global policy response and rhetoric — apart from last month’s relatively successful though limited central bank action to defuse tensions in bank-to-bank lending — is uneven.

 

On one hand, the Fed and U.S. Treasury have almost spooked investors with the extent to which they have signaled deep further rate cuts and tax relief already this year.

 

Yet some investors — fearful a full-blown recession may already be underway in some U.S. states — reckon that even a planned U.S. fiscal stimulus of one percent of national output and further Fed easing may not take hold soon enough to prevent a painful economic contraction.

 

Yet, in Europe the ECB doggedly refuses to take its eye off elevated inflation and has signaled no imminent easing of monetary policy even as private forecasters downgrade the euro zone growth outlook to well below 2 percent.

 

While British Prime Minister Gordon Brown has called for the IMF to take a lead in international financial crises, Britain’s own response to the global crisis is clouded by its focus on rescuing stricken mortgage lender Northern Rock.

 

But whatever the obstacles to concerted policy moves, the market slide will certainly focus minds in Davos and traders will watch all suggestions of action with nervous interest.

 

The U.S. recession is unlikely to leave the rest of the world unscathed and markets are starting to discount that.

 

“The (latest equity market) falls pull the last rug from under the hope of decoupling,” analysts at Lombard Street Research told clients in a note on Tuesday.

Pete


Are You Better Off Than The Previous Generation?

January 18, 2008

Yesterday, GM announced that it is offering buyouts to 46,000 older workers so that, under the terms of their new contract with the UAW, GM can replace them with workers that will be paid substantially less. 

On page 30 of Chapter 1, I asked the question, “Are you doing as well as someone in your position thirty years ago?”  This action by GM is a perfect example.  The people hired to replace these older workers will probably be very happy.  They’re probably people who have been working other jobs for $8 an hour, and now feel like they’re really moving up in the world.  But, compared to the preceding generation, they’re taking a very big step backward. 

This is the problem with our economy.  The downward spiral is slow enough that younger workers can’t see what’s happeing to them.  Only someone who’s been in the workforce for many years can put today’s events into proper perspective and see the damage that’s been over the years. 

This action by GM will do absolutely nothing in the long term to improve its competitive position. Foreign competition will simply respond by lowering their prices. GM’s problem is the same problem plaguing Ford and Chrysler – our trade policies. It has nothing to do with cost. If it did, wealthy countries with highly paid workers like Japan and Germany wouldn’t be killing us in the automotive market.Rather, the problem is that our trade policies are based on a flawed 200-year old economic theory of trade known as “comparative advantage.” It is flawed because it does not take into account (because the author could not foresee) what happens to per capita consumption when nations become very densely populated, or what happens when a reasonably-populated nation attempts to engage in free trade with such a nation.

As a result, we have an enormous trade deficit that has nothing to do with Americans being over-paid on under-productive. It has nothing to do with the quality of our cars. It is structural and irreversible without employing a tariff structure that is indexed to the population density of our trade “partners.”

 

Pete


Just In! Today’s Philadelphia Fed Survey Results!

January 17, 2008

After clicking the following link, click the “investor’s calendar” link on the left side of the page.  Then go to the release of the Philadelphia Fed Survey on Thursday, January 17th.

http://personal.fidelity.com/research/stocks/content/marketsindex.shtml?refhp=pr

Wow!  I like being right, but not this right!  A couple of months ago, as the decline of the dollar was well underway, economists predicted that this would lend support to manufacturing, because it would make American-made goods cheaper (relative to the competition) in the global marketplace.  I disagreed, predicting that it would make little or no difference because the trade deficit is not a function of cost, it is a function of population density and lower per capita consumption in highly populated nations. 

This report makes clear that, not only is manufacturing not growing but the decline is accelerating.  It is falling off of a cliff, figuratively speaking!  (And check out the graph of the 4-year trend at the bottom of the article.)  Is it possible that the trade deficit is eroding our economy at a rate even faster than I would predict?  Stay tuned!

Pete