Real Per Capita GDP Falls 1.2%

October 31, 2008
The Bureau of Economic Analysis reported Thursday that 3rd quarter real GDP* fell at an annual rate of 0.3%. But GDP is a meaningless figure if it’s not related to the size of our population. Since the U.S. population is steadily rising at an annual rate of about 1%, then the GDP pie has to be sliced into more pieces. If the pie isn’t growing faster than the population, then everyone gets a smaller piece. In other words, the effect on individual Americans is even more pronounced than raw GDP data would lead us to believe. In the 3rd quarter of 2008, real per capita GDP fell by 1.2% to $38,438 per person (adjusted for inflation and expressed in 2000 dollars). That’s a decline four times as bad as the government’s raw GDP data.

This is the third quarterly decline in real per capita GDP in the last four quarters. Only the second quarter of 2008 had a small gain of 1.8%, thanks to the fiscal stimulus package. Real per capita GDP is actually lower than it was in the 3rd quarter of 2007. And all experts agree that the 4th quarter of 2008 will be even worse.

The trade deficit continues to be a huge drag on real per capita GDP. Were it not for the trade deficit, 3rd quarter real per capita GDP would have been 6.0% greater at $40,733 per person. (Imports are a subtraction from GDP in the BEA’s calculation.) If the next president is looking for a way to turn the economy around, the trade deficit would be a great place to start.


* – Annualized 3rd Quarter Actual GDP, expressed in current dollars, was $14.429 trillion, compared to $14.295 trillion in the 2nd quarter.  However, “real” GDP, which is adjusted for inflation and expressed in 2000 dollars, was $11.720 trillion, compared to $11.727 trillion in the 2nd quarter. 



Taxpayer Money Used to Eliminate American Jobs?!?!

October 30, 2008,8599,1855185,00.html?xid=feed-rss-netzero

It’s being reported today that the details of the GM-Chrysler merger have been settled between GM and Cerberus Capital Management, owner of Chrysler, and that the deal may be done by Tuesday. Just one small detail stands in the way – financing. GM doesn’t have the money to pull it off. That’s where the federal government comes in. The governors of six states have signed a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, imploring them to quickly provide federal assistance, without which it is feared that all domestic automakers will go bankrupt, with catastrophic consequences for the entire American economy.

Although GM is selling this merger to the government as the best way to salvage jobs in the domestic auto industry, claiming that both companies will go under without it (which may very well be true if nothing is done), its real interest (beyond mere survival) is in eliminating a competitor while increasing sales and cutting costs.

Projections are that, if this merger takes place, approximately 35,000 Chrysler jobs will be eliminated and that nearly five times that many jobs will be lost in total when parts suppliers and other ancillary companies are included in the impact – a total loss of about 165,000 jobs. Yes, GM will improve its sales volume slightly by the elimination of this competitor, but the vast majority of Chrysler’s sales volume will be lost to foreign competition. What this means is that, if the federal government provides the funding for this merger, billions of American taxpayer dollars will be used to facilitate the elimination and outsourcing of 165,000 American jobs! Then, billions more will be spent on unemployment payments and billions more will be added to the national debt when the income taxes collected from those 165,000 workers falls to zero.  So far, I’ve heard no discussion of this snake-eating-its-tail scenario, where taxpayer money is used to eliminate taxpayers’ jobs.  This should be a pitchforks-in-the-street moment!  Where is the outrage? 

GM is pushing frantically for this deal to be done by Tuesday. Why Tuesday? What’s so magical about that day? The election. If Obama is elected, as appears likely, GM fears that it will then have to deal with an administration that will take a dim view of using taxpayer money to destroy so many American jobs. An Obama administration will still do a deal to salvage the domestic automakers, but will be far less likely to do a deal that eliminates Chrysler as a separate entity. GM would much rather close the deal with the Bush administration, Henry Paulson and Ben Bernanke – people who don’t give a rat’s behind about American jobs.

There are much better ways to save all of the domestic auto industry. Loan GM the money it needs to survive a bit longer and take a stake in Chrysler, perhaps even all of it. Couple that with some new protections of the domestic auto industry, like tariffs on imports, and within a couple of years we’d have an explosion in domestic sales. The government would soon be able to sell Chrysler at a handsome profit for taxpayers. The time is past for timid steps. Without the protection afforded by tariffs, the domestic auto industry will be doomed regardless of what other measures the government or the carmakers may take.

Bush Urges Support for Free Trade Principles. Need I say more?

October 26, 2008

The following excerpt is taken from the end of this linked Reuters article:

Bush warned against taking a protectionist turn in response to the current financial turbulence, saying free markets and free trade were fundamental to long-term economic growth.

“These policies have shown themselves time and time again to be the surest path to creating jobs, increasing commerce, and fostering progress,” Bush said. “And this moment of global economic uncertainty would be precisely the wrong time to reject such proven methods for creating prosperity and hope.”

Yeah, right.  The world is just awash in prosperity and hope right now, isn’t it?  Can there be any greater indictment of our free trade policies than the fact that Bush clings to them so desperately?  It’s like a drowning man crying out, “Water!  Water!” instead of shouting, “Help!”

There can be no doubt that our free trade policies have created jobs, increased commerce and fostered progress around the world – all at the expense of the United States.  Of course!  Pumping $700 billion into the rest of the world, year-in and year-out, will do wonders for the economies of nations like China, Japan, Korea and Germany.  But all it did for us is drive us into bankruptcy.  

Trade is a wonderful thing.  Really!  But the word “trade” implies some mutually beneficial exchange.  By definition, to be mutually beneficial, it has to be balanced.  It’s simply impossible for either side to sustain a large deficit indefinitely without eventually destroying their economy, and there’s nothing beneficial about that.  While trade is a wonderful thing, misguided trade policies like unfettered “free” trade skew the process and offer a slow but steady path to economic ruin.  

It’s time for a return to sensible trade policies that maximize the benefit of trade for the U.S. while maintaining a balance.

Oil and Gas Industry Commercial: Less Than Reassuring

October 20, 2008

I’m sure you’ve all seen the commercials that have been running frequently in prime time for the last few months, the ones with the lady striding confidently across a chart of America as she proudly boasts that “we have enough oil and gas right here in America to heat 160 million homes and power 60 million cars for the next 60 years!”  Is it just me, or do you also find this to be less than reassuring?  We already have 160 million homes, and it’s growing by two million homes per year.  And we have about 150 million cars hitting the road every day, not 60 million.  So now that oil and gas will only last maybe 30 years, not 60.  Then what?  It’s not like other global reserves aren’t being gobbled up at the same rate. 

This country needs to get serious real fast about planning our energy future, and no plan can possibly succeed if it doesn’t begin with stabilizing and then reducing our population. 

Thank you, oil and gas industry, for making it crystal clear just how dire our situation is.  By the way, you’ll soon need to change the figure in your commercial to “… we have enough to last 59 years.”

Global Economic Crisis Costs 20 Million Jobs

October 20, 2008

This linked article reports that the U.N. is predicting that, by the end of next year, the economic crisis will result in 20 million people losing their jobs world-wide.  But what I found particularly interesting is the following excerpt:

It was alarming that global unemployment had stayed at the same levels despite the strong economic growth seen between 2002 and 2007, said Somavia (Director-General of the International Labour Organisation), who files (sp) to New York this week for talks with the heads of all U.N. agencies, chaired by U.N. Secretary-General Ban Ki-moon.

I find this excerpt interesting because it is a frank admission that globalization has done nothing to create jobs globally.  It has merely shifted jobs from countries like the U.S. to the developing world.  The article goes on to say that global unemployment is expected to rise from 190 million people to 210 million, the first time in history that it will top 200 million.

But more than that, I find this quote interesting because it comes as no surprise to me at all.  It’s exactly what the theory I’ve advanced in Five Short Blasts predicts – that continued population growth beyond an optimum level inevitably yields rising unemployment and poverty.  When people are forced to crowd together, per capita consumption must decline due simply to a lack of space for using and storing products.  And it is impossible for per capita consumption to decline without a corresponding reduction in employment.  With the world’s population growing at a rate sufficient to populate a new medium-sized city every day, this process of crowding together and eroding employment is happening at an alarming rate.  These effects upon unemployment and poverty are absolutely inescapable, with one exception:  the effects can be reversed by stabilizing the population and then reducing it to an optimum, sustainable level.

Beware of Warren Buffett’s Advice

October 18, 2008

Warren Buffett issued a letter on Friday morning advising investors to start buying American stocks.  Like many others, Buffett believes that this is just a cycle and everything will soon return to normal.  His motto is “be greedy when everyone else is fearful, and fearful when everyone else is greedy.”  He’s made tons of money with this philosophy which I’ve generally tried to follow myself, until recently.

Many people who offer financial advice seem to feel the same way.  They believe this is just another market cycle.  “We’ve seen this all before,” they say.  Maybe they’re right.  Is it correct to assume that the stock market will rebound because it always has before?  Personally, I see a lot of reason for caution.  I could buy into that philosophy if business conditions were normal.  But they’re not.  Consider the following backdrop for the current economic crisis, and then consider whether the market will simply behave as it always does:

  1. The world has never been more overpopulated and, indeed, more and more experts agree that, not only is the world overpopulated, but that the current population far exceeds the earth’s carrying capacity for supporting humans at a western-style standard of living.  And the world’s population grows by enough people to fill a new, medium-sized city every day. 
  2. In spite of the challenges of providing energy resources while cutting carbon emissions, and in spite of the growing burden of unemployment, America’s population continues growing by enough people to fill a new city the size of Chicago every year. 
  3. Our national debt per capita is at a record level, 50% higher than it was at the end of World War II, and soaring fast.  Never in our history has the per capita share of the national debt exceeded our median net worth.
  4. Our cumulative trade deficit since 1975, the year of our last trade surplus, now stands at $9.1 trillion and rises by $0.7 trillion per year.  Consequently, never has a greater percentage of American assets been under foreign ownership and control. 
  5. U.S. savings rates are at a record low level.
  6. Per capita consumer credit (or debt) is at a record high level. 
  7. In spite of reducing lending standards so low that “standards” no longer existed, providing a huge boost to the housing sector of the economy until the bubble burst last year, the U.S. was barely able to maintain a normal rate of GDP growth.  With the manufacturing sector of the economy already in ruins, now the housing sector is in complete collapse too.
  8. Never has the U.S. been closer to bankruptcy.

Perhaps the experts are right.  Maybe it is a good time to buy stocks.  But are you willing to bet your entire future that the market can behave normally considering the above headwinds that it faces?  Be very careful!

Chrysler’s Demise Only Days Away

October 17, 2008

In November of last year (see my 2008 Predictions), I wrote the following:

Long Shot Prediction:  Either Chrysler will be broken up and sold off (and thus cease to exist) to raise capital for Cerberus or Ford will declare bankruptcy. 

Believe me, I take no delight in taking credit for yet another accurate prediction.  It’s this very kind of thing I was warning of when I wrote Five Short Blasts.  But it seems that the demise of Chrysler is now only days away.  The link above is an article reporting on “merger” talks Chrysler is having with Renault and GM.  What’s not reported in this article are details that are covered by the local media here in the Detroit area:

  1. GM is pushing to close this deal by the end of the month.  So too is JP Morgan Chase, one of GM’s financial backers.
  2. This really won’t be a merger.  Cerberus wants to dump Chrysler at any cost.  GM wants the Jeep brand and will maybe keep a couple of other models, like their mini-vans.  Other than that, GM plans to completely shut down Chrysler and eliminate all those jobs.  Basically, they see it as an opportunity to eliminate a competitor and enhance their own sales in the process. 

So we’re looking at the loss of at least 100,000 jobs and the elimination of what was once one of the biggest, proudest, premier companies in our nation’s history.  It’s the end of the line for an iconic brand and a long line of historic vehicles that were often on the forefront of automotive innovation.  The day that the merger happens will be a sad, sad day for American manufacturing and the American economy – one more big step in America’s downward spiral.

I was hoping this day would never come, that they could hold off just long enough for our nation to wake up from its globalization delusion.  But it appears that, if that day ever comes, it will be too late for Chrysler and, unfortunately, it may come too late for Ford and GM as well.  In the words of Don McLean, “bye, bye Miss American Pie.”

Candidates Tackle Trade in Final Debate

October 16, 2008

Following the 2nd debate, my expectations for last night were pretty low.  In spite of declaring before the 2nd debate that he would tackle the subjects of trade and immigration, Tom Brokaw did neither and his moderation may have been the worst for any presidential debate in history. 

So last night was a pleasant surprise.  Bob Schieffer did an outstanding job and finally drew the candidates into a discussion of trade, the most critical sub-issue of the over-arching issue of the economy.  The difference in the candidates’ positions on trade was stark.  True to form, McCain favors free trade, regardless of the consequences.  He supports free trade with Colombia, despite Colombia’s record of targeting labor leaders for assassination.  He favors eliminating tariffs on imported ethanol.  He favors eliminating subsidies for American agricultural products.  He has never expressed any concern about the loss of five million manufacturing jobs.  He believes all nations should have unfettered free access to the American market.  Only when talking about oil imports does he express concern about the “$700 billion we give to people who don’t like us very much,” a piece of data he extracted out of context from the T. Boone Pickens ad about energy policy, which drives me nuts every time I hear him repeat it, which is often.  McCain:  please, please, please get your facts straight on this!  $700 billion is the amount of our total trade deficit.  (Watch the T. Boone Pickens ad again.  He never says this is the amount we spend on foreign oil.)  Of that $700 billion, only about $300 billion is for foreign oil, and only a fraction of that goes to Middle Eastern countries and Venezuela – the countries who “don’t like us very much.” 

Obama, on the other hand, is opposed to trade with Colombia until they improve their labor rights record.  He is opposed to NAFTA being so skewed in Mexico’s favor.  He raised the fact that Korea exports hundreds of thousands of cars to us annually while importing almost nothing from the United States.  He mentioned China unfairly manipulating the exchange rate to sustain their $300 billion per year trade surplus.  And he has spoken often of tax breaks for companies who create jobs in America as well as helping our domestic industries.

I still have questions about whether or not Obama will really follow through and take the actions necessary to reduce (or hopefully eliminate) our trade deficit, but at least he sees the deficit as a problem and makes the connection between it and the loss of jobs and damage done to our economy.  Since the trade deficit is by far and away the biggest contributor to our economic mess, Obama’s approach to the economy is the right one.  I am an independent and will vote for anyone who comes down on the right side of the issues and, on the issue of trade, Obama is the clear choice.

Government Bank Bail-Out: Economic Crack

October 14, 2008
While Wall Street got high Monday on the government’s plan to bail out banks and while everyone cheered the apparent reversal in market psychology, no one has stopped to consider whether the plan will really achieve its long-term objective – restoring our economy and putting us back on the track to prosperity. My prediction is that, not only is this plan doomed to fail but, even worse, it will create additional problems.

The stated purpose of the plan is to inject liquidity into the financial system, freeing it up to begin lending once again. The problem was not that credit had completely seized up, but that only those who were credit-worthy were able to access it – people with decent incomes and collateral, which is the way things are supposed to be. But in today’s economic climate, following decades of declining incomes, that’s not enough to keep the economy humming at a pace that sustains an illusion of prosperity for everyone. So the idea is to pump money back into the banks so that they can resume making loans to those who couldn’t otherwise qualify.

In other words, the goal of the plan is to restore the status quo – the way things were before the wave of mortgage defaults started. Without increasing the demand for labor and thus restoring income growth, it’s easy to predict that another wave of defaults will ensue. And without addressing the trade deficit, the root cause of job losses and falling incomes, it’s easy to predict how long this $700 billion bail-out will last. Since the trade deficit continues to drain $700 billion from our economy each year, this bail-out may last just one year.

In only one year we’ll be right back in the same boat, needing to inject another trillion dollars or so into the economy. What then? Will we do more of the same – buy more bank shares? It’s like trying to keep a leaky boat afloat by running the bilge pump full speed. Unless you stop the leak, the bilge pump will fail when the boat runs out of fuel. We’ll never be able to keep putting money back into the economy as fast as it’s being sucked out by the trade deficit.

Beyond that, there are additional problems. If you are an investor, how can you possibly trust the financial statements of the bank? The bank now has even less motivation to properly value the loans it’s made. What’s the point? The government is there to back them up anyway. In fact, it’s now to the bank’s advantage to make as many risky loans as possible. It’s free money!

On the other hand, if you’re an investor evaluating companies in which to invest, why would you ever invest in anything other than a bank into which the government is plowing your tax money? Your investment there is completely risk free. It’s impossible for the bank to fail. Won’t this tend to suck investments away from other companies that need the capital?

And speaking of your tax money, why should the government even pretend to care about fiscal responsibility and budget deficits? It has just shown that it can materialize money out of thin air, and everyone is happier for it. Why not just spend more and more and just keep printing more money? You may say that eventually the interest on the national debt alone will exceed all federal revenue. Who cares? Just print more money to pay the interest and then, next year, print even more! For that matter, why even bother to collect any taxes at all? That would boost the economy even more and, besides, the government can just print the money that it would have collected from you and me!

And speaking of you and me, the voters, why should we ever listen again to any candidate who speaks of balancing the budget or fiscal responsibility? Why would we vote for anyone who doesn’t promise to shower us with more and more money?

And, for that matter, why should any of us bother to work hard and save, since the banks are there to lend us money regardless of our ability to repay it? Besides, it doesn’t matter if we repay it. The bank doesn’t care. The government will repay it.

And why should any of us pay attention when politicians talk about social security and medicare becoming insolvent? Hell, just print more money!

For that matter, why not just cut out the middle man and send everyone free software they can use to print money at home?

Perhaps I am being a bit facetious but, frankly, I’d feel equally silly telling you that this bail-out is just a one time thing and no one will ever expect the government to bail them out again. The precedent has been set. Next time, more will be expected. Then more. It’s difficult to see where this will end. It’s lazy economics and it will only breed more laziness. Why would our national leaders ever work hard to solve economic problems again when you can just pick up the phone and tell the Fed or the Treasury to crank out another bail-out plan and print more money?

The United States has just snorted its first “economic crack.” Can we yet rehabilitate ourselves or have we taken the first step in an irreversible descent into economic madness?



Paul Krugman: A Good Pick for Nobel Prize in Economics

October 13, 2008

This morning the Nobel Prize in Economics was given to Paul Krugman, an economist from Princeton and columnist for the N.Y. Times.  It’s encouraging that the Nobel committee would select someone like Krugman, whose work in “new trade theory” finds that free trade is not always a good model.  And it’s encouraging that they’ve returned to basics and recognized work in real economics instead of nonsense like “game theory” that they’ve rewarded in the recent past. 

Krugman appeared on the “roundtable” segment of ABC’s “This Week” program on Sunday morning.  I thought that his closing comment, in response to talk of Warren Buffet being the next Treasury Secretary, was profound:  “Great business leaders generally make very poor economic leaders.”  How true!  What we see time and again is that, when business leaders are given government leadership roles, instead of government that’s run like a business, we get a government that’s run for business. 

Almost every day I’m seeing more evidence of a turn away from the free trade model.  At some point it might even penetrate America’s leaders’ thick skulls. 

Here’s a sampling from the article explaining some basics about Krugman’s work:

Mr. Krugman won the prize for his research, beginning in 1979, that explained patterns of trade between countries, as well as what goods are produced where and why.

Traditional trade theory assumes that countries are different and will exchange only the kinds of goods that they are comparatively better at producing — wine from France, for example, and rice from China. This model, however, dating from the early 19th century, was not reflected in the flow of goods and services Mr. Krugman saw in the world around him. He set out to explain why worldwide trade was dominated by a few countries that were similar to each other, and why a country might import the same kinds of goods it exported.

In his model, many companies sell similar goods with slight variations. These companies get more efficient at producing their goods as they sell more, and so they grow. Consumers like variety, and pick and choose goods from among these producers in different countries, enabling countries to continue exchanging similar products. So some Americans buy Volkswagens and some Germans buy Fords.

He developed this work further to explain the effect of transportation costs on why people live where they live. His model explained under what conditions trade would lead people or companies to move to a particular region or to move away.

Mr. Krugman’s work has been praised for its simplicity and practicality — features economists are often criticized for ignoring.

Obviously, I think Krugman’s theories could be improved upon by incorporating the role of population density and its effects upon per capita consumption, but I’m pleased that the world of economics is beginning to consider that the principle of comparative advantage, proposed by Ricardo in the early 19th century – the theory upon which free trade is based – is overly simplistic and that there is much more at work.