Friday, April 30, 2004

By the way, thanks to Magpie and MaxSpeak for some kind publicity helping me out of my retirement. Old soldiers rarely quote Ringo Starr, but it is true that a little help from my friends goes a long way.

So, who's afraid of inflation?

Apparently the US stock market, the US bond market and global currency markets, which all trembled before the US GDP data released Thursday showing an annualized inflation rate of 3.2% in 2004:I for personal consumption expenditures, the fastest clip in three years. After a decade or so of quite low inflation, particularly under Bush, 3.2% seems like a mountain.

But is it? In 2003:I inflation by this measure hit 2.8% and in 2002:II at 2.9%, falling dramatically the next two quarters in both instances. Big spikes in energy prices drove each of these updrafts (69.3% and 65.2% respectively), while moderating prices afterwards eased them. This time around, it is true, core inflation is a bit higher, but not much so.

Global inflation in raw materials, including oil, has been partially driven by stunning growth in Chinese consumption. For example, China is now the world's #2 oil importer after the US but now before Japan. With the Chinese central bank determined to clamp down on loans in an effort to begin cooling the country's red hot economy, pressure on energy prices should ease as well. Considering US consumption growth is still being driven by toxic sources rather than wages and salaries, the future of inflation -- in the General's humble view -- is dim indeed.

UPDATE: For more smart commentary on China's cooldown and its global implications, see Stephen Roach today: "Trouble brewing in Asia".

On Wednesday, the General observed:
For each of the 12 quarters during which Bush has been President, wage and salary disbursements as a percentage of total consumption has fallen, from 71% in 2001:I to 65% in 2003:IV. The same goes for total employee compensation, falling steadily as a percentage of consumption from from 86% in 2001:I to 79% in 2003:IV. Disposable personal income rose just 0.5% in real terms in 2003:IV while personal savings dropped to just 1.7% of disposable personal income, the lowest levels since the depths of the recession in 2001.
Well, what kind of numbers for 2004:I did the cat drag in?

For January-March 2004, wage and salary disbursements as a percentage of total consumption slid down to 64.8%, from 65.1% in 2003:IV. Total employee compensation as a percentage of consumption shifted slightly lower, to 79.2% from 79.3%. Real disposable personal income for the quarter rose a robust 4.3% and personal savings ticked up ever so gently to 1.9%.

So while real income went up significantly, it yet again wasn't on the back of wages and salaries. Employer contributions to pensions and insurance were a big factor, up a whopping 13% in nominal terms. Dividend income rose 7.6% in nominal terms and nominal tax payments again fell -- 10% for 2004:I -- both especially "toxic" sources of income. Perhaps the slide in wages and salaries as a percentage of consumption has stopped, but there is still no sustainable foundation for US consumption under construction.

One of my favorite economic indicators to follow are housing prices in the consuming 'Anglosphere'. You know the routine: Asians work hard and save, send their capital and goods to the Anglosphere where Americans and Brits consume with hedonistic abandon. We all play our part in keeping the global economy afloat, now, don't we?

Yet high consumption in the US and UK over the past three years or so has been supported by a wealth effect, first derived from securities (esp. in the US) and later from the housing stock. Thus fears of housing bubbles in the US or UK has global implications.

Hence the General's interest in today news on the British housing market out of The Independent:
Fears of a slump in house prices grew yesterday as figures showed a surge last month in prices and mortgage debt, and a leading think-tank said there was an "evens" chance of a crash within two years.

The National Institute of Economic and Social Research said the longer the current boom continued, the worse would be the slump and its impact on the economy.

Its warning came just days after Gordon Brown, the Chancellor of the Exchequer, staked his reputation on a benign outcome for house prices, saying the market was on a sounder footing than before the crash of the early 1990s.

There was fresh evidence of a speculative boom from figures from Nationwide building society showing that prices jumped 2.1 per cent in April, equivalent to more than �100 a day. . . .

house prices were as much as 40 per cent over-valued, adding that a crash could sending them tumbling by 20 per cent - equivalent to the gains of the past two years.

This would wipe as much as 1.25 per cent off economic growth - equivalent to �12.5bn in cash terms but not enough to deliver a recession. He said there was little the Bank of England or the Government could do to stop the crash.

The latest poll on Iraqi public opinion conducted by USA Today/CNN/Gallup shows just how hollow rings the claims of the Bush administration as well as all the circulating emails I am forwarded from supposedly fulfilled US soldiers 'doing good' in Iraq.
Only a third of the Iraqi people now believe that the American-led occupation of their country is doing more good than harm, and a solid majority support an immediate military pullout even though they fear that could put them in greater danger . . .

Asked whether they view the U.S.-led coalition as "liberators" or "occupiers," 71% of all respondents say "occupiers." That figure reaches 81% if the separatist, pro-U.S. Kurdish minority in northern Iraq is not included.
In reading this, I couldn't help but think that all the neocons in Washington are grinding their teeth while consoling themselves with a little Rudyard Kipling:
Take up the White Man's burden --
The savage wars of peace --
Fill full the mouth of Famine
And bid the sickness cease;
And when your goal is nearest
The end for others sought,
Watch Sloth and heathen Folly
Bring all your hope to nought.

Thursday, April 29, 2004

Another tidbit from the 2004:I GDP figures released today:

State and local government consumption and investment fell 2.6% in real terms for the quarter, marking the fourth out of the last five quarters in which state and local government spending declined. It was the biggest drop in two-and-a-half years.

What kind of recovery is based on cutting K-12 education, health care and infrastructure??

The 2004:I GDP data is in, and the numbers look solid although under expectations.
Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 4.2 percent in the first quarter of 2004,
according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real
GDP increased 4.1 percent.
Economists' consensus forecast was 5.0% growth.

While there is a lot to sift through, I offer this observation as an initial shot across the bow. The BEA's preliminary figures show a 2004:I trade deficit of $520.2bn at an annualized rate -- 5% larger than in 2003:IV -- with the quarterly figure coming to $130.1bn. We already know that the trade deficit for January and February 2004 totals $85.5bn. A little simple math thus shows that the March 2004 trade deficit should come in around $44.5bn.

Get ready for an announcement of yet another record trade deficit, coming soon to a front page near you!

Wednesday, April 28, 2004

Massive personal debt seems to be driving consumption all across what Martin Wolf today calls the 'Anglosphere big spenders' (the US, the UK, Canada and Australia). From the NYTimes:
Despite frequent forecasts of a [housing market] slowdown, moreover, the average [housing price] increase is running at up to 18 percent a year, according to Halifax, the mortgage lender, far outstripping consumer price inflation of 1.1 percent. Even the International Monetary Fund sounded a warning recently that the main risk to Britain's economic outlook "is the possibility of an abrupt correction in the housing market.''

A collapse could have dire consequences, since the large increase in real estate values has persuaded more and more people to increase their mortgages to fuel a boom in consumer spending. (In Britain, consumers can add to their mortgages to finance home improvements and other types of spending using their home, at a higher assessed value, as collateral. In contrast to the United States, interest on mortgage payments is not deductible for tax purposes. )

As Mr. Lewis's debts showed, much of the spending is on credit cards issued by companies like Capital One, MBNA and the major British banks. So fierce is the rivalry to lure customers that issuers compete with low- or no-interest introductory offers that soon give way to much higher annual interest rates.

Those higher rates have not deterred consumers.

And just like Fed Chair Alan Greenspan, Chancellor of the Exchequer Gordon Brown shrugs the whole thing off.

Will this boom end in tears as most periods of irrational exuberance do? Britain is quite different from the US in that the US has multiple large housing markets; the UK is dominated by one, London. Brown is confident that interest rates won't rise rapidly or to large levels, cushioning any blows to homeowners. Much of that depends, of course, on the willingness of Asian savers and central banks to continue subsidizing low interest rates in the Anglosphere.

All is for the best in this best of all possible worlds?

On Thursday the BEA releases the 2004:I GDP figures. On Friday it releases the 2004:I personal income and outlay figures. While most folks are anxiously awaiting Thursday, I'm looking forward to Friday instead.

As we all know, the American consumer never lost a step all throughout the recent recession. The nagging question is always when and why (and whether) he will stop. The fact of unflagging consumption in the midst of very weak real income growth is remarkable (recall that real wages for production workers have been stagnant for some 18 months now). For each of the 12 quarters during which Bush has been President, wage and salary disbursements as a percentage of total consumption has fallen, from 71% in 2001:I to 65% in 2003:IV. The same goes for total employee compensation, falling steadily as a percentage of consumption from from 86% in 2001:I to 79% in 2003:IV. Disposable personal income rose just 0.5% in real terms in 2003:IV while personal savings dropped to just 1.7% of disposable personal income, the lowest levels since the depths of the recession in 2001.

We see more production, more investment and higher profits in the US, all of which will surely produce a nice GDP figure for Thursday. But where is the income to soak up all this production? As Stephen Roach is fond of pointing out, in the US today it is coming from particularly "toxic" sources: open-ended tax cuts, reduced saving, extraction of purchasing power from over-valued assets, and sharply rising household debt. Will the 2004:I personal income data finally show a turnaround in these trends? If not, don't count on the recovery just yet.

Not too long ago there was a major flap over redesigning the Georgia state flag. In 1956 segregationists removed the three parallel bars from the existing state flag and replaced them with the infamous Confederate battle flag, the Stars and Bars. In the mid-1980s activists began introducing bills to rid the flag of this symbol, and it took until 2001 to change the flag into a version of what South Africa's flag was during apartheid -- a large flag which incorporates past historical flags in miniature on the field. Everybody more or less hated this new state flag, and the unfortunate thing lasted a mere two years. In 2003 the state flag was revised once again, returning more or less to its pre-1956 roots. In all, it took some 45 years to resolve the Georgia flag flap.

I relate this story because it is clear that nobody from Georgia had anything to do with designing and introducing the new post-Saddam Iraqi flag.

Not only is the thing just plain ugly; the Iraqis really seem to hate it, and for a number of reasons. The blue and white motif has been compared to the Israeli flag, and one can't help but see the color similarities. This choice is even more idiotic when one recognizes, as Baghdad supermarket owner Muthana Khalil immediately did (and why can't the Americans in Baghdad figure this stuff out, too?????)
The flags of other Arab countries are red and green and black. Why did they put in these colors that are the same as Israel? Why was the public opinion not consulted?
When the US became independent, we still kept the red, white and blue of the Union Jack. Slavic countries tend to play on variations of the same theme of red-white-blue parallel horizontal bars (e.g. Russia, Slovakia, Slovenia, Czech Republic, Croatia, Yugoslavia). And indeed, most Arab countries use red, green, black and white, derived from the flag used in the 1916 Arab revolt.

It turns out that a brother of the chairman of the flag committee of the Iraqi Governing Council came up with the new design. To make matters even worse, this brother doesn't even live in Iraq now, but in London, and seems to have been assigned the task in complete isolation from the opinions of anybody beyond the IGC.
"I had no idea about a competition to design the flag. My brother just called me and asked me to design a flag on behalf of the IGC. Nobody told me about a competition," Mr Chadirji told The Independent yesterday.
I can't imagine a blue, white, yellow and teal flag is going to last in the new Iraq.

Congratulations to the Sierra Club for turning back former Colorado Governor Dick Lamm and a coterie of other neo-Malthusian anti-immigrant nutcases in their recent Board of Directors election.

By the way, notice how neo-Malthusian candidates Dick Lamm and Karyn Strickler in particular tout their pro-choice credentials. Abortion for poor folks as a population control measure! The Sierra Club really dodged a bullet with these people.

Tuesday, April 27, 2004

On the matter of what to do about Iraq, John Kerry is spinning his wheels because he has nothing to offer which truly differentiates him from George W. Bush. Kerry says simply that he will do the same thing Bush will do, but will do it better; thus Eleanor Clift rightly recognizes that "Kerry's position on Iraq is so similar to Bush's that voters can't distinguish between them".

Now this winner of a message has migrated from Iraq to the ballooning US current account deficit.
Sen. John F. Kerry may favor cooperating with other countries on most international issues, but on the subject of trade, the Democratic presidential candidate yesterday accused the Bush administration of failing to be confrontational enough.

Kerry asserted that the administration has "stood by" as foreign nations have broken trade rules, and he vowed that as president he would take a tough stand against practices such as the "manipulation" of currencies by China and Japan. A centerpiece of his trade policy, he said, would be the reinstatement of a legal mechanism giving the White House special authority to go after individual countries that maintain particularly high barriers to U.S. goods. That mechanism, known as "Super 301," expired in 2002.

"We will not turn a blind eye to clear trade violations when American jobs are on the line," Kerry said in remarks prepared for delivery in Wheeling, W.Va. . . .

The trouble is, Bush also proclaims himself to be a free-trader who enforces U.S. trade laws vigorously -- the stance the president took, for example, when he slapped tariffs on imported steel in 2002. So Kerry's position, in essence, is that he would be more effective and aggressive.
Kerry seems all set to run as a 'good government technocrat' after the example of Michael Dukakis. Only God can help us now.

The big international trade news today is the WTO's preliminary ruling for Brazil against US cotton subsidies. Liberal economists across the blogosphere are in rapture.

Not that General Glut supports agricultural subsidies as a general policy. It's just that the elimination of US agricultural subsidies is going to have much less affect on global agricultural prices than your average liberal economist thinks.

The WTO isn't releasing its ruling just yet -- we have to wait until June to really sift through the nitty-gritty. That being said, the New York Times is reporting that, according to the Brazilians,
United States cotton production would have fallen 29 percent and that American cotton exports would have dropped 41 percent. That would have led to a rise in international cotton prices of 12.6 percent, which would have helped Brazil's cotton farmers.
Who knows upon what these estimates are based. Agricultural economist Daryll Ray at the University of Tennessee has a model which suggests the impact is much much less.

Assuming all US marketing loan payments, counter-cyclical program payments and direct payments are eliminated (although assuming environmental and conservation program payments would continue), US cotton production would fall 12% in the first year but quickly stabilize to a net 5-7% reduction in planted acreage -- far from the 29% claimed by Brazil. Moreover, average cotton prices would rise immediately by 12%, but in the medium-term (5-7 years) stabilize at 7-9% higher -- about what the Brazilians claim but without the price increase being sustained.

And cotton and rice are the exceptions to the subsidy-production relationship. While cutting US subsidies on these crops would produce significant (although far from earth-shattering) changes in global production levels, the majority of US agricultural subsidies go to corn, wheat and soybeans, and eliminating their subsidies would have little to no effect on production or prices -- although they would tank US farm income.

While liberal economists rant and rave over direct agricultural subsidies, funny how they never point the finger at the real cause of overproduction -- government subsidized scientific research.

Monday, April 26, 2004

Remember how the US current account deficit hit $542bn in 2003? And how the US trade deficit for the first two months of 2004 is outstripping 2003's pace by 9% and 2002's pace by a whopping 44%? And how the current account deficit hit 5.2% of GDP in the first half of 2003? And how the US net international investment deficit for 2002 was 25% of GDP -- surely around 30% of GDP for 2003?

Well, thanks to Mr. Bush's War, it's all only going to get worse.

And unlike the esteemed Professor Galbraith, I don't think a John Kerry presidency is going to make it any better.

Looks like there really is a sucker born every minute.

Back in February 2004 High Priest Alan Greenspan spoke to US credit union leaders and dished out some, shall we say, "interesting" advice.
Of all the peculiar things Alan Greenspan said last week, none was more mystifying than his suggestion that consumers should seriously consider taking out an adjustable-rate instead of a fixed-rate mortgage at a time when interest rates are near record lows.

The Fed chairman's comments on Social Security last week got the most attention, but on that subject he was simply stating the inevitable: Baby Boomers will have to wait longer and collect fewer benefits than their parents.

His comments on mortgages, however, left many financial advisers dumbstruck.

"It was possibly the strangest bit of advice ever to be proffered by an American central banker," says Jim Grant, publisher of Grant's Interest Rate Observer.
(San Francisco Chronicle, 2 March 2004)
With interest rates at rock bottom with nowhere to go but up, you'd have to be a fool to take the adjustable rate path at this point. Benjamin Wallace-Wells notes with great insight that this is most likely Greenspan's desperate attempt to squeeze one more round of home refinancing out of the US housing market and thus inflate the housing asset bubble just a little more to buy time for the real recovery.

Well, it looks like the High Priest's ex cathedra pronouncement is having its desired effects.
As mortgage rates climbed for the fifth straight week, an index measuring refinancing applications slumped to its lowest level since January and fell well off the peaks of a year ago, when mortgage rates flirted with historic lows.

Applications for mortgages on new home purchases rose slightly, however. And consumers applying for either a new mortgage or a refinancing of an existing loan are more likely than a year ago to opt for an adjustable-rate mortgage than one with a 30-year fixed rate as they look to keep near-term monthly payments as low as possible, mortgage brokers said.

Perhaps you missed this little gem from the United Nations Commission on Human Rights last week.
In a resolution (E/CN.4/2004/L.24) on the right to food, adopted as orally amended and by a roll-call vote of 51 in favour and 1 opposed, with 1 abstention, the Commission considered it intolerable that there were around 840 million undernourished people in the world and that every seven seconds a child under the age of 10 died, directly or indirectly, of hunger somewhere in the world when, according to the Food and Agriculture Organization, the world produced more than enough food to feed its entire population; stressed the need to make efforts to mobilize and optimize the allocation and utilization of technical and financial resources from all sources, including external debt relief for developing countries, to reinforce national actions to implement sustainable rood security policies; recognized that the promises made at the World Food Summit in 1996 to halve the number of malnourished persons were not being fulfilled; encouraged all States to take steps with a view to achieving progressively the full realization of the right to food; and encouraged the Special Rapporteur on the right to food to continue mainstreaming a gender perspective in the fulfilment of his mandate.
OK, guess which country was the single vote against this resolution? Yah, you knew it would be.
The United States supported the progressive realization of the right to adequate food as a component of the right to an adequate standard of living. The attainment of that right was a goal to be realized progressively -- it did not give rise to international obligations or domestic legal entitlements.
When 840 million persons are malnourished around the world, exactly what you want is a slow-go strategy.

Indeed the US is usually the top global food donor -- but this is hardly out of the goodness of the heart of America. The history of PL 480 shows that the US gives food according to domestic levels of overproduction, not according to foreign need. In fact, the US often refuses to give money to starving people so that they can buy food from the most efficient source, favoring instead grants of grain direct from the silos of Cargill, ADM and the rest.

Too bad paying your taxes can't be the same kind of goal realized progressively without obligation. Oh, wait, I forgot -- for some it is!

Today is ANZAC Day (Observed). Go hug an Aussie (a Kiwi works just as well) and crank up Midnight Oil's Blossom and Blood on your old turntable.
You the mothers who sent your sons
Wipe away your tears
For those who fought and those who fell
Become our sons as well.

You the warriors with your words
Throw away your spears
You talk of times of peace for all
And then prepare for war.
All the people with dreams, all mothers with sons
All people with dreams never woken at night by the sound of guns.
Like a child that's born on a moonless night
Like a child that's born, we parachute down to an unknown fight.

This city of blossom and blood
This city suffered more than it should
These sidewalk silhouettes not washed away, not washed away.

Whatever you've done, whatever you've done, whatever you've done.

There's a hope in the heart says never again.
Whatever you say, whatever you say, whatever you say
It's the price of peace to remember that day.

Sunday, April 25, 2004

I wanted to revive a golden oldie from my retirement months.

Back in February, Petey at DKos posted the following in the midst of John Forbes Kerry's march toward the nomination:
So apparently, there are a couple of ironclad rules about post-WW II Presidential politics:

* You can't get elected President if you're from North of Misssouri
* You can't get elected President if you're a sitting member of Congress

There is only one exemption:

You must be a Senator from Massachusettes who skippered a small boat in combat with bravery who has the initials of J.F.K.
To which I replied:
But Petey, you forgot Karl Marx's famous line from the Eighteenth Brumarie of Louis Bonaparte:

"Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were twice. He has forgotten to add: the first time as tragedy, the second as farce."
I haven't seen anything since February to change my mind.

I am amazed that the New York Times saw fit to give comedian Ben Stein 1000 words in today's paper to say absolutely nothing. If reserving space for people to say nothing is their policy, I should be getting 1000 words from them in no time!

The subtitle of Stein's piece is "How Trade Deficits Are Good". Per standard liberal economics, trade deficits are "good" because they are good for the consumer. We're all consumers, so we all benefit, right? (we're also workers, citizens, stewards, parents, children, etc., but let's forget about all that now)

In like manner, all the subtleties of the US current account deficit are erased in 1000 words of nothingness. Japanese and Chinese capital flowing to the US lower US interest rates (except for exacerbating the US budget deficit, which as the IMF warned this week, raises US interest rates). It's good for us when foreigners park their capital in the US and spur our development (except for removing capital investment in other countries, limiting their growth and cutting into the ability of the US to export its way out of a current account deficit of some $550bn). We can always print more money to pay off our debt (except for sparking inflation and a run on the dollar, as well as dislodging the USD from the center of the global economy).

The best part, of course, is when Stein quotes his later father, former Chairman of Nixon's Council of Economic Advisors, on the sustainability of not only an ever-increasing current account deficit but also an ever-increasing net investment deficit which must be financed: "If a thing cannot go on forever, it will stop." One thousand words for that insight?

Saturday, April 24, 2004

Yesterday over at Angry Bear, Kash sat bemused at how "extremely unusual" the big jump in US corporate profits is in comparison to the tiny bump up in US wages over the course of the "recovery". Why so unusual?
Typically we would expect worker to be paid their marginal product � as they become more productive, they should be able to demand (and firms should be able to afford) higher wages.
This is pure liberal economic mythmaking. Let's let reality have a shot instead.

The relationship between manufacturing productivity and manufacturing wages in Mexico over the last ten years suggests a quite different world. Productivity has shot up thanks to NAFTA-spurred investment in the maquiladora sector of northern Mexico while wages have been stagnant at best. The early 1990s plunge is mostly due to the peso crash, but nine years later real wages still haven't recovered to their pre-NAFTA levels, much less risen. "Marginal product" has nothing to do with it. The power of capital versus the power of labor is the heart of the story. US and Asian factory owners in Mexico can capture virtually all the gains from productivity advances thanks to their stranglehold on capital as well as the global reserve army of the unemployed both in Mexico and elsewhere (especially China).

Thanks to Sandra Polaski's chapter from the Carnegie Endowment report on NAFTA, NAFTA's Promise and Reality, for the table.

You might have missed this little gem among all the hubbub over factory orders and corporate profits, but real wages in the United States have been on a slow but steady decline for four months now.

Total private average hourly earnings in 1982 dollars -- let's just call them "real wages" for short -- hit their recent peak in November 2003, when the average American was making $8.32/hr. (remember, these are 1982 dollars; in 2003 dollars that's $15.46/hr.). The March 2004 figure has slid down to $8.24/hr., about a 1% fall in wages in just four months.

Of course, we're still nowhere near the all-time real wages high of $9.08/hr. (in 1982 dollars) set way back in January 1973.

Since going into retirement last September, the General has kept up with his favorite econ blogs, especially Brad DeLong and Angry Bear. Kevin Drum has also done a nice job keeping economic issues on people's radar screen even if he needs DeLong to tell him what to think (that Drum-DeLong blog lovefest seems to be more than just puppy love). They all lack the radical edge I tried to offer here on General Glut's Globblog, but they usually have something both competent and interesting to say. In the meantime, other good econ blogs have gone out of business, including some of my favorites like Its Still the Economy Stupid and oikonomos.

While retirement has been good to the General, the loss of these good blogging soldiers and the mildly liberal pablum of DeLong, Drum and Bear just quite frankly doesn't cut it anymore. The blogosphere needs not only economic literacy but a radical commentary that tells the truth on the economic statistics and stories of the day.

So today I proudly announce that the General is putting his uniform back on. For my first posting back, I offer you the wisdom of Howard Beale from the film Network:
Well I'm not going to leave you alone. I want you to get mad! I don't want you to protest; I don't want you to riot; I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first, you've got to get mad. You've gotta say, "I'm a human being! My life has value!"

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go the window, open it, and stick your head out and yell, "I'm as mad as hell, and I'm not going to take this anymore!!"