Those who see no inflation in our future usually rest their argument on slow wage growth. The argument is that if wage rates don't increase, then there is nothing to pass on in the form of higher prices. Would that it were so?
The real issue is not whether wages are rising. The real issue is whether or not labor costs are rising. Wages are only one component of the cost of labor to business and wages represent a declining portion of that cost. Ask Walmart.
As Walmart faces a potential multi-billion lawsuit, companies around the US brace themselves for massive copy-cat employee lawsuits. All large companies now have to factor in dramatically higher potential liability costs associated with the Walmart lawsuit. Don't believe that companies aren't watching the developments in the Walmart case -- they are.
As for Walmart, you can be sure that they will make every effort, over time, to pass their litigation costs on to their labor force. But, in the short run, the cost of labor at Walmart has just risen dramatically, while wages have gone nowhere.
Lawyers are the big winners here. The losers are folks looking for a job or looking for a wage increase. Even if wages decline, there will be substantially higher labor costs ahead thanks to government efforts to "protect" employees. All of these protection mechanisms are costly and will be passed on to consumers in the form of higher prices.
The issue is not whether wages are rising. The issue is whether labor costs are rising. The answer is that labor costs are rising and rising at an incredible pace. Hence, higher prices.
Rabu, 30 Maret 2011
Senin, 28 Maret 2011
Inflation is Picking Up
While Bernanke continues to look in the rear view mirror hoping to spot some deflation, the facts on the ground and the road ahead are clearly all about rising inflation. The February CPI numbers released today, an annual rate of five percent should give Bernanke and his QE2 activity a reason to reflect. It is true that in a world of no food and no energy the numbers look better, but who lives in that world?
What are the implication of rising inflation? Trouble in bond land. This means investor losses on bonds and headwinds for stocks. Unanticipated inflation is always bad news for stocks. Inflation reduces the value of the national debt, but inflation increases the deficit, offsetting the former effect.
One big plus: the housing market will benefit from increasing inflation, mostly because homeowners are big debtors and have fantastic tax advantages compared to the owners of any other asset (even better than owning oil wells!). Those who buy homes now and over the next year or two will be big winners. Stocks will do fine longer term, bonds are headed for disaster, and homeowners will strike gold.
What are the implication of rising inflation? Trouble in bond land. This means investor losses on bonds and headwinds for stocks. Unanticipated inflation is always bad news for stocks. Inflation reduces the value of the national debt, but inflation increases the deficit, offsetting the former effect.
One big plus: the housing market will benefit from increasing inflation, mostly because homeowners are big debtors and have fantastic tax advantages compared to the owners of any other asset (even better than owning oil wells!). Those who buy homes now and over the next year or two will be big winners. Stocks will do fine longer term, bonds are headed for disaster, and homeowners will strike gold.
Minggu, 27 Maret 2011
Cost Is Not The Real Issue
You hear the President criticized over the cost of the new Libyan military adventure. Whatever the merits or demerits of the President's new military activities, they are not really that costly. That's why they are so easy to do. The cost restraint for military adventurism is not really binding anymore. We could fight a number of wars all over the globe for a pittance of what it costs to support Medicare, Medicaid, Obamacare, and Social Security.
War is cheap! The volunteer army did that for us. It replaced conscripts with folks that really wanted to do this. So we have fewer of them, pay them better, and they do a better job. Plus, war technology has improved.
So, Obama gets a push-button war on the cheap. Whether it's a good idea or not is an entirely different story, but cost is not the issue.
War is cheap! The volunteer army did that for us. It replaced conscripts with folks that really wanted to do this. So we have fewer of them, pay them better, and they do a better job. Plus, war technology has improved.
So, Obama gets a push-button war on the cheap. Whether it's a good idea or not is an entirely different story, but cost is not the issue.
Sabtu, 26 Maret 2011
Bob Herbert on "Losing Our Way"
Bob Herbert is a hard left columnist for the New York Times. Normally, his columns are showers of praise for the Obama Administration (like most every other political column in the NY Times). Today, Herbert is on a different tack. He is criticizing the Administration for spending tax dollars in Libya (and other foreign adventures) while "...simultaneously demolishing school budgets, closing libraries, laying off teachers and police officers and generally letting the bottom fall out of the quantity of life here at home." Sounds compelling doesn't it.
This article shows the depth of the lack of understanding of the hard left for what is really going on in the US and Western Europe. First and foremost, there is absolutely no reason whatsoever for laying off any public employees. Were it not for the absurd work rules and legal restrictions, public employees would take compensation adjustments and there would be few, if any, layoffs.
In my own county of Albemarle County, Virginia, rather than take a five percent paycut, the teachers lobby prefers to have five percent of the teachers laid off. That is a cruel and unfair outcome for the five percent who are laid off. The 95 percent who retain their jobs and benefits could care less. All that matters to them is that their pay and benefits are maintained. Under seniority rules only the newest teachers are at risk. The old fuddy duddies are completely protected from layoffs (as well as from any accountability at all). The "children be damned" attitude of the public school teacher lobby in this community (and in this state) mirrors that of teacher lobbies and teachers unions across the US and Europe. It is their decision to have layoffs. These would be very easy to avoid. Ditto for other public employees.
But, Herbert's column raises a deeper question. If money is spent on foreign adventures, doesn't that take money away from funding an economic recovery in the US? The answer is a resounding "no." Regardless of the merits or demerits of foreign adventures, there is simply no evidence that governments who spend money promote economic recovery, progress or growth. In fact, the opposite is true. What the government needs to do is get out of the way. No amount of government spending can undo the damage of the Dodd-Frank legislation or Obamacare. Sending Elizabeth Warren back to Harvard and dismantling the mis-named Consumer Protection Agency would do more for economic recovery than spending another trillion dollars funding Obama's political allies (Obama's definition of stimulus spending).
A similar argument applies to public education. Public education in the US and increasingly in Europe is in shambles. Why? Money? Just look at the numbers. Schools, public and private, higher education and lower education, absorb an increasing share of national output, not only in the US but throughout Europe. Are our schools getting better? Our schools, in fact, are poorly run, dominated by administrators and teachers with political, not educational, motivation. It is easy to teach students, if that is what you want to do, But, increasingly, teaching students is not what teachers want to do. You can see this most clearly in higher education, but it shows up dramatically in the modern public schools as well. The recent activities by teachers in Wisconsin show you where their true interests lie...it is not in the classroom.
Money isn't the issue, Bob Herbert. In fact, more money can cause even more mischief for our public schools, for our economic recovery. The best thing the government can do is to shrink itself and get out of the way.
This article shows the depth of the lack of understanding of the hard left for what is really going on in the US and Western Europe. First and foremost, there is absolutely no reason whatsoever for laying off any public employees. Were it not for the absurd work rules and legal restrictions, public employees would take compensation adjustments and there would be few, if any, layoffs.
In my own county of Albemarle County, Virginia, rather than take a five percent paycut, the teachers lobby prefers to have five percent of the teachers laid off. That is a cruel and unfair outcome for the five percent who are laid off. The 95 percent who retain their jobs and benefits could care less. All that matters to them is that their pay and benefits are maintained. Under seniority rules only the newest teachers are at risk. The old fuddy duddies are completely protected from layoffs (as well as from any accountability at all). The "children be damned" attitude of the public school teacher lobby in this community (and in this state) mirrors that of teacher lobbies and teachers unions across the US and Europe. It is their decision to have layoffs. These would be very easy to avoid. Ditto for other public employees.
But, Herbert's column raises a deeper question. If money is spent on foreign adventures, doesn't that take money away from funding an economic recovery in the US? The answer is a resounding "no." Regardless of the merits or demerits of foreign adventures, there is simply no evidence that governments who spend money promote economic recovery, progress or growth. In fact, the opposite is true. What the government needs to do is get out of the way. No amount of government spending can undo the damage of the Dodd-Frank legislation or Obamacare. Sending Elizabeth Warren back to Harvard and dismantling the mis-named Consumer Protection Agency would do more for economic recovery than spending another trillion dollars funding Obama's political allies (Obama's definition of stimulus spending).
A similar argument applies to public education. Public education in the US and increasingly in Europe is in shambles. Why? Money? Just look at the numbers. Schools, public and private, higher education and lower education, absorb an increasing share of national output, not only in the US but throughout Europe. Are our schools getting better? Our schools, in fact, are poorly run, dominated by administrators and teachers with political, not educational, motivation. It is easy to teach students, if that is what you want to do, But, increasingly, teaching students is not what teachers want to do. You can see this most clearly in higher education, but it shows up dramatically in the modern public schools as well. The recent activities by teachers in Wisconsin show you where their true interests lie...it is not in the classroom.
Money isn't the issue, Bob Herbert. In fact, more money can cause even more mischief for our public schools, for our economic recovery. The best thing the government can do is to shrink itself and get out of the way.
Jumat, 25 Maret 2011
A Soft Economy Amidst a Sea of Liquidity
Some parts of the economy have returned to pre-crisis levels. The stock market for one. The stock market is now well ahead of where it was just prior to the collapse of Lehman Brothers. Prices of the best buildings in NYC and London are nearing the peaks reached in 2007, if not exceeding them. Luxury homes are on the rebound. Yet the overall US economy is moribund and headed nowhere. How can this be?
The simple answer is the Federal Reserve. The Federal Reserve is monetizing substantial amounts of US treasuries (buying treasuries, in other words). This is equivalent to printing money instead of selling debt from the point of view of government financing. This is QE2. This process, QE2, adds enormous amounts of liquidity to the financial system, available to whatever suits the fancy of the financial system. Normally, such excess liquidity feeds directly into asset prices -- stocks, bonds, high end real estate -- and that is exactly what has been happening.
Business is not really using the excess liquidity to expand capital equipment and employment. Business is not optimistic about the future, mostly because business understands all too well what the Obama Administration is all about. Instead the excess liquidity is being soaked up into an asset bubble -- a bubble that will inevitably end badly.
Don't look for further rallies in asset prices. QE2 is coming to an end soon and there is not likely to be a QE3. Incredibly slow economic growth will continue on pace for the next two years as we slog our way to a 7-8 percent unemployment range with rising inflation -- a condition known as stagflation. Stock prices will stall here and bond prices will get hammered. High end asset prices, rising now from Bernanke's foolishness, will settle back to earth. There won't be a crash or a double dip, but the asset price rally will be ending soon while the economy will continue to trudge along.
The big unknown is the exploding debt nightmare. That nightmare could upset the slow moving turtle that is the American economy.
The simple answer is the Federal Reserve. The Federal Reserve is monetizing substantial amounts of US treasuries (buying treasuries, in other words). This is equivalent to printing money instead of selling debt from the point of view of government financing. This is QE2. This process, QE2, adds enormous amounts of liquidity to the financial system, available to whatever suits the fancy of the financial system. Normally, such excess liquidity feeds directly into asset prices -- stocks, bonds, high end real estate -- and that is exactly what has been happening.
Business is not really using the excess liquidity to expand capital equipment and employment. Business is not optimistic about the future, mostly because business understands all too well what the Obama Administration is all about. Instead the excess liquidity is being soaked up into an asset bubble -- a bubble that will inevitably end badly.
Don't look for further rallies in asset prices. QE2 is coming to an end soon and there is not likely to be a QE3. Incredibly slow economic growth will continue on pace for the next two years as we slog our way to a 7-8 percent unemployment range with rising inflation -- a condition known as stagflation. Stock prices will stall here and bond prices will get hammered. High end asset prices, rising now from Bernanke's foolishness, will settle back to earth. There won't be a crash or a double dip, but the asset price rally will be ending soon while the economy will continue to trudge along.
The big unknown is the exploding debt nightmare. That nightmare could upset the slow moving turtle that is the American economy.
Portugal, Greece and More
Greek unemployment has now surged to 16.5 percent as it struggles to implement a half-baked austerity program. Greek's austerity program is an example of policy gone berserk. The austerity program that Greek politicians have pursued (with the support of the EU) is too little to have any impact on their spiraling debt problems and too much to permit the economy to avoid collapse. Why do this?
The Portuguese have rejected austerity. Others will follow. Austerity without at least a partial debt default is a foolish and unsustainable policy. The best historical precedent for the madness going on in the European union today is the reparations payments program foisted onto Germany by the Treaty of Versailles. We know how that experiment ended. Enough.
There is no reason to insulate bondholders from the folly of their investments. They should bear the brunt of bad decisions. Portugal, Greece, Ireland, Italy, and Spain should default, at least in part, on their sovereign debt. "Should" will eventually turn to "will" anyway. There is no way that these austerity programs are bearable.
None of the European economies are truly competitive any more. Europe has been carried along by the American economic engine for the past two generations. But, the US can't be the engine that pulls the EU anymore. The US has problems of its own that increasingly mirror the problems of the European zone.
The economic future is with countries that have competitive economies fostered by governments that see economic growth, not economic pie redistribution, as the number one goal of economic policy. This means Asia. This means parts of Eastern Europe. It means one or two isolated situations in Latin America. Everywhere else, the number one goal is to divide up the economic pie. That never leads to good things for the average person who finds, inevitably, his/her share of the diminishing pie diminishing as well.
The rich do not necessarily get richer. Sometimes the rich get preoccupied with implementing policies that stifle economic growth. Hubris breeds incompetence. That is what has happened to Europe and the United States.
The Portuguese have rejected austerity. Others will follow. Austerity without at least a partial debt default is a foolish and unsustainable policy. The best historical precedent for the madness going on in the European union today is the reparations payments program foisted onto Germany by the Treaty of Versailles. We know how that experiment ended. Enough.
There is no reason to insulate bondholders from the folly of their investments. They should bear the brunt of bad decisions. Portugal, Greece, Ireland, Italy, and Spain should default, at least in part, on their sovereign debt. "Should" will eventually turn to "will" anyway. There is no way that these austerity programs are bearable.
None of the European economies are truly competitive any more. Europe has been carried along by the American economic engine for the past two generations. But, the US can't be the engine that pulls the EU anymore. The US has problems of its own that increasingly mirror the problems of the European zone.
The economic future is with countries that have competitive economies fostered by governments that see economic growth, not economic pie redistribution, as the number one goal of economic policy. This means Asia. This means parts of Eastern Europe. It means one or two isolated situations in Latin America. Everywhere else, the number one goal is to divide up the economic pie. That never leads to good things for the average person who finds, inevitably, his/her share of the diminishing pie diminishing as well.
The rich do not necessarily get richer. Sometimes the rich get preoccupied with implementing policies that stifle economic growth. Hubris breeds incompetence. That is what has happened to Europe and the United States.
Kamis, 24 Maret 2011
The Beat Goes On
Jose Socrates, Prime Minister of Portugal, failed this week to get his country to complete the fiscal austerity program designed to save Portugal from defaulting on their sovereign debt. The truth is that no one cares about Portugal. The big concern is Spain. Portugal is a relatively small economy and EU bailout fund could easily accommodate Portugal's needs (and probably will do so soon). But, that leaves Spain. Spain's problems are so immense that the EU has no serious way of dealing with it.
Thoughts of Portugal lead to the contemplation of Spain, in true domino-theory progression. It is hard to see what the EU will do when Spain is the headline. That could be game over (and we haven't even begun to speak of Italy).
All of this is a policy of wishful thinking by the EU, of course. It is simply a matter of time until all the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) default on their sovereign debt and are forced to nationalize their largest banks. Why they think putting this off is a good idea is something of a mystery. It only gets worse with time.
The US is not far behind.
Thoughts of Portugal lead to the contemplation of Spain, in true domino-theory progression. It is hard to see what the EU will do when Spain is the headline. That could be game over (and we haven't even begun to speak of Italy).
All of this is a policy of wishful thinking by the EU, of course. It is simply a matter of time until all the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) default on their sovereign debt and are forced to nationalize their largest banks. Why they think putting this off is a good idea is something of a mystery. It only gets worse with time.
The US is not far behind.
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