Relevant and even prescient commentary on news, politics and the economy.

Drama=China or dull trade policy discussions? Information and a caution

Lifted from an e-mail by Stormy

Financial Times notes that China’s champions-elect are going abroad, in oil, in mining and in car manufacturing, supported in almost all cases by state-owned banks. But the banks themselves are largely staying put. Why?

Global chinese capital See charts for China

Unfair China Trade Costs Local Jobs

Couple of points:

1. Currency manipulation is discussed here and here:
Neither you nor anyone else knows what the true currency exchange (dollar v yuan) should be. The only way we will know is if the yuan is allowed to float. (Ours does…the Canadian one does, etc etc…in fact, most industrialized nations allow their currencies to float… If they did not, then there would be a big stink.)

2.Walmart–both retailer and manufacturer. What we need to see is where that split between retailer and manufacturer occurs. Often, it has forced major U.S. firms to outsource production in order to keep their goods on Wal-mart shelves,,,e,g, Master Lock, to name only one. On the other hand, Faded Glory is a brand name in effect created by Wal-mart and made in China on the cheap. It is not a Chinese brand name. But again, no one knows what the proportion of foreign brands, Wal-mart brands, Chinese brands is on Wal-mart shelves.

3. China is beginning to protect and nurture certain categories of indigenous firms. It is worth watching what areas it is and will be investing in. Certainly IT.

Beyond Wal-mart:

What needs careful analysis is exactly the relationship between major firms and Chinese suppliers. In some cases, the foreign firm itself has set up shop….in terms of others, the firm– like Mattel–use Chinese firms as suppliers. In others, there may indeed be a Chinese firm.

Apparently, Walmart is responsible for 10% of China’s exports…but how is that 10% spread between foreign firms in China and indigenous Chinese firms? And what how much has it forced American firms to outsource production to cheap locales–Mexico, China, etc?

I can easily point you to declarations by Chinese officials that 60% of China’s exports are driven by foreign firms in China–in the case of IT, closer to 80%.

I pointed you and others to National Tooling and Machining Association because there is a possible shift occurring. Unfortunately, I do not think anyone bothered to read the pdf file at that site.
That association is only one of the many collections of foreign firms using China and other third world countries as export platforms. The reasons for this possible shift are many and varied.

I see that some in NakedCapitalism are sad that China is getting only 2% profit margin (on Walmart?) Well, not sure how that number is arrived at.

Anyway, the intent apparently is to allow China to continue to manipulate its currency. Weird.

As far as the cards China and the U.S. have to play in their trade spat? Certainly China can use its role as major creditor with some effect. (If I remember correctly, the U.S. government fully protected China’s investment in AIG. Does that say anything?) Now, how effective that role will be…who knows. The U.S. can try to deflate its currency…up to a point. These are tricky waters.

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Financial Arson Watch III

Robert Waldmann

Goldman Sachs accused of (civil) Financial Arson

I don’t want to bore readers so I’ll just mention, again, that this wouldn’t have been possible if cash settlement CDS were not allowed. In all other cases it is not legal to insure against a risk that one doesn’t bear. A simple law which says that Courts must consider all CDS contracts signed after May 1 2010 to be physical settlement CDS contracts if anyone seeks enforcement would eliminate the opportunity for the alleged fraud.

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Topical thread April 16, 2010 Oil and demand/supply

Lifted from an e-mail by Stormy. Another topical thread.
U.S. military….massive oil shortage.
I have not tracked down the original report….but there has been growing concern from a number of unusual quarters. (I discount the Oil Drum, Matt Simon, et al.)

With gas usage in the states at low levels and with oil prices continuing to rise….something is amiss and out of place. This could well be the next shoe to drop.

Just a heads up. Something to watch.

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An auspicious sign: the consumer (for now) is back

I remain very skeptical about the sustainability of the recovery, as the labor market is in shambles and nominal wage growth is unlikely to facilitate “healthy” deleveraging – please see this recent post “Reducing household financial leverage: the easy way and the hard way”. I digress; because you can’t fight the data. And for now, the consumer is back.

The latest retail sales figures reveal two bits of information worth noting. First, autos were a big factor in the March 2010 surge. Second, even though the large contribution from motor vehicles and parts compromises my enthusiasm somewhat, the underlying trend has emerged: consumers are less frugal in spite of income constraints.

The March advanced retail sales report was genuinely strong, 7.6% annual pace since March of last year or 1.6% over the month and seasonally adjusted. At first I thought that this heroic sales growth was just a scam. March auto sales were unusually large in response to the competitive pricing during the peak of the Toyota scandal. See’s preview of the March light weight vehicle sales that registered a large 11.75mn gain.

And in reality, the March number was driven largely by auto sales, contributing 1.1% to the 1.6% monthly growth in retail sales. Furthermore, 36% of the total sales bill drove 5.7% of the 7.6% annual gain: nonstore retailers, motor vehicles and parts, and gasoline stations.

One could stop there (which I almost did); but upon further examination, a real trend is breaking out: the growth is broadening across categories with each month that passes. Just look at the evolution since January 2010 (after revisions, of course).

The charts illustrate the sequential contributions to growth from each major category in the advanced retail sales report from left (January 2010) to right (February 2010) to lower left (March 2010). The number next to the date for each chart (title) is the annual total retail sales growth, and you can find the data at the census website here.

You might ask yourself now, what do retail sales look like when conditioning for the robust growth in nonstore retailers, motor vehicles and parts, and gasoline stations? What’s happening to the other 64% of sales? Here’s where the green shoots become even more evident.

The trajectory of retail sales ex nonstore retailers, motor vehicles and parts, and gasoline stations is more of the 60-degree type, an auspicious sign for the near-term recovery.

However, as I have stated time and time again, further deleveraging is imminent. Whether that happens through default or through income growth is all the same in the aggregate – that is, until default causes further macroeconomic instability. Until the economy generates income enough to pay down leverage, the risk of a double dip remains as the inventory cycle is laid to rest. Economic momentum is gaining; let’s just hope that policymakers don’t screw it up.

Here’s something of interest: our friend rjs is looking at a sales tax conundrum….

Rebecca Wilder

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Boomer Entitlement Mess???

Barkley Rosser at Econospeak takes aim at immigration and worker ratios:

Robert Reich says so, “Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess“, which is also linked to by Mark Thoma. He has been on the Social Security Advisory board and has heard all the tales of coming Demographic Doom due to the impending wave of boomer retirements, even though the adjustments due to the Greenspan Commission in the early 80s were supposed to pay for the boomers’ retirements. This year the fund is running a (small) deficit, and so out of all the sources of the broader federal budget deficit (of which rising medical care costs, not to mention high defense budgets) it is social security that is the Big Problem that Something Must Be Done About (along with Medicare). I would agree that more immigrants will help in the short run, but demography is not the main problem here.

I and Bruce Webb have posted only about a million times in the past here and elsewhere on how if the “optimistic” projection of the SSA were to hold, the system would never run a deficit. In many recent years the economy beat that projection. However, in the last few it has plunged far below the pessimistic forecast with fica revenues collapsing as employment has collapsed in the Great Recession. This is the problem, and the simple solution is to get the economy and employment growing again at something like the optimistic forecast rate. Then the system will go back into surplus, possibly even mostly staying there, without any fiddling with or opening the doors to massive immigration (and, no, I am not anti-immigrant at all here, just trying to be clear about what is what).

Indeed, the fallaciousness of this general demographic hysteria is seen in that the US has among the best demographics for this even with low immigration compared with other OECD economies. Germany (and others) have the age distributions the US will have in 2030 when we hear Doom will hit, and they are paying their pensions all right, with Germany’s even higher than the ones here. Really, folks, higher immigration may be an OK thing, but it is relatively peripheral to the condition of the Social Security system. Growing the economy and particularly employment is the key to saving the system.

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Bush vs Obama Deficits: In pictures.

by Bruce Webb

Reader BuffPilot has been asking Angry Bear for awhile now to post the following graph
If you follow the link you will see that Heritage updated it with new CBO and OMB data this year. That is below the fold.

Which I will amplify with the actual CBO Table

I am not sure what the take away here is. A year ago CBO was more pessimistic than OMB about the years after 2012, where OMB stay deficits stabilizing at a fairly level percentage of GDP, CBO saw much sharper increases. This year that seems to have flipped flopped some with both OMB and CBO seeing deficits stabilizing through 2018, with CBO seeing smaller deficits than projected the year before and the White House OMB seeing them somewhat higher. probably because CBO is working off current law that would have middle class tax cuts expire, while OMB is counting on preserving them for people making under $250,000. Anyway if you just take CBO scoring things are moving in the right direction policy-wise.

Anyway plenty for people to chew on. Consider this a budget and deficit open thread.

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March industrial production only rose 0.1%. But this is a very misleading headline as
manufacturing output rose 0.9%. The difference was a 6.4% drop in output of utilities.
The decline in utilities largely reflects the March rise in temperatures and fall in heating days as the weather returned to normal after the severe snow storms of February.

Historically, recoveries have been proportional to the recessions — severe recessions have strong recoveries and mild recessions have weak recoveries. So far the recovery in industrial production this cycle looks about average. But given the depth and severity of the recessions an average rebound is disappointing.

The second aspect of the report reinforces last months signal that manufacturing productivity growth may be slowing very sharply. The monthly manufacturing productivity data is not reported, but I estimate it by dividing the output data reported by the Federal Reserve by the manufacturing hours worked data by the BLS. It is not exactly what is reported in the quarterly productivity data, but it is close enough to provide significant warnings of major trend changes and that is what the data is now showing.

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The 1920s Depression: Glenn Beck, Thomas Woods, and "Benefits" of Cutting Taxes to Combat a Recession, Part 1

by cactus

The 1920s Depression: Glenn Beck, Thomas Woods, and “Benefits” of Cutting Taxes to Combat a Recession, Part 1

So I get an e-mail from reader Dean Moriarty, stating:

Yesterday, I found myself in the sad position of inadvertantly listening to the Glenn Beck show. He was talking to some caller about how American history classes never want to talk about the 1920 Depression, because it is a matter that somehow completely undermines everything we are taught about how “the New Deal was a miracle and totally saved America from the Great Depression.” Aside from the straw man he made about the New Deal, I was still curious why he felt that the government response to the 1920 Depression was such a trenchant rebuttal of any kind of left-leaning economic philosophy.

Basically, the claim is made that it was a cut in government spending, tax cuts, laissez-faire ecomomic policy, and inaction on the Federal Reserve that solved the problem.

Dean goes on to point out that Beck claims to get many of these ideas from a dude called Thomas Woods, who is a senior fellow with the very libertarian Mises Institute. The guy has written a few books and gotten a few awards from assorted libertarian organizations, so he’s something of a prominent chap int those circles.

Woods’ position on the 1920s can be found here. Its even got footnotes so you just know its authoritative. Anyway, read the whole thing if you’d like, but what Woods is arguing is this:

According to the endlessly repeated conventional wisdom, the Great Depression of the 1930s was the result of capitalism run riot, and only the wise interventions of progressive politicians restored prosperity. Many of those who concede that the New Deal programs alone did not succeed in lifting the country out of depression nevertheless go on to suggest that the massive government spending during World War II is what did it.1 (Even some nominal free-marketeers make the latter claim, which hands the entire theoretical argument to supporters of fiscal stimulus.)
The connection between this version of history and the events of today is obvious enough: once again, it is claimed, wildcat capitalism has created a terrific mess, and once again, only a combination of fiscal and monetary stimulus can save us.

In order to make sure that this version of events sticks, little, if any, public mention is ever made of the depression of 1920–21. And no wonder: that historical experience deflates the ambitions of those who promise us political solutions to the real imbalances at the heart of economic busts. The conventional wisdom holds that in the absence of government countercyclical policy, whether fiscal or monetary (or both), we cannot expect economic recovery—at least, not without an intolerably long delay. Yet the very opposite policies were followed during the depression of 1920–21, and recovery was in fact not long in coming.

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover—falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” 2 By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.

The article goes on providing support for the idea that a) the gubmint stayed the heck out of the economy and b) the economy recovered swimmingly. It ends with this:

The experience of 1920–21 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920–21 depression. It is because those things were avoided that recovery came. The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode—and observe how hastily our interrogators try to change the subject.

I read this, and to me its poison – it sounds reasonable, but is off just enough to be completely misleading. And it seems to me to be more than just purposely deceitful. See, influential people, whether they also think its deceitful or not, use these arguments. And that makes them dangerous. To me, dealing with this sort of thing is unpleasant. And I’m wasting my Sunday on something unpleasant only because I think its important. So before I lay into this let me explain the result of this post. I am going to lay out some arguments. They will state that Woods is wrong. My statements will contradict his in such a way that the difference between us will not be one of opinion. It will be one of facts and the use of facts. And I believe that at the end, there will be only four options. These are:
1. I am making up substantially all of my facts in a willfully deceitful way… and one would have to be crazy to take me seriously on anything
2. I am mistaken to the point of being delusional… and one would have to be crazy to take me seriously on anything
3. Woods is making up substantially all of his facts in a willfully deceitful way… and one would have to be crazy to take him seriously on anything
4. Woods is mistaken to the point of being delusional… and one would have to be crazy to take him seriously on anything

So with that, I’m going to start with what what normally might be a big deal, but in this case amounts to a minor quibble. And that quibble is that Woods uses made up data and doesn’t let on that the data he’s using is not the real thing. This may not be data he made up, mind you, and it may go by but its made up nevertheless.

For example, when Woods tells you that “unemployment had jumped from 4 percent to nearly 12 percent” in 1920 (presumably he means the unemployment rate) or that the ” unemployment was back down to 6.7 percent and was only 2.4 percent by 1923″ Woods is using somebody’s estimate of the unemployment rate. But if you head on over the Bureau of Labor Statistics’ website, and look around for historical figures, they’ll give you data going back to 1940 and no further. Spend a bit more time on the BLS site poking around and you might find an FAQ entitled “How the Government Measures Unemployment” which states:

Because unemployment insurance records relate only to persons who have applied for such benefits, and since it is impractical to actually count every unemployed person each month, the Government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country. The CPS has been conducted in the United States every month since 1940, when it began as a Work Projects Administration project.

We can get into a quibble about the establishment survey and its precursors, but suffice it to say, whatever data Woods is using is an estimate someone probably produced long, long after the fact. Similarly, Woods tells us in 1920 “GNP declined 17 percent.” And once again, the question is, where is this data supposed to come from? Because when someone says “GNP” the natural assumption by someone with some familiarity with the data is that it originates with the Bureau of Economic Analysis’ National Income and Product Account Tables. And those tables only go back to 1929. Simon Kuznets wasn’t producing estimates before that.

Where does his data come from? No idea. Maybe he got it from Glenn Beck for all I know. But I have a hard time taking estimates produced decades after the fact seriously if I don’t know how it was done or by who. And when the person using those figures either doesn’t know or doesn’t tell you who made the data he’s using or how, it really gets suspect. But like I said earlier, for where we’re going, this is just a quibble.

So let’s quit the quibbles and get into his argument, namely that our Hero, Warren G. Harding, went all slash-and-burn on them vile tax rates starting in 1920, the Federal Reserve did nothing, and this led to a robust recovery, unlike, say, what tax hikes and gubmint meddling did to the Great Depression. Here’s how he puts it:

Not surprisingly, many modern economists who have studied the depression of 1920–21 have been unable to explain how the recovery could have been so swift and sweeping even though the federal government and the Federal Reserve refrained from employing any of the macroeconomic tools—public works spending, government deficits, inflationary monetary policy—that conventional wisdom now recommends as the solution to economic slowdowns. The Keynesian economist Robert A. Gordon admitted that “government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive. . . . Despite the absence of a stimulative government policy, however, recovery was not long delayed.”5 Another economic historian briskly conceded that “the economy rebounded quickly from the 1920–21 depression and entered a period of quite vigorous growth” but chose not to comment further on this development.6 “This was 1921,” writes the condescending Kenneth Weiher, “long before the concept of countercyclical policy was accepted or even understood.” 7 They may not have “understood” countercyclical policy, but recovery came anyway—and quickly.

So let’s look at a picture that both shows what happened to tax rates and illustrates the extent of the rapid recovery. Below, I’ve graphed the top marginal income tax rate (data from the IRS), and the gray shaded areas are the periods the economy was in recession information from the NBER) for the period from 1920 to 1940.

Let’s start with the timing of the recovery. Unless I’m missing something, the tax cuts came after the end of the recession. That is to say, the recovery preceded the tax cuts by half of a year. Now, Woods is very precise… he says tax rates were slashed between 1920 and 1922. I for one was left with the impression that tax rates were slashed in 1921 as well as 1922, but he never quite said that. So its right, but misleading. (Its the fact that he writes so precisely about timing that leads me to believe this is not a mistake on his part, but rather that he knows what he’s doing.) But then why are the tax cuts in 1922 being given credit for a recovery that had already begun half a year earlier? Woods quotes some dude called Anderson who in turn writes:

The rally in business production and employment that started in August 1921

Again… rapid recovery in 1921, tax cuts in 1922. Anyone see the problem with this? If Woods doesn’t, I have a bridge I’d be happy to sell him… in New York City in 1402. Unless, of course, we’re supposed to infer the classic libertarian view, which is that everyone knew a tax cut was coming and acted on the fact, Of course, anyone who was gonna act on tax cuts in August of ’21 ahead probably would have acted on them in November of ’20… when Harding was elected. As I understand it, Harding didn’t exactly make a secret about what he intended to do. Part of the The Return to Normalcy campaign he ran on included a rejection of Wilson’s active government.

But once more back to this quote:

Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups.

Again, one more thing slightly misleading (at least to me) but technically correct. Tax rates were slashed for all income groups, but not in 1920 or 1921 or 1922. Check the IRS link again… the folks at the bottom only got their tax cut later, in 1923. (One can see very clearly why Reagan admired Harding.) And Woods doesn’t quite say that all income groups had their tax rates slashed between 1920 and 1922, does he?

But we still haven’t even touched the bigger problem the graph shows. To most people, “rapid recovery” does not mean “a recovery that burns out quickly, leaving behind another recession less than 2 years later.” But that is, indeed, what happened. Call that recession “Recession # 2.” Interestingly enough, Recession #2 didn’t end until after a tax hike, which makes for a delicious detail given what Woods writes. Following the end of Recession #2, taxes are cut again. (I imagine that Woods must be thinking he can credit tax cuts for retroactively ending that recession too. Also, that buying a bridge in New York City in 1402 would allow him to charge Moses a hefty toll when he rides across on a dinosaur.)

OK… so there’s a tax cut, and that leads to another rapid(ly ending) recovery – Recession 3 comes around about 2 years later, in October of ’26. That recession ended in November of ’27. And we know what came next, right? Another rapid(ly ending) recovery (21 month long) with a tax cut!!! And this time what follows is a doozy – the Great Depression itself.

Note… for comparison with the policies Woods is happy about, I continued the graph through 1940. Take a gander at the period from 1933 to 1940, when that commie pinko Roosevelt was in office. I wonder if Woods would say the tax hikes Roosevelt instituted are the reason there were no rapid(ly ending) recoveries in the 1930s.

So let me recap, but using a bit different phrasing than Woods might use. Starting with Harding, Republican administrations repeatedly cut taxes in the 1920s. Recessions came fast and furious; in the 96 months between the end of the 1920 Depression and the start of Great Depression that followed this tax cutting bonanza, the economy was in recession 30% of the time.

To be honest, this doesn’t strike me as a good argument for cutting taxes, but then maybe that’s why no libertarian organization would ever contemplate giving me a prize.

Which leads me to my next graph… or maybe not. I haven’t even gotten to my best material, but this post is getting a bit long. Expect part 2 next week. I’ll be taking my gloves off.

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