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

Food For Clark Fans

Mark Kleiman’s got a bunch in this post with highlights from Gen. Clark’s recently released military records. Here’s a taste:

Everyone knows that the army has carried grade inflation to a point only dreamed of in the university, and that Hollywood has its press agents study efficiency ratings to learn hyperbole. But the language used about Clark by the commanders he worked for is completely off the charts. Comparisons to Marshall and MacArthur aren’t made lightly by any soldier who wants to keep the respect of his peers.

On the downside, as Kleiman points out, the Clark campaign didn’t get much coverage of this.


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Widespread Fantasy Update II

On Monday, I took issue with Michael Kinsley’s silly statement that liberals widely believe that Colin Powell will resign and turn on the administration (Kinsley wants you to see that liberals who place faith in any general(s) are misguided). I also asked for just one person who believed this to stand up and explain why. While a few said they held such a hope before Colin Powell’s February 5th appearance before the UN, there have been no takers. Not one.

So if this really isn’t a “widespread fantasy” among liberals, did Kinsley just make it up? No, apparently Kinsley is a regular reader of BusyBusyBusy (for a quick laugh and to see why, click here).


P.S. Thanks to Elton of BusyBusyBusy for the tip (and note that he explains, “But it was a joke, really!”, though it seems Kinsley missed that).

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The Three-Way Currency Contest

The Economist’s Buttonwood column (subscription required) poses an interesting dilemma: the managers of each of the three largest currencies in the world – the dollar, yen, and euro – would like their currency to depreciate. Yet it is impossible for all three to simultaneously depreciate against the others.

I’ve previously written a bit about why the US government wants the dollar to depreciate, particularly against Asian currencies, in order to stimulate exports, reduce imports, and thus hopefully help the US manufacturing sector.

However, Buttonwood points out that the Japan also wants its currency to fall:

Japan’s recovery started in the fourth quarter of 2001 and growth is picking up. But officials there are increasingly worried that a rising yen will choke it off. The yen is close to a three-year high against the greenback. Its rise accelerated after the recent G7 summit in Dubai, when America’s weak-dollar policy became most obvious. Yet Japan needs the yen to fall because it needs inflation to help wipe out the massive debts the country incurred both during the bubble and in trying to get the economy going again after it had popped.

But that’s not all. What about Europe? They are also facing the real possibilities of recession and deflation, so…

At some point, perhaps even the European Central Bank will wake up to the fact that the rising euro will keep the European economy close to recession. All of which is to suggest that none of the world’s major currencies is especially alluring; for one reason or another governments in all three might want them to fall. Of course, they cannot all fall against each other.

The column goes on to hypothesize that maybe what will happen is that all three currencies will depreciate against a fourth major international asset: gold.

It’s an interesting possibility, but I disagree about its likelihood. To get this effect, you’d need to think that investors, losing confidence in all three currencies simultaneously, will all flock to gold instead, pushing up the price of gold and thus the value of the three currencies down.

Far more likely, I think, is that investors will favor one or two of the three major currencies over the other(s). There will therefore be one or two winners in this currency tug-of-war, and one or two losers. The winner will get a depreciating currency, the losers an appreciation.

The net effect on each country’s economy, however, will depend on more than just the value of each country’s currency. It will also depend on whether investors simultaneously drive down asset prices in the country that they shift away from. If investors decide to move out of the dollar, for example, they could also decide to move out of the US bond market, driving up US interest rates. Whether or not that happens will depend on the confidence they have in the financial management of the US government.

Uh oh.


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Secretary Snow Answers My Question #2

CBS Marketwatch was kind enough to try to get an answer to question #2 from the seven in my “California Questions” post that followed Arnie’s coup in CA. They went right to the top (almost), and asked Treasury Secretary John Snow.

NEW YORK (CBS.MW) — If Governor-elect Arnold Schwarzenegger is hoping for help cleaning up California’s fiscal mess when he meets with President Bush, he may be disappointed.

“I’m sure we’ll listen to him, but you know California’s problems are basically California’s own problems,” Treasury Secretary John Snow said in an interview with CBS MarketWatch. “I think California is going to have to solve its own problems rather than turn to the Treasury of the United States.”

Probably not surprising. But of course, today Arnie will have the chance to go over Snow’s head and talk directly to the boss about getting help for CA, so who knows…


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CPI Shows Continued Disinflation

The BLS released its monthly report on consumer prices this morning. The core rate (excluding food and energy prices) rose .1% in September, bringing the annual rate of core consumer price inflation down to 1.25% over the past year. So the trend of declining inflation, called “disinflation,” continues, as I suggested in last week’s post about the PPI. For your amusement and edification, I’ll include a graph.

Given that it is generally accepted among economists who do this sort of thing that the CPI overstates actual inflation by a bit (maybe by .5% per year, maybe by as much as 1% per year), the US is basically in a period of flat prices right now. Any further disinflation, however, will bring up the dreaded ‘d’ word: deflation. And as I suggested last week, deflation could cause some serious problems. Stay tuned.


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Widespread Fantasy Update

The title of this post is much more exciting than the content. Yesterday, I initiated my search for just one liberal reader of Angry Bear who believes that Colin Powell will resign as Secretary of State and turn against the administration. Michael Kinsley, you may recall, says that belief is “widespread” among the foolish liberals who like generals (be they Powell or Clark).

Since issuing that challenge, I’ve had 600 unique visitors, predominately liberal. Now some may be repeat visitors from different computers and some may not be liberal, so let’s conservatively suppose that only 100 liberals have visited. Kinsley’s “widespread” is now somewhere below 1% of liberals–and dropping.


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Sneaky Lou Dobbs

Making a regularly scheduled visit to Eschaton, I see his latest “Torture Lou Dobbs.” Always happy to strike a blow against pseudo-science, I quickly followed the link to Dobbs’ latest poll. Here are the questions:


Whose view of the situation in Iraq do you believe most?

  • Bush administration’s
  • Congressional Democrats’
  • Media’s
  • United Nations’

It’s a clear attempt to fracture the oppostion vote (e.g. 65% against Bush would be split at about 22% for each of the three non-Bush choices, so Bush’s 35% would be the “winner”–“by more than a 50% margin” would be technically true but disingenuous). For example, the announced result would be “our latest internet poll shows that more people believe Bush’s view of the Iraq situation than believe Congressional Democrats’/United Nations’/Media’s.” Cleverly, Dobbs would likely only compare Bush to one of the alternatives at a time, but never compare the votes for Bush to the non-Bush votes, nor say anything like, “65% rejected Bush’s view”.

Given the choices, I was indecisive for a bit. Briefly, remembering that the point is to frustrate Dobbs rather than express my view, I was stuck trying to figure out which in Dobbs’ book would be the greater evil. Then I remembered that of the three, only the United Nations controls black helicopters and blue helmets, and voted.

As it turns out, Atrios’ readers are legion, as well as too clever to fall for Dobbs ploy: the current tally is UN 49%, Democrats 27%, Media 16%, and Bush 8%. The fracturing did work somewhat, but not well enough for Bush to come out ahead. Look for the choices in a future Dobbs poll to be Congressional Democrats, the Media, Howard Dean, The United Nations, Wesley Clark, Nader, Gray Davis, Noam Chomsky, Al-Jazeera, the BBC, NPR, PBS, the New York Times, the Washington Post, CalPundit, and George Bush.


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George Soros

The three most famous super-rich liberals are George Soros, Warren Buffet (notwithstanding his advising the Shwarzenegger campaign), and Bill Gates Sr. (Gates Sr. is not personally rich, but as head of The Bill and Melinda Gates Foundation he still makes the list). The upcoming issue of Fortune has a medium-length piece on Soros and his new book (paid subscription required). In a nutshell, the point of the article is that Soros is (1) really wealthy, (2) really smart, (3) really angry at the Bush administration, and (4) planning to spend and raise money to do something about it:

“I lived through both German and Soviet occupation,” Soros told me as we walked through a park on Budapest’s Margaret Island. “When I hear President Bush say that those who are not with us are against us, I hear alarm bells.” He calls Bush’s speeches “Orwellian” and compares the Bush vision of international democracy—”You can have freedom as long as you do what we tell you to do”—to Soviet rhetoric about “people’s democracies.”

Soros has just committed $10 million of his own money to an effort to drum up support for Democrats in key states, immediately becoming one of the biggest individual donors to next year’s electoral race. In September he staged a fundraiser for former Vermont governor Howard Dean. And after years of writing moderate, carefully argued—and not very influential—tracts about the international economy, he is now almost ready to publish a very different kind of work, a book to be called The Bubble of American Supremacy. It’s a no-holds-barred attack on what he sees as the hubris of American policy. “I’ve come to the conclusion,” Soros told FORTUNE, “that one can do a lot more about the issues I care about by changing the government than by pushing the issues.” In short, he has become the world’s angriest billionaire.

How do Republicans respond when one-who-should-be-with-them sides with the opposition?

“The Democratic party has been unable to broaden their message,” says Republican National Committee spokeswoman Christine Iverson, … “George Soros has purchased the Democratic Party for $10 million”

Spread nationwide, in smaller chunks to various candidates and state parties, $10 million buys an entire party? I wonder what these 23 people are buying with their $200,000 or more in funds that will be contributed to a single person?


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Will Bernanke be Right Again?

Fed governor Ben Bernanke testified today on Capitol Hill as part of his confirmation process for a full 14 year term. He had some pretty bullish things to say, particularly about the prospect for an improvement in the US labor market. Here are some excerpts from his testimony:

After several false starts, the economy is showing signs of sustained recovery… Particularly encouraging are the signs of revival in capital expenditure by businesses… Although economic forecasting is far from an exact science, private-sector forecasters broadly agree that the economy should grow at nearly a 4 percent rate in 2004. I believe that forecast is plausible, assuming that the revival in business investment remains vigorous.

Until the job market improves, [however,] this recovery will not feel like a recovery to most Americans. A number of factors explain why we have not yet seen net new job creation.

First, we have seen truly remarkable increases in labor productivity, which have permitted firms to meet the increasing demands for their output without hiring additional workers. Second, possibly because of geopolitical and economic uncertainties, it appears that employers have been slower than usual to make commitments to expand their plants, add staff, or add to inventories.

However, in my view, the growth of productivity is likely to slow, at least somewhat, from its recent extraordinary pace, and so it seems very unlikely that firms can continue to meet rapidly rising demands without adding to their capital stocks (as they have already begun to do) and to their workforces.

Thus, given the rate of increase in spending and output that we are now witnessing, a reasonable expectation is that firms will need to add significant numbers of workers within the next several quarters.

I tend to think that Bernanke knows what he is talking about. As I mentioned in an earlier post, I think he’s been right on the mark about the trend of prices in the US. Plus, he’s just a really smart guy and a good economist. Interestingly, he’s also the only left-leaning economist that I can think of that Bush has nominated for anything. So it might be worth keeping his predictions in mind.

Hmm, that’s two non-bearish posts in a row. I’m going to have to do something about that…


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Is the US Heading for Financial Disaster?

Several commentators have been posing that very question recently. The concern is that the US might be heading for a major financial crisis due to increasing debt. For example, in Krugman’s piece in the NYTimes today, he writes

The timing of [economic] crises is hard to predict. But there are warning signs, like big trade and budget deficits and rising debt burdens.

And there’s one thing I can’t help noticing: a third world country with America’s recent numbers — its huge budget and trade deficits, its growing reliance on short-term borrowing from the rest of the world — would definitely be on the watch list.

Similarly, The Economist (subscription required) ran a story recently called “America the Risky?” that reported on the results of a model, developed by economists at Lehman Brothers, designed to predict major financial crises. That model showed that the US was in the danger zone:

The model, called Damocles (as in “sword of”), is an early-warning signal. It puts together ten indicators—from external debt as a percentage of GDP to foreign reserves as a percentage of short-term debt—to assess the overall riskiness of a country, which is expressed as an index.

A reading above 75 indicates that a country has a one-in-three chance of a crisis in the next 12 months; a figure above 100 implies a 50-50 chance.

When Lehman ran America’s economic numbers through Damocles, the outcome was striking. With its rapidly climbing current-account deficit and foreign debt, among other worries, America’s Damocles index is just shy of 75.

So is the US really in danger of facing a severe financial crisis? I think I have to be slightly less bearish than usual in this case, and say probably not.

The US has some serious advantages over any other country in a similar situation. The biggest advantage is that the primary way that the US is borrowing money from the rest of the world is by issuing US government bonds. Those bonds are considered the safest investments in the world, for good reason. It’s impossible for me to imagine that changing anytime in the meaningful future (or at least the next 20 or 30 years, at least). So the US will continue to be able to borrow money from foreign lenders, and thus will be able to avoid a serious international lending crisis.

In addition, unlike most developing countries (such as Mexico in 1994, and Argentina in 2001), the US doesn’t have to worry about currency fluctuations increasing the US’s debt burden. The US will always repay its debt in dollars, which the Fed will ensure continue to exist in adequate quantities to repay international loans.

So, while I think that the US has a host of long-term economic problems facing it, and that the US government’s finances are a dangerous shambles, I disagree with some of the most pessimistic observers about the likelihood of the crisis scenario. The main problem with the government budget deficits is redistributional, in my opinion – it will require much higher taxes on future generations, and redistribute income away from borrowers and to lenders. But those are topics for another day.


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