The Coming Economic Propaganda Blitz
-Let this post serve as your first warning. The Bureau of Economic Analysis (BEA) within the Commerce Department is going release the advance estimate for 2010 4th quarter Gross Domestic Product (GDP) on January 28, 2011. This estimate is likely to show the economy growing at a 4% (or better) annual rate. But that won’t be the end of it—not by a long shot. Due to the Fed’s bond buying (QE2) and the massive tax cuts just enacted by Congress, growth in subsequent quarters is also going to be considerably higher than it would have been. Well, you might say, isn’t that a good thing? Doesn’t that indicate that "The Economy" is finally kicking into gear? That’s certainly what the Powers That Be want you to believe. The problem is that there are two economies, not one. See my post "The Economy" — America’s Great Lie
. There’s the economy where the well-off and the rich folks dwell, and there’s the other one where ordinary Americans live. If the former is thriving, and it is, and the official statistics lump the two together, it will appear that everybody is better off
Lesson’s from Japan’s fiscal disaster
– When it comes to overindebted countries which can’t stop spending, it’s pretty hard to compete with Japan. The fact that everybody picks up on when reporting
on the 2011 budget is that debt issuance is going to exceed tax revenues for the second year running — or, to put it another way, that more than half the budget is being paid for by borrowing rather than taxes. For me, however, the scarier fact is that more than half of government tax revenue is going to go straight back out the door in debt-service payments. If you’re at all interested in Japan’s budget, the Yomiuri Shimbun editorial
on the subject is excellent; for a shorter version, James Simms
has a good overview in the WSJ. The problem is a familiar one: politicians are happy spending money and incapable of implementing budget cuts, and the result is a slow-moving fiscal trainwreck. The situation in Japan is particularly depressing because the country has no major ethnic or political rifts. I can’t imagine Greece-style riots in Japan either. But still the technocrats can’t make any headway.
Poll: Obama is ‘Most Admired Man’ for 3rd year in a row – It was a tough year to be Barack Obama in many respects–but he’s ending it on a strong note. Not only did the president rack up a number of key legislative wins in the lame-duck 111th Congress, but he also won the honor of being the man Americans admired most in 2010, according to a Gallup/USA Today poll released Monday
Paul Krugman on "Peak Oil" and Smooth Adjustment to Anticipated Rising Commodity Prices
– In this column
, Paul Krugman says some wise stuff. As an applied micro economist, he starts with some facts: "Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months." He offers some speculations about the causes of these price dynamics. But, the interesting part of the article is his predictions about the consequences of these events: He writes: "So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources."
Credit-deposit growth gap behind liquidity crunch
– The faster growth in bank credit than deposits is behind the present cash crunch, the Reserve Bank of India (RBI) has said. Year-on-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI’s projection of 20 per cent and 18 per cent, respectively, for 2010-11. The liquidity deficit, indicated by banks’ borrowing from the repo tender of RBI, has been over Rs 1 lakh crore on an average since November. Low government spending, coupled with slack deposit growth and advance tax outflows, has resulted in the crunch. On Wednesday, banks borrowed a record Rs 1.7 lakh crore from RBI.
Food, fuel prices drive inflation worries
– Rising prices in India of fuel and food are reviving worries about inflation and sent swap rates to 26-month highs as expectations grew for more rate increases in Asia’s third-largest economy. India’s embattled government is expected to decide next week whether to increase state-set fuel prices as international crude oil hovered near two-year highs, a move that would have a broader inflationary impact than a decision earlier this month by state-run fuel retailers to lift the price of petrol. In the year to Dec. 11, India’s food price index rose 12.13 percent, with the price of onions — the country’s most widely-eaten vegetable — of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week."Inflation is becoming a problem now. We expect the RBI (Reserve Bank of India) to hike rates sooner rather than later. Now we expect 50-75 basis points of rate hike in the next year, most of which should happen in the first half," said Manish Wadhawan, director and head of rates trading at HSBC in Mumbai.
Commodity Prices and Inflation
– Krugman – The reactions to today’s rather wonkish piece
are kind of funny: I’m getting a lot of “you’re an idiot who doesn’t understand economics, it’s all about the debased dollar”. Anyway, it’s worth pointing out that commodity prices do have a habit of fluctuating, a lot — and that historically, such fluctuations have generally presaged neither major inflation nor major deflation. Update
: Oh, I forgot to mention that the best analysis I’ve seen of the 2007-2008 commodity price spike is this Jim Hamilton paper
Middle-class gap grows – The gap between the rich and the middle class is larger than it has ever been due to the bursting of the housing bubble. The richest 1% of U.S. households had a net worth 225 times greater than that of the average American household in 2009, according to analysis conducted by the Economic Policy Institute, a liberal think tank. That’s up from the previous record of 190 times greater, which was set in 2004. The widening gap came even as wealthy households’ average net worth tumbled 27% — to about $14 million — between 2007 to 2009. That’s the first time that they suffered a decline since the three-year period of 1992 to 1995. Meanwhile, the average family’s net worth plunged 41% — to just $62,200 — from 2007 to 2009, according to EPI’s calculations. "The typical person lost more because a bigger percentage of their wealth in 2007 had been the value of their home,"
America’s Political Class Struggle – America is on a collision course with itself. This month’s deal between President Barack Obama and the Republicans in Congress to extend the tax cuts initiated a decade ago by President George W. Bush is being hailed as the start of a new bipartisan consensus. The US is running an annual budget deficit of around $1 trillion, which may widen further as a result of the new tax agreement. This level of annual borrowing is far too high for comfort. It must be cut, but how? The problem is America’s corrupted politics and loss of civic morality. One political party, the Republicans, stands for little except tax cuts, which they place above any other goal. The Democrats have a bit wider set of interests, including support for health care, education, training, and infrastructure. But, like the Republicans, the Democrats, too, are keen to shower tax cuts on their major campaign contributors, predominantly rich Americans. The result is a dangerous paradox. The US budget deficit is enormous and unsustainable. The poor are squeezed by cuts in social programs and a weak job market. One in eight Americans depends on Food Stamps to eat. Yet, despite these circumstances, one political party wants to gut tax revenues altogether, and the other is easily dragged along, against its better instincts, out of concern for keeping its rich contributors happy.
Two Views of Class Struggle
— Jeff Sachs writes
, Since Ronald Reagan became President in 1981, America’s budget system has been geared to supporting the accumulation of vast wealth at the top of the income distribution. Amazingly, the richest 1% of American households now has a higher net worth than the bottom 90%. The annual income of the richest 12,000 households is greater than that of the poorest 24 million households. Investors Business Daily
editorializes, Add the cost of benefits and pensions, and the average compensation gap between federal and private-sector workers jumps to nearly $62,000 per year — $123,049 vs. $61,051.
Krugman: Peak Oil has Arrived
— His exact words are
: the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived.
Emphasis mine. I would have worded it a bit differently: with a nuance here and a caveat there, but I think the broad thrust of what he’s saying is helpful. It’s good to see such a widely followed voice acknowledging these issues. I think the degree of political strain is going to be somewhat greater than he’s yet acknowledging though.
Unemployment Situation in Pictures; Manufacturing, State and Local, Temporary-Help
– Inquiring minds are looking at charts of state and local employment, manufacturing, temporary help, and other items in the BLS Current Statistics report. Note how local governments were still expanding mid-recession, all the way up till July of 2008. A year later, starting June of 2009, local governments finally got religion and started cutting jobs. Look for this trend to continue into 2011. In spite of all the whining by states, they have not yet made any significant cuts in employment. For all the brouhaha about the manufacturing recovery, employment in the manufacturing sector has dropped four consecutive months. Total nonfarm employment shows the nature of the jobless recovery. Jobs are expanding barely enough to hold the unemployment rate constant, and it has taken a declining participation rate to do that.
Startups Key to Job Growth – New businesses are the most important source of new jobs, researchers say. And that’s just counting people who are on the payrolls of firms that get counted in official job statistics. According to a paper by Small Business Administration economist Ying Lowrey, the actual role of startup businesses in employment may be far greater than official employment statistics suggest. Many startup companies have yet to be incorporated, she says, and the entrepreneurs who toil at them are unpaid or self-employed workers aren’t counted in official tallies. “These unpaid and self-employed jobs make contributions to the economy, involving millions of individuals, but are not incorporated in the job counts that are the basis of much scholarly research,” How many jobs are we talking about? Using data from a University of Michigan panel study of entrepreneurs, a Kauffman Foundation survey of new businesses and a Census Bureau survey of small business owners, she estimates that between 1997 and 2008 new entrepreneurial businesses created 3.5 million new jobs a year.