Category Archives: Economics

Do great droughts and great recessions coincide?

Anybody else find it odd that these great droughts occur during weak economic times? The Dust Bowl of the 1930s occurred during the middle of the Great Depression. Now this one during our Great Recession.

Or perhaps it is because a nation is able better endure these hardships when times are good…

Obama the Luddite

Barack Obama believes that unemployment is high, in part, because of ATM machines.

Our President is totally right. It’s totally the ATMs fault. I think we should go around destroying all ATM machines. Think about how many jobs we’ll create by destroying all those machine.

Luddites of the world, unite!

Obamanomics = Failure!

S&P/Case-Shiller signals double dip in housing:

U.S. home prices fell in March for the eighth straight month, confirming the beleaguered housing market has entered a double-dip recession, according to a closely followed index released Tuesday

U.S. consumer confidence declines in May:

Consumer confidence fell in May as Americans grew slightly more pessimistic about future job prospects and business conditions, according to a closely followed survey.

Chicago manufacturing gauge nosedives:

A Chicago-area manufacturing gauge dropped by the largest amount in nearly two-and-half years in May, in a further sign that the rise in oil prices and the Japanese earthquake have affected activity.

Another sign of the Chinese bubble bursting

Marketwatch reports:

Falling land prices may prompt Chinese property developers to write down the value of their assets, forcing a sober reassessment for those with vast land holdings, according to a survey released Monday by Credit Suisse.

Most at risk are those mainland Chinese and Hong Kong developers who added aggressively to their land banks in 2009 and 2010, the prices of which could come under pressure amid Beijing’s ongoing credit tightening, the investment bank said.

The findings were part of a poll of both listed and unlisted companies conducted by an independent research company and commissioned by Credit Suisse.

[…]

Prices for land sold at auction were down 20% so far this year, the report cited one industry expert as saying. Other data indicated price declines of up to 50% for the year to date, although the figures were affected by slumping transaction volumes in cities such as Beijing, possibly overstating the true rate of declines, the report said.

Story continues here…

I’ve written before about the Chinese bubble. Nobody knows when this bubble will burst or deflate, but it will. And now that China is such a major player, it will drag down economies around the world.

The popping of the Chinese bubble?

With all the talk of inflation, China is experiencing a deflation problem. Marketwatch reports:

China is urging major supermarkets to boost vegetable sales and encouraging farmers to bypass middlemen and market produce directly, in a bid to curb a steep slide in prices that is hurting farmers’ incomes, the Ministry of Commerce said in a statement.

Twelve major supermarkets, including Wumart Stores Inc., have agreed to boost sales, the ministry said. The China Daily newspaper said Thursday Wal-Mart Stores Inc. and Carrefour SA are also involved in the effort.

The ministry has also set up a “work group” to maintain prices at a “reasonable” level.

Its statement Wednesday underscores the difficulties the government faces in controlling volatile prices. The impact of an official push last year to raise vegetable output appears to be unraveling now, amid overproduction and clogged distribution lines.

Vegetable prices have fallen 21% in a month and 5.9% from a week ago, the ministry said.

The sharpest declines were seen in green pepper, which fell 20.9% from a week ago, and cabbage, chili pepper and lettuce, which fell 12%, 8.9% and 8.1% respectively.

In contrast, grain, pork, beef, metals and rubber all continued to post small increases of between 0.2% and 1.7% from a week ago.

Last year, the Ministry of Agriculture pushed farmers to raise vegetable acreage by 7% and production by 7.5%, following almost three years of little to no growth in the sector.

The directive was part of wider efforts, including price caps on cooking oil and flour, to curb a surge in food prices.

Worldwide commodity inflation has been driven, in part, by demand from China. Are these price corrections the first sign that the Chinese bubble has popped and that inflation will turn to deflation as Chinese demand evaporates?

Private property is a most sacred right of mankind

Adam Smith writes in The Wealth of Nations:

To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.

This quote reminds me of what John Adams wrote in 1787 in his A Defence of the Constitutions of Government of the United States of America:

The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If “Thou shalt not covet” and “Thou shalt not steal” were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free.

Adam Smith: Supply Side Economist

From The Wealth of Nations:

High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes. [page 954]

Boston Fed President invents new 1984-style system of economics.

Fed’s Rosengren: Higher gas prices may hurt growth:

Rising energy prices are a concern not that they will lead to higher inflation but that they will subtract from household income and thus weaken the economy, said Eric Rosengren, the president of the Boston Federal Reserve Bank on Friday. Rosengren said the lasting effect on energy prices on overall inflation “has been surprisingly small in recent years.” The surge in oil prices in mid-2008 were followed by significant declines in core inflation, he noted. Rosengren said the Fed’s innovative monetary policy has not been inflationary. “It has been more than two years since the Fed’s balance sheet expanded dramatically. Sine that time core inflation has fallen to something like 50 year lows, he said. Rosengren is not a voting FOMC member this year. He spoke to an event hosted by the Connecticut Mortgage Bankers Association.

Maybe Mr. Rosengren can explain to me how rising oil prices leads to falling household income? Spending money on oil is spending, obviously, not a change in income. I assume he meant that the rising prices eats up a larger portion of household income; in other words, non-discretionary spending rises. But there’s a term for this phenomenon of rising prices: INFLATION.

Trying to give the Fed President the benefit of the doubt, I thought maybe the article was misconstruing what he said. So I searched Google and found his actual words:

My primary concern about rising energy prices is not so much that they will lead to higher inflation, but that they will subtract from household income and thus weaken the economy.

Apparently, we live in a new economic reality. In the new economics, rising prices weaken the economy (by somehow hurting “household income” but I assume he meant income available for discretionary spending) but does not lead to inflation. Get that? I admit, this new economics is confusing so here it is in simple English: rising prices cause deflation or, at the least, disinflation.

We really are living in George Orwell’s 1984. “WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH.” And now, INFLATION IS DEFLATION.

Deflation bad for government, not so much for you and me.

According to Marketwatch, Federal Reserve Chairman Ben Bernanke warned against deflation:

He also said the risk of deflation, a steady decline in prices and wages, remained a threat.

He stressed to the Senate panel that deflation would increase debt burdens and lower living standards.

If prices and wages declined at the same rate, how would that hurt us? We’d make less, but our expenses would go down. Yes, it would hurt somebody in debt, but it would help the person holding that debt, i.e. savers.

Now, who would get hurt the most? Who owes the most money of anybody? THE UNITED STATES GOVERNMENT.

What the Federal Reserve fears is the real value of the government’s debt increasing, making it harder to pay back. Furthermore, in a deflationary environment, the Fed would lose its ability to keep rates low and inflate the money supply. How so? Currently, if inflation is about zero, the Fed can keep interest rates near zero as well. But if we have deflation of two percent, the Fed can’t really lower rates below zero, so the inflation adjusted interest rates would be two percent. In effect, the government will be paying a two percent interest rate, increasing its deficit and expanding the debt, and the Fed will lose control of interest rate policy.

Legal Insurrection: Key Numbers In Unemployment Report Not So Good

Le·gal In·sur·rec·tion analyzes today’s employment report and the results are not good despite the headline decline in unemployment from 9.8% to 9.4%. (Reposted with permission. Original post here.)

Needless to say, administration supporters will be touting that the unemployment rate released by the Bureau of Labor Statistics this morning dropped from 9.8% to 9.4%.  Politically, this is good news for Obama, at least in the short run.

Dig just a bit deeper, and you will see that 0.2% of that drop (or half the total drop) was from a decrease in the “participation rate” from 64.5 to 64.3 of the population.  So half of the good news reflects that people have dropped out of the work force and have given up looking for work.

To put this in context, I ran a chart from the BLS website historical statistics database, showing the participation rate over the past 20 years, which shows that we are at a 20-year low:

The other disheartening statistic is reflected in the chart combining the unemployment, marginal and discouraged workers (in short, everyone who is not working but currently or at one time wanted to work, or who is employed part time because full time work was unavailable).  Combine all those and the total is 16.6% up from 16.3% November not seasonally adjusted (seasonally adjusted it is 16.7% down from 17%).  This is the highest number since 1994 (first year data available):

Here are two other charts showing the depth of the problem.  The first shows the average length of unemployment (in weeks) and the second the median length of unemployment:

While the drop in the unemployment rate from 9.8% to 9.4% is good political news, it’s hard to see any real improvement below the surface.

This gives further evidence that the American economy is still in decline. All that government stimulus accomplished nothing except for putting us further in debt.