Misery Economic Theater 2011

[ewmayer]

Originally Posted by ewmayer

Mish also correctly points out: "The fastest and most furious rallies are short-covering rallies in bear markets. We saw many of them in Autumn of 2008."

Like, say, the 600+ point swing in the DJIA in the hour-and-a-half leading up to the close today - Today's FOMC minutes came out just after 2pm eastern and led to some crazy (likely HFT-driven) action, first a sharp spike up to 11000, then a 400-point drop in the next 20 minutes as traders actually read the frickin' thing and probably realized "hey, this basically admits that things are far worse than the Fed has been admitting ... but no hint of QE3! Where's our candy, man?" Then a sharp reversal starting around 2:40 and a 600-point rocket shot into the close - On what "news", I have no idea. That may have been government intervention like we saw in Asia last night. If the boys at ZeroHedge figure out where the buying was coming from, I will post.

But, without further ado: Yeah, that looks like a healthy stock market, there:

[Christenson]

Originally Posted by ewmayer

It is similarly absurd to expect immediate upward rises in gasoline prices when oil futures rise, and yet I daresay that phenomenon is well-known to most motorists.

I'm not sure I understand your argument about asymmetry - are you suggesting that there *should* be a difference in the time-lag from oil-price-change to gas-price-change depending on the sign of the change? Or are you simply citing various reasons for a time-lag which should be similar irrespective of the price-change direction?

ew, imwithid is citing phenomenology with his assymetry ... this is the way it does happen, regardless of whether he thinks it is right or not.

The only quibble I have with imwithid is that gasoline/petrol consumption has long-term elasticity, as people either stop travelling so much or buy more efficient vehicles, or car-pool, and net US consumption is down from the peaks at $4 per gallon.

My understanding is that about 50 cents on my $3.75 gallon of gas is taxes, and economists were saying that inflation had eroded its purchasing power for the roads necessary to sustain all the cars.

The first problem with the tax is that it is per gallon, not per dollar sold, so the ability of that tax to fix the potholes and bridges varies substantially with the price of gas. The second problem is that gas and oil recieve a major, off-the-books subsidy from the rest of the federal government whenever troops go off to the mideast, ultimately protecting our low-cost foreign oil sources. The third is that none of the gas taxes go towards improving fuel efficiency, for example, by getting people and goods out of cars and trucks and onto rails, for example. Meanwhile, more and more time is spent in cars commuting and more and more stoplights go up in my area, slowing everyone.

[xilman]

Originally Posted by ewmayer

Would any of our UK readers care to comment on the London (and now elsewhere) riots? It seems there is much more at work there than mere protests against against police brutality (the proximate-cause cited) or government austerity (the structural cause cited by many).]

Not a personal comment, but one from someone who lives nearby: http://www.alexhudson.com/2011/08/10...-on-the-riots/

Paul

[R.D. Silverman]

Originally Posted by xilman

Not a personal comment, but one from someone who lives nearby: http://www.alexhudson.com/2011/08/10...-on-the-riots/

Paul

An excerpt from the above:

"What is disturbing, though, is what comes out of the mouths of these people when you listen to them being interviewed. I’ve heard a variety of interviews with people across the country who’ve been rioting, and the message is basically the same no matter who they are. They hate the police (the “Feds”), but this is just a proxy for authority of any sort. They don’t care who gets hurt, they don’t identify with any particular societal structure except for maybe their own gang, and they see an easy opportunity to gain at low risk of getting caught."


....easy opportunity to gain??? Exactly what is it that they hope to gain???

The essay referred to the failure of the education system for these people.
Some people (as evidenced in this forum!) are simply uneducable. Lack
of jobs for the uneducated may be driving these riots. Much of the same
is happening in the U.S. (minus the riots as yet). Is this an example of
"Idiocricy" or "The Marching Morons"? (C. Kornbluth)

Lack of education is certainly driving the Tea Party here.

[xilman]

Originally Posted by R.D. Silverman

An excerpt from the above:

"What is disturbing, though, is what comes out of the mouths of these people when you listen to them being interviewed. I’ve heard a variety of interviews with people across the country who’ve been rioting, and the message is basically the same no matter who they are. They hate the police (the “Feds”), but this is just a proxy for authority of any sort. They don’t care who gets hurt, they don’t identify with any particular societal structure except for maybe their own gang, and they see an easy opportunity to gain at low risk of getting caught."


....easy opportunity to gain??? Exactly what is it that they hope to gain???

Money, electronic goods, booze, ...

Most anything they can conveniently carry out of a shop before it's burnt down.

[jasonp]

Originally Posted by Christenson

My understanding is that about 50 cents on my $3.75 gallon of gas is taxes, and economists were saying that inflation had eroded its purchasing power for the roads necessary to sustain all the cars.

Looks like it varies by state (my estimate was way off)

[ewmayer]

Originally Posted by Christenson

The first problem with the tax is that it is per gallon, not per dollar sold, so the ability of that tax to fix the potholes and bridges varies substantially with the price of gas. The second problem is that gas and oil receive a major, off-the-books subsidy from the rest of the federal government whenever troops go off to the mideast, ultimately protecting our low-cost foreign oil sources. The third is that none of the gas taxes go towards improving fuel efficiency, for example, by getting people and goods out of cars and trucks and onto rails, for example. Meanwhile, more and more time is spent in cars commuting and more and more stoplights go up in my area, slowing everyone.

I was going to make a similar comment about the (alleged) large hidden tax in the form of military expenditures, supported by a few numbers. It is estimated that around 1/3 of the U.S. military budget can be tied to "defending our interests in oil regions". [Don't have a citation handy - If anyone finds one which gives a drastically different estimate, please post it]. So let's do the math - we don`t need to know the precise breakdown of how-much-of-each-barrel-of-oil-goes-to-make-gasoline, just what fraction of the price of each barrel is accounted for by the subsidy hidden in the defense spending. (Or better, how much higher the per-barrel price would be if the government imposed a direct oil tax to get the same revenue).

- Current U.S. defense budget is roughly $680 Bln/year. [On top of that, there are roughly $70 Bln per year in tax breaks and sundry subsidies the US government gives to the oil industry, but that seems not germane to the present computation], One-third of that is ~$230 Bln/year.

- US oil Imports average roughly 9 million barrels/day, or ~3.3 Bln barrels/year;

- Per-barrel prices have averaged ~$80-90 over the past 4-5 years, so U.S. spends ~$300 Bln/year on oil imports, a little over 2% of GDP.

So that points to a hidden government subsidy equivakent to around 75% of the price of a barrel of oil. If the government instead collected that money via taxes, gasoline prices would be in the $6-7/gallon range, which is close to what Europe pays.

--------------------

I was chuckling yesterday at the insane late-session market rocket-shot into the closing bell, thinking to myself “What are these folks smoking? The FOMC just basically admitted that we’re back in recession, and only promised to keep interest rates low forever, which is exactly what anyone who knows the Greenspan/Bernanke mind-set knew they were going to do anyway.” Easy come, easy go, I guess. Though this morning’ s excuse – rallies always have reasons, whereas sell-offs require excuses not involving the nasty words “market is fundamentally overvalued” – is rumors swirling about SocGen’s balance sheet. Now those may or not prove true – but massive market moves on rumors of bank-balance-sheet insolvency is what you get when you allow (and more, encourage) banks to mark-to-myth on the same balance sheets.

[R.D. Silverman]

Originally Posted by ewmayer

<snip>

.

An interesting summary of the situation:

http://money.msn.com/exchange-traded...ri.aspx?page=2

[ewmayer]

European indices started today solidly in the green, but the latest investor panic about bank shares (mainly banks in Italy and France) led to a vicious late-afternoon selloff. For example, Germany's DAX suffered another flash crash, plunging 5% in 30 minutes starting around 4pm local time:

[Christenson]

Originally Posted by ewmayer

I was going to make a similar comment about the (alleged) large hidden tax in the form of military expenditures, supported by a few numbers. It is estimated that around 1/3 of the U.S. military budget can be tied to "defending our interests in oil regions". [Don't have a citation handy - If anyone finds one which gives a drastically different estimate, please post it]. So let's do the math - we don`t need to know the precise breakdown of how-much-of-each-barrel-of-oil-goes-to-make-gasoline, just what fraction of the price of each barrel is accounted for by the subsidy hidden in the defense spending. (Or better, how much higher the per-barrel price would be if the government imposed a direct oil tax to get the same revenue).

- Current U.S. defense budget is roughly $680 Bln/year. [On top of that, there are roughly $70 Bln per year in tax breaks and sundry subsidies the US government gives to the oil industry, but that seems not germane to the present computation], One-third of that is ~$230 Bln/year.

- US oil Imports average roughly 9 million barrels/day, or ~3.3 Bln barrels/year;

- Per-barrel prices have averaged ~$80-90 over the past 4-5 years, so U.S. spends ~$300 Bln/year on oil imports, a little over 2% of GDP.

So that points to a hidden government subsidy equivakent to around 75% of the price of a barrel of oil. If the government instead collected that money via taxes, gasoline prices would be in the $6-7/gallon range, which is close to what Europe pays.

<snip>

Only 1/3 of the defense budget? I think that estimate is conservative...we have all these troops in the mideast, in two separate countries, who would not be there if not for oil. That's all of the active fighting our troops do.

Does TSA fall under defense? Make sure that silliness falls in your numbers too, as bin Laden would certainly have less traction if it weren't for oil....

******
As for the london riots, I think we should recall various riots here in the US...I'm just old enough to half-remember riots like Kent State in 1968 (funny, how the man who set up that shooting became Ohio Governor Jim Rhodes, not a pariah), Detroit, and Miami. There were also riots when the lights went out in New York City.

I think the common formula is "large number of hopeless people + triggering signal = riots". I can also attest to having heard people observe that when breaking "the rules" gets to a certain level, they realise punishment for crime has become a statistical matter, and the police are on the wrong end of the statistics. This was a practical truth in the soviet union in the mid 1980s.

I also think that, at least in the US, the forces at work are that we will "educate" almost anyone, burying them in debt in the process, without regard to the ultimate welfare of the erstwhile student or the welfare of the society as a whole. Results include (though this may have always been true) that employers have no idea who can do the jobs they need done, and most degrees are devalued since they are no longer scarce.

[ewmayer]

Originally Posted by R.D. Silverman

An interesting summary of the situation:

http://money.msn.com/exchange-traded...ri.aspx?page=2

Please forgive me, but I was unable to bring myself to read much further once I saw this segment of neo-Keynesian "we need another lending bubble!" claptrap from who other but a dyed-in-the-wool FedHead:

The Fed has room to do more, and it's possible chief Ben Bernanke is saving something to announce at the Fed's annual economic conference in Jackson Hole, Wyo., later this month.

But Allan Meltzer, an elder statesman and the mastermind behind the epic "A History of the Federal Reserve," believes that monetary policy has pretty much done all it can. He told me that "we don't have a monetary policy problem" given that interest rates have been stuck near 0% since 2008 and that excess bank reserves have swollen to a whopping $1.6 trillion. There is plenty of cheap money already in the system.

Unlocking this cash, along with the more than $1.2 trillion held by nonfinancial companies, according to Moody's, would be like finding an emergency fuel reserve. It would reignite the economy's engines and get it moving again. The cash would be used to fund new loans and new investments in equipment and employees.

Right ... it wouldn`t go into financial speculation and inflated asset prices now, would it? I mean, just because the last (n >> 1) times the Fed tried this it didn`t do f***-all for the productive economy or the labor market (in terms of creating lasting jobs) doens`t mean it won`t work this time, does it?

Remember that all the ingredients for a corporate-investment-led economic expansion remain in place: high profitability, undercapitalization, unsustainably low spending rates, falling productivity and low financial leverage.

The key is confidence. Corporate confidence. If we're going to save ourselves, we're going to need the CEOs to do it.

Wrong, wrong, wrong, wrong. The key is DEMAND - without demand for their products, companies will not invest in new equipment or employees. The past decade, all the demand growth has occurred overseas, so that`s where companies invested their profits. Thus they created woefully few jobs back home. And why has there been no demand growth domestically? Because for decades now we`ve been shipping good-wage middle-class jobs overseas in order to maximize corporate short-term profits. That has led to a declining wage base, meaning that consumers could only maintain their piece of the American dream by going ever-deeper into debt to finance the difference between their (corporate and bank-encouraged) needs and wants and their declining incomes. The same "Fed which can cure all our ills" encouraged this by throwing cheap credit around like mad. This led to biggest consumer-debt binge in the history of the world. But now the debt overhang has gotten so big that the resulting population of debt slaves is being choked by its financial shackles. With no prospects of those tens of millions of decent-wage jobs returning, consumers won`t go further into debt except out of dire necessity (and in that case usually with every intention to default), and those that can are cutting back and paying down their debt, even though it will a long drawn-out process. The resulting deflationary environment trumps all of your other bogus "ingredients for economic expansion".

4 ways the feds could prime the pump

Meltzer suggests four things politicians and Fed officials could do to help prod them along.

...and I stopped reading when the first of the ensuing presented options was not any of these:

1. Fed should admit that the "third mandate" it adopted under Greesnapn of supporting equity-market prices and throwing gobs of money at the markets and cheap credit at consumers every time they suffered a bad stumble has not helped the economy by way of the inflated-asset-price "wealth effect" and hoped-for neo-Keynesian "virtuous circle" due to the increased consumption resulting from all that newly-created paper wealth, but rather, has ignited a series of ever-more-ruinous speculative boom/bust cycles, each of which the Fed attempted to cure by trying an even bigger dose of the same financial Patent Nostrum.

2. Fed should further admit that its bogus market-distorting "cures" have in fact left the economy worse off than it would have been, left to its own devices, by encouraging moral hazard, insane risk-taking and massive lending fraud, and by diverting a large fraction of the nation`s financial and human capital from genuinely productive economic activity toward Ponzi finance and speculative manias.

3. Fed should unwind its bloated balance sheet by forcing the banks to take back the over $1 trillion in garbage-MBS the Fed deliberately overpaid for during its QE1 experiment, selling its similar quantity of Treasury debt (not all at once, but in as expedient a fashion as reasonably possible) into the open markets.

4. Fed should disband itself and the right of "coinage" (monetary issuance) should return to Congress as specified in the Constitution. Government should pass legislation (or better, seek to amend the Constitution) to the following effect, thus returning the Fed`s willfully-misinterpreted mandate of "price stability" to its original meaning:

"Any monetary issuance above the rate of U.S. population growth may only occur by way of U.S. government debt issuance into the open markets."

[That allows for emergency financing as occurred e.g. in WW2, but only so long as people were willing to buy the bonds on reasonable terms].

5. Banks shall henceforth be required to hew to the 1 dollar of capital rule, that is, hold one dollar of actual unencumbered capital against every dollar of unsecured lending, said capital being marked-to-market nightly. For secured lending, a leverage limit of no more than 6:1 shall apply.

6. Bank demand deposit accounts (e.g. Checking accounts) shall return to being true demand deposit accounts backed by actual capital. (Repeal of the Greenspan sweep-account 'innovation'.)