The Skeptical Optimist

Pulse rate: Almost back to normal

A business mentor of mine once said there are three types of people in the world: (1) those who make things happen; (2) those who watch things happen; and (3) those who say What the hell happened?  On Friday, Fed Chairman Ben Bernanke made good things happen, and CNBC was helping me watch them closely.  What a thriller. 

After the late-week excitement on the monetary front, Bernanke's decisive Friday morning action and its aftermath helped bring my pulse rate back down to near-normal ...but, admittedly, I need to see another day's action on the 13-week T-bill and the fed funds rate before it's all the way back down. 

The Fed chairman did the right thing at just the right time (lowering the discount rate).  Jim Cramer, CNBC's famous wildman, estimates that it prevented a thousand point plummet in the DJIA.  I have no idea how to gauge whether that's accurate, but I do know the pundits were nearly unanimous the previous evening (Thursday) that the liquidity crisis was serious indeed.  I did hear that Bernanke's action just before the opening bell the next morning, on option-expiration Friday, put some index fund short-sellers out of business within a few minutes.  [When you're a short seller committed to down 500 at the open, up 300 is a killer, literally.]  It still looks to me as if Fed action early Friday just might have prevented a freeze-up of the banking system.  Three cheers for Bernanke. 

And a big hat tip from me to the CNBC tag team—especially Erin Burnett, Mark Haines, Maria Bartiromo, and Larry Kudlow—who stayed right on top of these events the whole time, mornings through evenings.  They were asking the right questions at the right times, and they gained at least one loyal listener for CNBC: me.  You should take a peek at them every now and then, too, if you don't already. 

For me, last week's monetary events served as a stark reminder that those gradual, linear-looking trends many of us overstudy and pontificate about are occasionally interrupted—very rudely—€”by vertical spikes of discontinuity.  Some spikes are positive, some are negative, but all are nearly-instantaneous.  I have a feeling our Fed chairman preempted what otherwise would have been a nasty day for our economy on Friday.  Just an educated guess.

FQ.07.33: Favorite Quote for This Week

We won’t experience one hundred years of technological advance in the twenty-first century; we will witness on the order of twenty thousand years of progress [at today’s rate of progress], or about one thousand times greater than what was achieved in the twentieth century.
—Ray Kurzweil

"Artificial Easing" by the Fed

For the last few days, our banking system (and therefore our economy) has been suffering a liquidity crisis.  A liquidity freeze means that the banks don't have the funds to finance even the best-quality short-term loans.  In short, that's really bad news.  Larry Kudlow summarized it accurately on his show yesterday:

Without liquidity, this economy cannot grow.

No wonder the Fed has been stepping in with massive liquidity injections in the last few days.  In effect, the Fed has reduced its so-called target rate without actually saying they've reduced it.  Take a look at this startling chart of daily interest rate data; we may never again see another one shaped quite like this.

Click to enlarge:

The white line (fed funds rate) is determined by the banks who borrow and lend reserves among themselves overnight; the Fed usually tries to keep it close to the Fed's target rate (5.25% today) by injecting or withdrawing reserves (base money).  Usually.  But the last two days weren't usual days; the vertical free fall in the white line was caused by the Fed's massive liquidity injection.  The vertically-dropping red line, by the way, is a massive flight to the safety of short term US Treasury securities in the last two days.  My jaw dropped when I charted those two lines. 

Why did the white line drop almost vertically?  Because of the Fed's liquidity injection, the banks didn't need to borrow much at all from each other to comply with the Fed's reserve requirements.  The Fed vice chairman reportedly called it "artificial easing" (or "indirect" easing; I couldn't find the exact quote before press time).  To me, that sounds like a fancy way of simply saying "easing."  [That process, incidentally, is what most people mean when they say the Fed "prints money."  Contrary to the stigma some have attached to "printing money," it is absolutely necessary to sustain real growth, and is occasionally necessary to prevent a collapse.) 

Regarding the Fed's interest rate target versus its open market operations, something's gotta give: to get the white line closer to the Fed's advertised target rate, the Fed either needs to reduce its target rate, or remove liquidity from the banking system.  The latter would be one of the dumbest moves by the Fed since 1929; I therefore predict that the Fed will reduce its target rate soon, possibly before its next scheduled meeting in mid-September; a decrease from 5.25% to 4.75% wouldn't surprise me a bit.  [Although I hardly ever predict interest rates, there aren't many other things besides "easing" that can happen in this highly unusual case.]

[UPDATE, 7:20 am CDT, 8/17/07:  The Fed did indeed cut the discount rate by a half point.  That was quick.  See http://tinyurl.com/3738na ]

Political ramifications
It always comes back to politics one way or another, doesn't it?  In this case, it goes like this: (a) too many bad mortgage loans—by stupid lenders who deserve to go broke—will probably cause house prices to fall; (b) unless sufficient liquidity can mitigate that problem, lower house prices would reverberate through the economy, eventually dampening consumer spending; (c) a big-enough slowdown in consumer spending would cause a recession; (d) a recession during election time almost always causes the party that gets blamed to lose the election, badly. 

As a result, look for the president to meet with the Fed chairman and the Treasury secretary soon, for a photo op and a chance to emphasize the government's intent to fix the liquidity problem, with vigor.  Whatever.  I hope their liquidity remedy works, because otherwise we can kiss the current economic boom goodbye, and say hello to a nine-month-or-longer recession starting in a few months. 

If that sounds a bit pessimistic, it is.  Maybe I'll be pleasantly surprised, though.

==========
End note:
Anyone interested in getting to know the members of the Fed Board of Governors a little better can start here, at the Fed's website:
http://www.federalreserve.gov/bios/

Tax me now, AND tax me later

One of the tax reform ideas that has apparently gained a following is the national sales tax.  (Some are also calling it the Fair Tax, but I'm not so sure "fair" is an accurate description, so I'll keep calling it the national sales tax.) 

It's reasonably easy to find lists and discussions of the pros and cons; Wikipedia is a decent starting place, but here's a short summary of what you'll usually see.  (Hint: it's missing my big objection, which I'll explain later): 

Possible advantages of a national sales tax:
• No federal taxes are deducted from your paycheck;
• No savings are taxed;
• Consumption is taxed when you spend the money;
• The 23% sales tax rate makes the cost of government very visible;
• No more IRS.
• A "prebate" makes it progressive.

Possible disadvantages of a national sales tax:
• It might prove difficult to collect, esp. in states with no sales tax today;
• It could be easy to evade;
• It might reduce retail sales;
• It might not be progressive enough to satisfy some;
• Future politicians might reinstate the income tax;
• It could increase the size of the underground economy.

Those points by themselves are enough for a lengthy debate, but did you notice what's missing from the list?  It punishes savers—specifically, those who have already been saving.  That's a show-stopper for me; if you've been a disciplined saver, it should be a show-stopper for you as well. 

In a nutshell, here's what happens: Under today's system, many people choose not to spend all of their net take-home pay.  For example, if you have a savings account at your bank, or a Roth IRA, you are one of those savers who paid federal tax on your income, then took a piece of what was left and put it into a savings account.  But now, if a national sales tax suddenly replaces the income and payroll taxes, those "after-tax" dollars you thought you saved would all of a sudden become pretax dollars.  They'd be taxed a second time, as soon as you spent them.  Double taxation of your principal is what it would amount to. 

To illustrate...

Before the national sales tax:

After the national sales tax:

I went to the "Fair Tax" website and searched up and down for any provision that would fix (or mitigate) this problem, but had no luck.  If you know of anything I missed, please let me know.  For now, I have to conclude that the so-called Fair Tax is unfair to those of us who long ago formed the supposedly good habit of saving a little extra all along the way.

Proponents of the so-called Fair Tax should not assume I'll give their proposal much support until I know how they propose to fix the problem of double-taxation-of-principal.  Until then, a short way to describe what I think of it would be "tax-me-now AND tax-me-later." 

Hey, candidates: Why not an Energy X-Prize?

To conservatives, the number one threat to our grandchildren's generation is radical Islamic jihadism; to progressives, it's global warming.  I've seen each side ridicule the other's top priority as politicially-inspired fear-mongering.  Both sides consider the debate to be a contest: the Virtuous Truth-bearers versus the Scheming Liars.  Here are the definitions: 

Virtuous Truth-bearers:
Selfless good guys trying their best to defend our grandchildren's future well-being, but struggling to get the true message through to the masses.

Scheming Liars:
Power-hungry bad guys trying their best to get themselves elected by hypnotizing enough gullible voters into believing their false message, grandchildren's generation be damned. 

Which of those two groups do you belong to?

Just kidding, because I already know the answer.  If Americans were polled on that question, the Virtuous Truth-bearers would number in the hundreds of millions—outnumbering the Scheming Liars by hundreds of millions.  So, my guess is that you are a Virtuous Truth-bearer.  That's good, because an Energy X-Prize has something big in it for you, not to mention all of your fellow Truth-bearers. 

Newsweek skewers Newsweek
Newsweek's Robert J. Samuelson recently skewered his own magazine for last week's global warming cover story. His whole article is here, but he hit the nail on the head with this statement:

The global-warming debate's great un-mentionable is this: we lack the technology to get from here to there. 

He's right: technological innovation is what we need, not a debate victory for one side's political talking points.  If we could accomplish a few of the right technological breakthroughs, we'd take a giant leap towards both sides' stated goals.  The sooner we achieve those technological breakthroughs, the better for our grandkids' generation.  If we could do it within the next ten years, it could make our grandkids not only much, much safer, but also tens of trillions of dollars wealthier. 

The Energy X-Prize: something for everyone
This should be a unanimous no-brainer—or, at worst, a near-unanimous small-brainer.  I described it last year as a "21st century GI Bill"— but I now think "Energy X-Prize" is a better name for it.  It's carrot economics (a lucrative reward for doing something government defines as "good"), instead of stick economics (a stiff penalty for doing something government defines as "bad").  For example, one prize might be a $1 billion, federally-funded X-Prize offered to the first person or organization that demonstrated how to build a safe, lightweight, mobile, rechargeable battery or capacitor rated at 400 kilowatt hours, which is enough stored energy to run a personal automobile for several hundred miles on domestically-generated electric power, instead of using gasoline or diesel. 

A federally-funded X-Prize is merely an extension of Paul Romer's thesis that, yes, government does have a role to play in economic growth. 

Imagine just a few of the benefits to society if someone could win that particular X-prize:

• Instead of importing oil, we could build and export superbatteries or supercapacitors;

• Instead of funding terrorism with petrodollars, we'd help fund anti-terrorism defense (and offense) with electrodollars;

• Instead of American laws penalizing Americans for putting too much CO2 into American skies, we'd be helping the entire car-driving world to stop emitting CO2 into the entire world's skies. 

See, there's something there for everyone.  I'd like to see one of the presidential candidates latch onto this idea.  Spending a billion (or ten billion) extra dollars today is mere chickenfeed when the future return is security, a cooler globe, and trillions of extra dollars for our grandkids.  After all, that's the generation all the Virtuous Truth-bearers are saying they're focused on, isn't it? 

FQ.07.32: Favorite Quote for This Week

There’s a way to do it better.  Find it.
—Thomas Edison

Deficit Watch thru July 2007

The trends in tax receipts and spending are both creeping in the wrong direction, so anyone hoping for a balanced budget in '08 will be mildly disappointed by the latest numbers.  If the current trends hold up, the budget would move into balance in March 2009, five months later than last month's trends indicated.  A little too late to make the home stretch of the presidential campaign more interesting, in other words.   

Click to enlarge:

Based on the July '07 results, I definitely cannot call March '09 a "forecast" for budget balance, because of the three reasons likely to keep the trends bending the wrong way:

1. Individual and corporate tax receipt growth is tailing off (now at 10.1% and 14.5% respectively);

2. Tax-hiking rhetoric by political candidates will reinforce if not accelerate that tailing-off process in revenue growth;

3. Spending growth is slowly accelerating (...and the department of Health and Human Services is a major cause; I'll soon be peeling back that onion to find out why). 

Historically, not much happens to tax receipts in August, but September is usually big.  In short, barring an August surprise, the next good read we'll get on the trends is two months away. 

Tonight's Business News

The backwards-ticking debt clock, and how to fix the debt-limit farce

Imagine opening up the sports page to see how your local sports teams did yesterday, and seeing the following "scores":

• Baseball:  NY Yankees 4
• Football:  NY Jets 28
• Basketball:  NY Knicks 101

That wouldn't tell you much about what happened yesterday, would it?  In fact, you'd probably consider switching your subscription to a better newspaper.  I would, anyway. 

Why, then, do so many editorial writers and Capitol Hill politicians think we'll keep taking them seriously when all they tell us is "The national debt is at an all-time high of $8,942,383,522,008.61"?  Or "The debt is growing by $8,872.90 per second"?  Or "Each person's share of the national debt is $29,610.54"?  Do they really think that kind of meaningless drivel won't make us switch to a better source of information?

Why don't they think we'd also like to know that "The size of the economy is at an all-time high of $13,818,809,181,973.50"?  Or "The economy is growing by $19,869.16 per second"?  Or "Each person's share of the national output is $45,757.65 per year and growing"? 

I can't explain why.  But I can provide the complete score for anyone who prefers the bigger picture. 

The debt clock shifts into reverse
I knew this had to happen sometime soon, and it did: The debt clock is now ticking backwards.  [Notice the clock at top right, which I recalibrated yesterday.]   

As a portion of GDP, total debt is 64.6% and dropping; publicly held debt (the more important statistic) is 36.2% and dropping.  This blog is one of the few places on the web, if not the only one, where that good news is prominently displayed.  Everyone else is just giving you a partial score; try googling "debt clock" and see what I mean. 

The reason for the backwards-ticking clock is simple: the economy is growing faster than the debt.  GDP is growing at an annual pace of about 4.5%; total debt is growing at 3.1%; publicly-held debt is shrinking at 0.8% (all current-dollar rates).  Those relationships cause the ratio clocks to tick backwards. 

In short: The Yankees beat the Blue Jays 4-0, and GDP growth is beating debt growth 4.5% to 3.1%. 

Isn't that information a lot more useful?

The debt-limit farce, and how we could fix it
Here it comes again: the political farce about the debt limit.  Here's an article predicting the same old political game we are about to witness once again:

The U.S. debt limit is set by statute, so the Treasury has to seek Congress' approval for an increase. With both houses of Congress now under Democratic control, the request likely sets the stage for a debate about the Bush administration's management of the economy and of the national debt.

It doesn't matter which party is in control of the agenda; the game is the same: a completely meaningless, time-wasting parade of politicians trying to make political hay out of the dollar value of the debt (...which, conveniently for their rhetorical game, looks like it's approaching Avogadro's number).  It is a disgusting waste of valuable debate time. 

But I have a way to fix the problem of the debt-limit farce, and get the debate onto a far more productive track.  All it would take would be one simple little change to the debt-limit law to put some real teeth into it.  All it would take would be to change the debt limit from a dollar number (currently $8.965 trillion) to a percentage of GDP (say, 80.0%). 

Think how that would change the debate for the better: it would force our politicians to address economic growth, instead of just continuing to demagogue the debt number ad nauseam.  All of a sudden, a "new" way to keep the debt below its legal ceiling would be to pass growth-friendly laws. 

Unfortunately, I'm afraid that opening up the debate to growth ideas would be too scary for many of our politicians, because debating how to enhance economic growth can become complex very quickly.  Let's face it, it's a lot easier to leave growth out of it, and just demagogue the debt in the headlines and in front of the C-Span cameras.   It's a lot more difficult to reject theatrics and start engaging in real leadership. 

As a result, I pessimistically look forward to another inane, meaningless debate about the dollar debt limit in the coming weeks.

=========

End note, added 8/9/07:

To clarify why the publicly-held debt is shrinking, here are two graphics, which I explain in more detail in a comment below.  Click to enlarge.

Where the jobs went, and what good they're doing

For several months I've been posting what looks like very good news about jobs from the Bureau of Labor Statistics—and July's numbers are no exception.  In the past 12 months, some jobs have disappeared, but far more jobs have been created.  Not only that, but more higher-paying jobs have been created than the jobs that went away. 

Seems as if that should be good news, doesn't it?  Especially to those who've been isolating their attention to the jobs that disappeared—the ones we're supposedly "exporting"—while ignoring the new jobs.  [Not an inclusive way to analyze the job situation, but it evokes strong emotions and is therefore politically potent.] 

Anyway, each time I've posted the jobs results, a small percentage of the comments and emails still find some bad news in the numbers.  For example, if jobs aren't being created at the same rate the population is increasing, isn't that bad news? 

What good the jobs are doing
To address that question, I've added a chart showing what good the jobs are doing, because what matters more than the percentage of people working is real output, real incomes, and real spending-and-saving power (all per capita). 

To illustrate: If the population is increasing due primarily to more children and more retirees, that would decrease the percentage of working-age people.  Is that bad news?  Not necessarily; not if GDP per person and disposable income per person were still growing.  And that is just what has happened.  That's why, before showing the jobs charts for this month, I'm leading off with this new chart:

The population is growing, but we're still growing real GDP (output) per person and real disposable income (after taxes and transfers) per person.  More good news, in other words. 

One of my favorite statistics is the last one above, real disposable personal income per capita.  That's the real purchasing power left over after taxes and after transfer payments.  (My wish list, by the way, includes a breakout of that number that would show after-tax, after-transfer, real disposable income by quintile, in addition to the aggregate reported by the BEA; that would enable a before/after redistribution comparison, to help in the income inequality debate.) 

Private sector jobs versus year-ago
I added the average wages for each job category (from BLS Table B-3) to the chart showing jobs added and subtracted.  Click to enlarge:

Government jobs versus year-ago
The BLS reports the government jobs (federal versus state & local), but not the average wage rates, so I couldn't include those.  In the past 12 months, the federal government shrank by 35,000 jobs; state & local government expanded by 260,000.  Here's the chart:

In the three charts above, I can't find much to be unhappy about.  Let me know if you spot anything.  [I guess it would be less upsetting if creative destruction could grow everyone's real income without anyone ever losing a job, including the obsolete jobs, but that is not the way creative destruction works—by definition.]