This trully scares me

Source.

True, Obama cheekily dismissed budget projections (and hence, implicitly, budgets in general) last Tuesday night, but for those of us who think that some sort of educated guesswork is more useful than walking blindly into the future a la Bush, the CBO is a pretty respectable, non-partisan source of such stuff.

With output at potential starting in 2015, the CBO's baseline projection is a 2% structural deficit from then on... and a 4% and worsening deficit under the President's Budget.

So true, as Obama said, there will be deficits with or without his budget... it's only that, with it, they are worse and keep getting worse.

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Can't tell anymore...

Source.

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On Summers

Newsweek (!!!) has a cute little piece on Larry Summers. Here's my favorite, non-policy relevant part:

Summers is generally said to suffer from smartest-kid-in-the-class syndrome. He has heard the criticism so many times he has a slightly wounded, misunderstood air. Unlike some people who pretend to listen, Summers says he actually does listen—but he admits to an unfortunate tendency to look bored or impatient, which he acknowledges can seem rude. Summers can be playful and charmingly irreverent. But he can also just be rude.

Everyone has a Larry story, it seems. Princeton economist Alan Blinder recalls head-on collisions with Summers in the '90s. "As everybody knows, Larry is very smart and he likes to show it," says Blinder, who served on Clinton's Council of Economic Advisers and later as Fed vice chair.

Truth be told, he sounds just like any econ academic I've met worth his/her salt. Whether that's good or not, who knows? Not me, but there you have it, that's how we were re-socialized.

And nope, I do not have a Summers story. Which is for sure not uncorrelated in deep, multi-layered, symbolic ways to why I'm blogging about this little article instead of doing meaningful work on policy issues.

(But I do have an Ed Glaeser story.)

p.s. "cute" and "Summers" in the same sentence? My, oh me, I need to re-re-socialize myself ASAP!

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The dark side of econblogging (one of them)

Clive Crook:

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party... Politics and economics are always difficult to keep apart... Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.

Experts from whatever discipline may become the worse kind of hacks when it comes to politics. Economists are certainly not above that. What sets economists apart is that, with so much of politics being about economic policy, economics becomes one with politics with an ease that, say, physics or English Lit lack.

If only it were possible to tell when the same people are playing the role of propagandists and when that of thoughtful experts (who may, with all sincerity and after their best efforts at rigorous analysis, still disagree). But it is not and, unfortunately, some call themselves "economists" indiscriminately under both guises.

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Night of the Living Dead

Graph time! Two of my favorites this week!

First one: as of 1/21/09, US commercial bank capitalization is less than the second tranche of TARP funds (less than $350 bn).

(Source, but hurry! The content of the page is frequently updated.)

Of course, this is not the same as "just go ahead and buy the damned things!" as purchasing common stock is not the same as injecting new capital. But it does give an uncomfortable sense, bordering on schadenfreude, of how the mighty have fallen (check out Citi and BoA, ex "largest bank in the US") and also of how insignificant commercial bank capital has become (was always but for incorrect valuations and off-balance items?) with respect to their liabilities.

The second graph hardly needs any words beyond "who's your daddy/main shareholder?" and "click on the source link to see a larger version":

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Meta-markets (second quote of the day)

"I've abandoned free-market principles to save the free-market system." G. W. Bush, Dec. 16, 2008
Source.

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Quote of the day

"Bankruptcy is not the same as liquidation."
Source.

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Reanimator: US automaker rescue package

This is at least the third time since the early 80s that the US automakers have asked (and in now seems, received) some form of Federal bailout (or change in the regulatory framework), threatening with the end of Western civilization if they didn't get what they ask for.

First they needed help because the oil shocks would never let anyone drive ever again, then because the Japanese automakers were exploiting their workers with inhumanly low wages, and now that expensive oil and commodities can't be blamed, it's because of the financial crisis.

But this is not (mainly) a labor or finance cost issue, which is where most of the political "debate" seems focused on: the share of US automakers within the US market has been plummeting for some 30 years. That trend might have something, but not a lot to do with labor costs, something, but not a lot to do with the end of the securitization of 0% financing loans, and something, but not a lot to do with the operational costs imposed by the byzantine and anticompetitive contracts signed between the automakers and their autodealers.

The reason is much sadder and more terminal: terrible management and even worse innovation and quality policies have led growing numbers of US consumers to prefer "foreign" cars assembled in the US. And this despite American cars being $2,600 cheaper than the comparable foreign car (obviously not cheaper enough and inferior along some hedonic dimension not measured in the price comparisons). [See here for an excellent summary of the labor cost side of the equation and for the source of that number].

At the end of the day, automakers and unions negotiated brilliantly with the Feds; they didn't blink and ended up twisting the Treasury's arm when they failed with the Senate, though the White House will surely push back somewhat. Now TARP funds will be used to prop them up for a few months until they require more funds for more propping up.

Thus, Q: if what we want is to avoid putting workers and suppliers on the street and keep household expenditure going, wouldn't a more cost-effective use of taxpayers funds be to subsidize the transition of these companies' workers and suppliers into new jobs and contracts (or, more broadly and fairly, simply return money to taxpayers) and let the carmakers file for bankruptcy, instead of re-rescuing these dinosaurs who have shown themselves unable to face competitive challenges for decades?

It's a pity that a problem which could mostly be dealt with through restructuring under bankruptcy protection has become a political issue in which public funds will be used to raise zombies. There're too many vested interests against doing the right thing: executives would lose, union leaders would lose, current creditors would lose... and some politicians would lose face. It's only the other 300 million Americans who would benefit if things were done right.

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Car bubble

Yet another failed attempt to pass the rescue package for US automakers. How long before they try again? February? (Aside: Will GM's, Ford's, Chrysler's CEOs now bring their private jets to fly back home to spite the Senate?)

Here's one I haven't heard before (though maybe that's because I haven't been able to follow the blogosphere that much lately):

1. Over the years, we had been hearing that US automakers were not making a good return (to say the least) on their auto-making side, but were making some profit on the financial side. This is taken today to mean that consumers didn't really want the cars they made if it wasn't for their very convenient, easily obtained financing. (Remember all those "0% financing" ads?)
2. Now we are all painfully aware that credit was so preposterously cheap in the last many years thanks to (lay-the-blame-where-you-will) set of circumstances which led to the non-pricing of risk.
3. So was the strategy US automakers used to survive this far just another side-show in the (market-failure induced) Cheap Credit main attraction?

(Keep in mind that "US cars" are, controlling for characteristics, already cheaper than "foreign" ones; and that more-expensive labor, for all it's blamed, has but a small effect on the final price of a car; see here, for example.)

In other words, now that the credit bubble popped, is there really a place left under the wintry sun for all three of GM, Chrysler, and Ford?

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POTUS, the chef of soulful chicken soup

After reading GWB's interview in the National Review Online , I've become convinced he missed his true call in life: author of self-help books (ok: of audiobooks in his case).

From the Mouth of POTUS:

This [compassionate conservatism] is a philosophy that most people adhere to... It wasn’t very well defended, but most people adhere to it. Compassionate conservatism basically says that if you implement this philosophy, your life would become better. That’s what it says. And that’s what it’s all about. It’s saying to the average person, this philosophy will help you make your life better. It’s the proper use of government to enable a hopeful society to develop based upon your talents and your success.

I can see a franchise in the making.

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My Kernel, My Null Revisited

The lonely tree in the Amazon rainforest that is this blog, it will attempt a return. Of sorts. Emphasis on "attempt."

Many things have happened since I stopped blogging. Work, for one, shifted up a gear or two (and I'm a ten-hour-day workaholic to begin with, so I'm not kidding here). But that's not the main reason.

Instead, it was a truly happy one, and this blog was sacrificed to the cause of my higher utility: I got married!

As an event, it was a true child of the global era, with receptions here, there, and everywhere; and then there was the most-god-awesomest honeymoon I could have ever wished/hoped/dreamed for/of.

In the meantime, I did achieve a couple of media victories: I now, once in a while (once in a long while), publish articles in the leading econ/business weekly magazine in Perú. And I was invited to blog for it too, although the whole guest-blogger thing is still very experimental for this publication, so we'll see how that one works.

Hopefully, this time around, there will be some economies of scope (or, as the kids say these days, "synergies") between those media efforts and this blog (though, unfortunately, none has still a thing to do with my day job); but that is yet to be seen.

(Sadly, both articles and blog are gated (the blogs are not even open to subscribers yet), so I cannot link to them from here. Anyway, my analysis there is, of course, written for readers in good 'ol Perú, so it wouldn't necessarily be that wow-inducing to readers outside.)

Returning to topic: while the dust did begin to settle at some point with the descent from the heavens above after the honeymoon, re-starting was forever postponed, never quite feeling I had managed to catch up with the edge of econ affairs at a time when everyone and their dog's uncle were talking about the same two things: global financial collapse and US elections.

People wholly focused 24/7 on these topics where writing all day, everyday about them. So why add echo?

And was there anything else to write about?

But publishing again made me nostalgic for my littlest Kernel, my beloved Null. Plainly sentimental reasons, then, to return.

And the repeat-optimizer than I am, I might reinvent this blog. We'll see how it goes.

I even changed the subtitle. Subtle, huh?

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Just for the heck of it

Agree or disagree, it's a conversation starter.

Source: Peter Brookes, TimesOnline

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Commodity fundamentals, commodity speculation

The Economist is ceding (at last!) that loose monetary policy in the US may have something to do with the acceleration of commodity-price inflation, going as far as dropping the b-word!

There is no doubt that commodities have become an increasingly popular investment category — in fact they bear many of the hallmarks of a speculative bubble... The most recent circumstantial evidence also suggests that the Fed may bear some responsibility for the commodities boom. The dollar slipped after the Fed’s rate-cut decision as investors reacted to its doveish tone, though at $1.56 per euro, it was still up 2.6% from its low of $1.60 on April 22nd. The price of oil, after hitting a record high of almost $120 a barrel on Monday, had tumbled to $113 on Wednesday. But the price of crude and other commodities rose afterwards. If those reactions persist, America’s central bankers may have to reflect carefully.

I think that the conflict in this speculation-vs-fundamentals debate lies in (a) the overlap of the (possible) speculative price-increases we've seen over the last few months (sp. since the interest rate cuts in January) on top of a long-term trade driven by fundamentals and which has been in play for several years already; and (b) Jeff Frankel's attribution of the long-term trade to low interest rates also, rather than to fundamentals (as briefly explained in The Economist's article).

Clearly defining the time-horizon one's referring to should deal with most of the confusion arising to the first item. I doubt that most "fundamentalists" can deny that there's been an acceleration over trends over the last few months at the same time as some major economies have been slowing down. And most of us "bubble-heads" agree that there are long-term trades at play and that the really sharp drops in interest rates are fairly recent.

On the other hand, Frankel's arguments will fuel disagreement for as long as there is more than one sentient being willing to have an opinion on the issue. As usual, outside the realm of formal modeling, in which at most one explanation is admissible, reality is likely to be a combination of fundamentals and interest-driven investment/speculative reasons. The question is how much of each.

But since there's more than one sentient being still willing to have an opinion...

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Busy econ day

1. We're waiting for the Fed to say something about interest rates.
2. Commodity traders "realized profits" yesterday (read: "commodity prices fell a little yesterday"), perhaps to do something while they wait for the Fed's decision. Will the "low US interest rates have lead to speculation on commodities" crowd have more or less ammo if prices bounce back up/ the Fed does something different than cutting 25 basis points? (Full disclosure: for whatever it's worth, I'm part of the bubble-crowd. For a brief, but comprehensive discussion of the different explanations for the rise in commodity prices, see here. The bubble crowd tries to distinguish the continuous, fundamentals-led growth of the last few years from the vertiginous phenomenon of the last few months.)
   
3. Growing business inventories kept the US's GDP from contracting (it grew by 0.6% in the first quarter). While this is obviously better than a falling GDP, could there a less encouraging reason (looking forward) to have avoided the fall?
4. Thanks to Hillary Clinton, the mainstream media is awakening to the idea (ripped from McCain in a deepening of her mind-bogglingly bizarro attempt to contrast herself from Obama in the primaries by looking more and more... Republican?) of the gas-tax holiday. Can there a more idiotic, nonsensical policy proposal this campaign? Even Robert Reich's against it! The founder of the Pigou Club (and no Obama fan himself) says "Score one for Obama."
5. We're still waiting for Ben...
   

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