Would You Help Out A Fellow American Who's Down On His Luck?

Tim Cavanaugh | August 10, 2009

Although or because I agree with the following comments from David Rosenberg, chief economist & strategist at Gluskin Sheff + Associates, I think they need some devil's advocacy. Gluskin Sheff requires a subsciption, but you can get the excerpts here and here.

Concerning last week's very fishy good news on unemployment, Rosenberg writes:

The auto sector added 28,200 to the industry payroll in July, which was the highest tally in 11 years. To show you just how big that really is, it is a 69% annualized surge. Normally, the industry, which is in secular decline, posts job losses of between 20,000 and 30,000 consistently, so this alone represented roughly a 50,000 swing. We estimate that there was about a 30,000 swing in the rest of the manufacturing sector due to the spillover from the current inventory adjustment in the motor vehicle industry. The 0.3% MoM increase in the workweek was also skewed by the 4.1% MoM jump in the auto sector.

As we mentioned, there have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today's report that 12,000 federal workers were "hired" in July. Again, mathematically, this contributed about 20,000 to today's headline number. In other words, and we have no intent on raining on anyone's parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today's report into a view that we are about to fully turn the corner on the job market front.

Yes, the income number was also firm; average weekly earnings popped 0.5%, but again, this reflected the bounce in the auto sector as well as the 10.7% increase in the minimum wage to $7.25 an hour. Again, this is a non-recurring item and does not at all reflect an improvement in underlying income fundamentals in the personal sector. We had a similar bounce in the summer of 2008 when the minimum wage was last boosted.

As for a possible GDP rebound, Rosenberg writes:

The reason why we remain skeptical over the sustainability - the operative word for investors - is because the U.S. economy (or the global economy for that matter) has yet to show any ability that it can stand on its own two feet without the constant use of government steroids. At a time when the U.S. government is running a 13% fiscal deficit-to-GDP ratio, it somehow has enough in the coffers to try and perpetuate a cycle of spending by inducing a populace in which 20% are already three-car families, to go out and buy a new car to support a shrinking industry at future taxpayer (or bondholder) expense.

Look at what happened in that first quarter GDP number - total GDP contracted around $30 billion at an annual rate, but when you strip out all the government activity, ranging from spending, to tax reductions, to benefit payouts, the decline exceeded $300 billion. In other words, without all the government intervention, the decline in GDP in 1Q would have been closer to an 8% annual rate, not 1%.

Motor vehicle sales surged to a 10-month high in July - an annualized 11.2 million units compared with 9.7 million in June. The results largely reflect the "Cash for Clunkers" $1 billion program that ran out of money in barely more than a week...

But what all these gimmicks do is bring forward consumption - they don't "create" anything more than a brief spending splurge at the expense of future performance - the pattern gets distorted as opposed to there being any real permanent change in the trend.

The proper Keynesian to this is, "So what?" Market intervention assumes (probably correctly) that normal people are not overly concerned with the integrity of the free market; they just want somebody to help. Where is the injury if a targeted intervention by Washington results in even a temporary reprieve? You can argue that Cash for Clunkers and auto industry life support rip off the many to support the needs of the few or the one, but the constitutional mandate to "promote the general welfare" doesn't mention anything about doing so with optimal market efficiency. If it's your job that got saved or created the benefit is obvious. And if you're one of the majority of Americans who will pay for it, the injury to you, as of today, is not clear. The dollar continues to strengthen despite trillions in newly created bills. You can say this will be hyperinflationary, but in the absence of facts on the ground, you're left with the argument that it will hurt everybody in the long run. But all good market interventionists know that in the long run we're all dead.

I know how I would respond to that last paragraph, but it's hard to make the argument without sounding like some ivory tower poindexter. The logic of market intervention, like the logic of international intervention, swallows up detractors even though it is highly illogical.

Comments

Fluffy|8.10.09 @ 4:55PM|#

Very awesome Humphrey Bogart reference.

hmm|8.10.09 @ 4:56PM|#

I'm starting to look at every action as a means to retain or build political capital in the short term.

Q3 C-4-C to push GDP and employment numbers, claim it's working.

Q4 hope for or manufacture a short term means to boost holiday sales and seasonal employment, claim more victory.

Q1 come up with a new gimmick or watch the bottom fall out of it all.

I keep getting the sinking feeling that these short term manipulations are just that and that the worst part is they will continue until the system fails.

hmm|8.10.09 @ 5:01PM|#

The political tie is the most nefarious part to me. I kind of left that point out or was vague about it.

The political aspect has always been my largest problem with government intervention to save me.

|8.10.09 @ 5:08PM|#

The dollar continues to strengthen despite trillions in newly created bills.

WTF? The USDX peaked for the year at 89.624 on March 3, and is now trading at 79.23, not too far above its 52 week low of 75.489.

EJM|8.10.09 @ 5:09PM|#

Attention: post is missing author's name. That is all.

|8.10.09 @ 5:11PM|#

May I suggest you read Sumner at The Money Illusion. We are not really printing trillions.

Steve

|8.10.09 @ 5:16PM|#

Tim Cavanaugh: why did you have to link to another site to show a piece Brian Doherty wrote for Reason? Why has that piece been deleted from Reason's Web site?

Tim Cavanaugh|8.10.09 @ 5:17PM|#

WTF? The USDX peaked for the year at 89.624 on March 3, and is now trading at 79.23, not too far above its 52 week low of 75.489.

RC, I may correct that, but first: If deflation is continuing, doesn't that mean for almost all Americans the dollar is getting stronger? (That is, it buys more today than it bought yesterday.)

|8.10.09 @ 5:19PM|#

The problem with all these interventions is that they are, at the end of the day, leveraged. And that means that, when the bill comes due, it comes due with interest.

Take C4C. After cannibalizing sales for the coming months by bringing them forward with C4C, just what do you think auto sales are going to look like when C4C runs out? At best, C4C will do no more than increase the volatility of the auto industry. That's a good thing, how?

Richard |8.10.09 @ 5:21PM|#

At the risk of being an ivory tower poindexter, there is no constitutional mandate to "promote the general welfare." The preemble describes that the constitution AS A WHOLE is supposed to do. The founders thought that a government of enumberated powers within a decentralized federal system "promoted the general welfare" the best by limiting the federal government.

mark|8.10.09 @ 5:23PM|#

There can be no consumption without production. Any economic theories which attempt to get around that basic maxim are bunk IMO.

|8.10.09 @ 5:24PM|#

RC, I may correct that, but first: If deflation is continuing, doesn't that mean for almost all Americans the dollar is getting stronger?

What deflation? The dollar declining in value is symptomatic of inflation, not deflation - each dollar is worth less. And the dollar has declined around 11% since March. I don't see anything deflationary in that.

As I see it, the deflationary period, if there was one, was from last summer through March, when the dollar rose around 12 - 14% in value.

|8.10.09 @ 5:27PM|#

Note the content of the Doherty piece that was deleted (it obviously used to be on this site, since there's a Reason URL at the link):

http://anti-state.com/forum/index.php?board=2;action=display;threadid=4367

hmm|8.10.09 @ 5:30PM|#

CONSPIRACY!!!

Warty|8.10.09 @ 5:32PM|#

I'm pretty sure that economic numbers are mostly intended to confuse.

|8.10.09 @ 5:39PM|#

"The problem with all these interventions is that they are, at the end of the day, leveraged. And that means that, when the bill comes due, it comes due with interest"

As someone said on TV (I don't recall who) - If you ar in debt, taking on even more debt won't get you out of debt.

|8.10.09 @ 5:47PM|#

"What deflation? The dollar declining in value is symptomatic of inflation, not deflation"

You're getting crossed up on definitions of a number of related, but distinct concepts...

1. Inflation/Deflation: An increase/decrease in the quantity of money. The US money supply has been substantially inflated to counteract the credit collapse and corresponding reduction in demand.

2. Appreciation/Depreciation: An increase/ decrease in the floating foreign exchange value of a currency. After surging in value in 2008, the US dollar has recently depreciated against other major currencies.

3. Revaluation/Devaluation: An increase/decrease in the fixed foreign exchange value of a currency. China has been slow to revalue the yuan renmimbi which is pegged against the US dollar.

4. Rising/Falling Prices: An increase/decrease in the aggregate domestic price level. Despite the desparate inflation of the money supply, the credit crises has resulted in falling prices in the US, particularly within the housing sector.

Hope this helps.

One additional point is that the price level is difficult to evaluate on aggregate. The current environment is leading to lower asset prices (real estate, investment portfolios, etc.) but higher goods and services prices (haircuts, newspapers, Starbucks, etc.)

|8.10.09 @ 6:02PM|#

You're getting crossed up on definitions of a number of related, but distinct concepts...

I hear you, Russ. Note that I said the rather abrupt (for a reserve currency) decline in the dollar's value was "symptomatic" of inflation.

There's no question the money supply has been inflated. There's a real "hockey stick" graph out there showing the drastic, drastic inflation of the money supply.

There's also no question that the dollar has depreciated against other currencies and the rather odd new "safe havens" of various commodities, including oil and the metals complex. This is what you would expect of a currency whose supply has been drastically inflated.

As you note, what has gone down is the value/price of assets, and what is going up is the price of goods and services. In other words, we're getting poorer, but our lifestyles are getting more expensive. That sounds like the leading edge of a hyperinflationary economy to me.

I can't see any case being made for a strong dollar, or a strengthening dollar, given these trends. You have to have an enormous amount of faith that the Fed can somehow reel in all the new dollars it has put out there. I, for one, have no such faith.

All the mechanisms that it has for reducing liquidity would be absolutely fatal to any recovery, and, it is under enormous pressure to keep cranking out more dollar equivalents via "quantitative easing" to keep the T-Bill market from going completely pear-shaped.

Russ 2000|8.10.09 @ 6:03PM|#

but higher goods and services prices (haircuts, newspapers, Starbucks, etc.)

I thought Starbucks lowered their prices on their main items, wages are falling with rising unemployment although the recent bump in minimum wage makes Starbucks a bad comparison... even the large grocers in my area are advertising lower, everyday prices rather than mere "sales" prices (which is nice for me since I hate the damn saver cards, though I think a lot of the lowering of prices is more to capture non-card customers with the prices the card customers were getting).

It's definitely a credit deflation (mostly assets) and a monetary inflation (everyday items) - and right now the amount of credit decline is a little more than amount of new dollars. The question is where wages fit in - so much debt-fueled expansion of business supported their wage rates and those wages are now declining. I'm not seeing ANY price increases on everyday services - I see slight increases in commodities. Rising # of dollars plus job losses sounds like stagflation to me.

hmm|8.10.09 @ 6:06PM|#

Warty | August 10, 2009, 5:32pm | #
I'm pretty sure that economic numbers are mostly intended to confuse.

Pure truth.

Elemenope|8.10.09 @ 7:14PM|#

...rip off the many to support the needs of the few or the one...

Paging Captain Spock! The warp drive could use some attention...

The Angry Optimist|8.10.09 @ 7:45PM|#

well, he did say "highly illogical", too.

Elemenope|8.10.09 @ 8:02PM|#

well, he did say "highly illogical", too.

"Would you agree that the needs of the many outweigh the needs of the few?"

-I accept that as an axiom.

"Then you stand here alive because of a mistake, made by your flawed--feeling--human friends."

libertreee|8.10.09 @ 8:24PM|#

At the risk of being an ivory tower poindexter, there is no constitutional mandate to "promote the general welfare." The preemble describes that the constitution AS A WHOLE is supposed to do. The founders thought that a government of enumberated powers within a decentralized federal system "promoted the general welfare" the best by limiting the federal government.

Except for the enumberated mispelling of enumerated, Richard is correct, IMHO.

The General Welfare clause is confined to the enumerated powers, and is not a general grant of power for government to rob Peter to pay Paul.

There is nothing in Art 1 about Congress bailing any industry out, nationalizing any industry, or helping people by helping them get at other people's property.

That being said, the Constitution is a dead letter, because, as the article states, no one believes in that stuff anymore.

Except for a few libertarians and paleocons.

Tim Cavanaugh|8.10.09 @ 8:27PM|#

higher goods and services prices (haircuts, newspapers, Starbucks, etc.)

I don't buy newspapers, but I have gotten a haircut and bought coffee (not Starbucks) lately, along with milk, eggs, beef, beer, wine, sangria and a bunch of other staples. They're all down in price.

And while I wouldn't know for sure because I'm unemployed, they tell me wages and salaries have declined sharply.

I actually want to start a broader debate here, because I think there's a good case for reevaluating a lot of economic data, including what the CPI comprises. So feel free to lament my economic ignorance. But it seems weird to believe in inflation when I'm actually paying less for most of the stuff in my daily life. (Though not gas this past week.) My 2009 1040 is going to be a fraction of my 2008, but from what I've seen of deflation, I like it.

|8.10.09 @ 9:00PM|#

In my business, we've see pretty major benefits to our bottom line due to the relatively lower costs of fuel this year. Food and other goods that are heavily dependent on transportation costs should be declining in price. However, if we start seeing real inflation, that downwards push will be offset.

I'm highly dubious about the CPI. I suspect that it often gets manipulated for political reasons.

robc|8.10.09 @ 9:22PM|#

There's a real "hockey stick" graph out there showing the drastic, drastic inflation of the money supply.

Here it is.

That is M0. The only reason that we havent already had massive inflation from that is that M1 and etc havent jumped up like that due to velocity of money decreasing.

One day, they are going to bounce back and inflation will suck. Im guessing we will have a long, slow recovery because I dont think the economy can suck that all up at once. Either that or we dont have a recovery. One or the other.

robc|8.10.09 @ 9:23PM|#

If you prefer a more hockey stick version.

Gilbert Martin|8.10.09 @ 10:51PM|#

"You can argue that Cash for Clunkers and auto industry life support rip off the many to support the needs of the few or the one, but the constitutional mandate to "promote the general welfare" doesn't mention anything about doing so with optimal market efficiency."

No what I can argue (quite correctly) is that specific welfare for selected indivuduals, in whatever form. has nothing to do with "general welfare" in the Constitutional meaning of those words in the first place.

smartass sob|8.10.09 @ 11:13PM|#

Would You Help Out A Fellow American Who's Down On His Luck?

Help you? Why should we help you? We don't have to give you no stinking help!

|8.10.09 @ 11:53PM|#

If inflation is the enemy, does that mean deflation is your friend? Answer is neither one...some of the former will be needed to reflate asset prices not this year but 2010 and beyond. Will gentle BEN be able to do his dance, or possibly someone else making that call next year ?

The problem of deflation would be highly deleterious to any hope of GDP growth...corporations that delay expansion, hiring decisions & capital expenditures are one example of what could become a broader issue. If future demand continues to be delayed or lessened, then it's just a spiral down the port-hole.

Dallas Morning News on Sunday cost $3.00...a match & lighter fluid is of better use.

hmm|8.10.09 @ 11:54PM|#

That is M0. The only reason that we havent already had massive inflation from that is that M1 and etc havent jumped up like that due to velocity of money decreasing.

One day, they are going to bounce back and inflation will suck. Im guessing we will have a long, slow recovery because I dont think the economy can suck that all up at once. Either that or we dont have a recovery. One or the other.

I keep hearing that the current amount of M1 and the increase coupled with the lack of a price increase is proof monetary inflation and price inflation are not as tightly tied as many thought. I always ask how long anyone subscribing to this belief thinks it will last or how long the two will stay mutually exclusive. Or as you put it if the velocity of money picks up and people start buying and money starts changing hands as production spools up what will prices do. Inventories are down, demand is down, and there is a ton of money floating around. I don't see how that much money, even in a simplistic analysis of just the physical currency, can be available and not make it out into the market, and therefore create a price increase. It seems like everyone is sitting on dollars and as soon as a little "hope" pops its head up the price inflation will be swift and painful. Or the measures to reduce the price inflation will be swift and painful, of course politicizing the Fed even farther means the days of Volker are more than likely gone. I guess we can hope for a long slow decrease in M1 coupled with a long slow increase in inventories and buying/selling and a lost decade or two. With everything controlling monetary decisions being political now I'm sure the main goal will be relection and power.

As with everything else it feels like we are just putting off the pain.

hmm|8.10.09 @ 11:58PM|#

If future demand continues to be delayed or lessened, then it's just a spiral down the port-hole.

The flip side is demand goes through the roof and the M1 out there in LaLa land starts to drive up price.

Or some long slow juggling of deflation and inflation leading to no fucking growth and a stalled economy.

God I keep feeling like the choice is to get fucked by Buba or fucked by Steve. Either way I'm taking it in the ass by someone, and I'm just not into that.

|8.11.09 @ 12:19AM|#

"Or some long slow juggling of deflation and inflation leading to no fucking growth and a stalled economy."

1970s, here we come. Just no disco this time

|8.11.09 @ 1:02AM|#

And if you're one of the majority of Americans who will pay for it, the injury to you, as of today, is not clear.

And we all know that things you don't see can't hurt you, right?

|8.11.09 @ 1:38AM|#

I actually want to start a broader debate here, because I think there's a good case for reevaluating a lot of economic data, including what the CPI comprises. So feel free to lament my economic ignorance. But it seems weird to believe in inflation when I'm actually paying less for most of the stuff in my daily life.

Tim: The first thing you should do, is clarify what you think the word "inflation" means. There are two meanings: a general rise in prices, and an increase in the amount of money. Confusion of these two meanings makes it almost impossible to think clearly about the phenomena in question. Some commentators may want to spread such confusion.

That's why I try to specify either price inflation or monetary inflation to distinguish the two meanings. Then you can express thoughts such as "price inflation is caused by monetary inflation, with a time lag due to temporary money-hoarding". Absent the two separate terms, this becomes "inflation is caused by inflation, with a time lag due to temporary money-hoarding".

Lots of insolvent banks and other institutions are being bailed out by the Fed, by the mechanism of the Fed creating new money and using it to buy toxic assets at face value. This is like your rich uncle buying your AMC Gremlin for the price of a new Porsche, so you can have enough money to pay off your maxed out credit cards. (Your rich uncle is rich because he happens to be the town counterfeiter, and has bribed the local pols to leave him alone.)

Unless and until the bailed out institutions start to deploy their new money by spending it or loaning it out, the new money will not enter circulation, and have no effect on the price level. So, the Fed can generate monetary inflation, without immediately inducing price inflation.

But as soon as the bailed out banks feel like the economy has "bottomed", they will start to deploy the newly created funds, and price inflation will rage. At that point, Bernanke claims he (the Fed) can somehow recall all that newly created money before it gets spent. Which would re-bankrupt the banking system, so I think he's, ummm, well, lying.

Are we done creating new money to bail out failing, yet too-big-to-fail components of the economy? Well, have all the big institutions been made whole, pretty much?

Neal Barofsky (the Inspector General of the TARP program) commented a couple weeks back, that the TARP might cost up to $23,700 billion, instead of the current $700 billion. This would mean that the Fed would have to create another $23,000 billion to hand out to these failing institutions. And, the notional value of all derivatives is something like $700,000 billion (yes, that is not a typo: seven hundred trillion dollars).

So, how much new money will the Fed have to create, to bail out all of the failing banks and big companies? How much more, before the system is "stabilized" and we have "hit bottom" (no more looming bankruptcies of too-big-to-fail Wall Street banks? Another trillion? Another $23 trillion? Another hundred trillion? A quadrillion?

And when in this bailout process of money creation, do our creditors bolt and dump their Treasuries? What will that do to the bottom lines of the big banks, except push them further underwater, necessitating even more bailing out?

I don't think the '70s is the appropriate model for what is going to happen.
I think Weimar Germany is.

Paul|8.11.09 @ 2:09AM|#

just what do you think auto sales are going to look like when C4C runs out?

Ahh, but that's the question, no? Wouldn't it be politically advantageous to not let CFC run out? What's another $50 billion to keep the program going?

Paul|8.11.09 @ 2:16AM|#

there's a good case for reevaluating a lot of economic data, including what the CPI comprises.

In my secular opinion, the CPI index is always in need of reevaluation.

Counter-inflationary|8.11.09 @ 4:37AM|#

I don't think the '70s is the appropriate model for what is going to happen.
I think Weimar Germany is.

Possibly, but let us note two very important differences between Weimar Germany and our current state:

1) Germany ran its printing presses day and night. Our inflation will be almost entirely electronic; that is, some guy somewhere (probably in the FED) will keep adding more money to an account with a few keystrokes and mouse clicks, making the inflation a lot trickier to see coming. Only as prices rise to meet the flood of new money and the printed bills start getting lots of extra zeros on them will inflation gradually come to the public's attention.

2)Germany wasn't allowed to pay its international debts--reparations--in those worthless marks. It had to pay in gold. Our debt is almost entirely denominated in dollars, and surely can be paid in increasingly worthless dollars. Unlike the Alliance's creditors, hyperinflation for us means our creditors will be hosed.

The place where I got these facts? It was c/o a certain online text at the Mises Institute detailing certain personal experiences of people in that time and place:

http://mises.org/resources/4016

Definitely worth a read if you're wondering about the finer details of what's coming our way. (For starters, when inflation really gets going, expect a wild spending spree on everyone's part as people rush to get rid of their worthless currency. That's what happened last time.)

|8.11.09 @ 11:10AM|#

Argh! My comment was eaten!

OK, to rehash: Reason, August 1985, "Dubious Debt Doubt", Joe Cobb.

Inflation: bad. National Debt: bad. Inflation wipe out national debt: no.

The '70s -- now with MP3s!

|8.11.09 @ 11:24AM|#

1) Agreed.
2) "Hyperinflation for us means our creditors will get hosed."
Yes. Which is the leading reason why we are going to hyperinflate.

Thanks for the link. Will read.

Another good source for info about the economic collapse of Weimar Germany is "The Economics of Inflation" by Constantino Bresciani-Turroni (1931). This book contains many detailed descriptions of the various types of people (working people, traders, various industries) caught up in the disaster which lead to the rise of Hitler.

My dad lived through the Depression as a young man. He describes prices and wages back then (all paid in silver of course): His wage - $0.15/hour (theater usher - no income tax), Christmas dinner at a restaurant, complete - $0.29, brand new Ford sedan on the showroom floor - $200, brand new house (3br 2 ba bungalow in the Hollywood hills) - $3,500. A coworker supported himself, his wife, and one child, on his wages of $8.15 per week (they worked hard back then). I expect after the dollar evaporates, you will again be able to support a couple with one child, on an ounce of silver (5 old quarters) per day.

|8.11.09 @ 12:01PM|#

I think there's a good case for reevaluating a lot of economic data, including what the CPI comprises.

I'm happy to explain to anyone who asks how to create one's own personal price index. Here are a few tricky parts to keep in mind:

--Do you change what you buy (hedonic substitution, thus changing the "basket" of goods) based on price changes?
--When the products available improve in quality (e.g. newer technology), do you consider yourself better off?

Once you have answers to these questions that satisfy you (and you can convert the answers into measures of dollars or goods), calculating the index is easy. Good luck finding someone else to agree with your index as a viable subsitute for adjusting Social Security benefits, though.

Invisible Finger|8.11.09 @ 12:57PM|#

Unlike the Alliance's creditors, hyperinflation for us means our creditors will be hosed.

And then WE'LL be hosed because no one will give the federal government credit anymore - so they'll ransack the taxpayers. It's not like the government can file for bankruptcy with the IMF and then Japan makes 'em take a timeout for 3 years.

I'm not concerned with hyperinflation, I don't think it will happen. Hypertaxation is a better possibility, along with military adventures.

Rice Bingham|8.11.09 @ 1:47PM|#

Private sector debt is between 300% - 375% of GDP depending on which numbers you believe. Is this level of debt sustainable/serviceable?

|8.11.09 @ 2:37PM|#

Counter-Inflationary: Am reading your linked book. It meshes well with Bresciani-Turroni's book.

I got a flavor of a society in the grip of hyperinflation when I visited Yugoslavia in the spring of 1991. It was surreal - lots of civil unrest combined with a facade of normalcy, with two different currencies circulating simultaneously, the old and new dinar.

If we continue down our current path of giga-bailouts on top of wild government spending, this will be our fate. And it does look like that is where our political and business leaders are sending us. Not good at all.