Friday, August 27, 2010

Liquidity Risk Waiting for the Other Shoe to Drop

Bernanke gave the stock market a pep talk to push the Dow above 10,000 again. But the future is still cloudy. In a liquidity trap people are paralyzed by fear and stop buying so the economy continues to sink. Lowered interest rates do not trigger spending so some other stimulus is needed so that people feel more confident. With pensions and social security getting cancelled due to lack of money people are saving a lot more instead of spending. Even worse the lower interest rates make it even harder to accumulate money.

The first attached chart shows that new house construction and furniture has stabilized at much lower level. But housing may crash again as interest rates rise back to normal. The fed has pushed interest rates very low but that cannot last so eventually housing will get clobbered again as interest rates rise back to normal. Also governments are sitting on a lot of debt so their budgets will get clobbered as they start to pay higher interest rates.

The second attached chart indicates that stock prices do poorly in September. I don't know why they just looked at the post WWII data. I have data on this computer going back to 1870 that may show September is not so bad. But this year portfolio managers may want to sell in September to show they did not perform so badly if the market continues to tumble.

Obama needs to reverse his socialistic tendencies with a big tax cut and firing of a lot of worthless bureaucrats. Otherwise people will continue to freeze spending due to fear of continued economic malaise or worse -- a depression. They are waiting for the other shoe to drop:

Thursday, August 26, 2010

Liquidity Trap

Yes, USA is in a liquidity trap -- interest rates are near zero so cutting them will not help. Bernanke is following ZIRP in accordance to the dictates of Muslim Economics. A Zero Interest Rate Policy obeys the commandment to not rip people off by charging interest on loans. According to Islāmic law, the charging of interest is unjust and exploitative. Also the USA government Fannie and Freddie violate Proverbs 11:15: He who guarantees a loan for a stranger will suffer, but refusing to underwrite is safe.

Monetary policy is at the end of its rope and has not revived the economy. The Obama fiscal policy stimulus was too much spending, not enough tax cuts. People need a big tax cut to pay off loans so they can keep their houses and cars and quit wasting money on interest payments. If they felt more secure they would spend more to boost the economy. But they are wisely cutting back because the Obama approach is pushing USA back into recession.

Keynes wrote in a different era when there was less debt and taxes. So the huge spending of the 30s and especially WWII stimulated the economy. Now we suffer from too much debt, taxes, and government spending. A big tax cut would be the fastest and easiest way to get some stimulus, especially if accompanied by elimination of some government programs. The net result would still be Keynesian deficit finance adjusted to meet the new reality.

Dow 9966 today. Obama/Bernanke should resign so we can get somebody in there who can cut taxes. They are the #1/#2 most powerful. The buck stops there. I worry confidence will never return until we breed a better crop of politicians. USA becoming a third world banana republic faster than demographic changes would predict. It is a leadership foulup by 60s liberals who think big government is a panacea.

Response to: I have been looking at where we stand in this economic downturn, and I have an admission to make. I have never supported Keynes in his arguments about depression economics, especially the issue of deficit spending to break deadlocks of the downward spending spiral. But I am re-evaluating my position. In looking at Keynes, I now believe he was right,, especially the "liquidity trap". He said, "No matter what the Fed would do to bring down interest rates to stimulate economic activity, it would be like pushing a rope through a knothole". He was right. I am now convinced that we are in a "liquidity trap". Keynes would be gratified to see what is happening today, and the Fed using useless tools to spur recovery. Ironically, he predicted the "liquidity trap" during depression days in the '30s at around 3.5 percent, which is where we are now, and such an environment to last around seven years, which is exactly what is happening now. Looking back to those depression days the government did not recover the economy with Roosevelt's New Deal as much as the economy recovered itself, just as he predicted in his "General Theory". I am re-reading his General Theory in a more concentrated light. I now believe that this economy today is in exactly that same position, with a lack of confidence in the system which will continue until confidence recovers in the marketplace....maybe another seven years down the road.

Response to: Dow fell to 9966 early this morning. Republicans are right to call for Obama to fire his economics team who are leading the country in the wrong direction. The universities are also to blame. They are importing illegal aliens to build increasingly fancy buildings for themselves while letting education fall by the wayside. Seems they should keep prices low to help students afford the education. Use their excess money to improve the curriculum. USA economy was better decades ago when business schools did not have such fancy buildings.

Tuesday, August 17, 2010

College Education Decline

USA education is increasingly Micky Mouse. Harder colleges should be upgraded in the rankings. Instead they get downgraded. A race to the bottom on how easy colleges can become. The increasingly low quality of population is the root cause of the underlying economic malaise. Professors get great teaching evaluations by making their classes easier and easier to where in the end much time money is wasted on classes that do not teach anything and the students cannot do anything. Made worse by sexual diseases, drug addictions, death, rock and roll damaged ears. Jungle culture becoming mainstream.

Electric Car Race

Racing is a good way to force improvements to vehicles, many of which are too heavy, sluggish, top-heavy and bogged down with junk. One advantage to batteries is that the weight can be slung low and distributed right to improve handling and aerodynamics. We just drove 400 miles in a new larger Honda gas V6 that got nearly 40MPG at mostly 70MPH. Mileage could be improved by shrinking the vehicle and shedding frills. USA needs more taxes and regulations to force auto makers to make better vehicles. GM should not get a bailout until they discontinue all vehicles that do not get 20MPG (like a large 1955 Ford V8 sedan.)

Friday, August 13, 2010

FHA Bailouts for the Rich?

Should taxpayers take the risk on million dollar New York City condos that most taxpayers cannot afford? Or is government a way for the rich to ripoff the middle class. Bailout developers and those who do not repay their debts.

Wednesday, August 11, 2010

USA Bankrupt, dismal science

I am glad economics is returning to its traditional role as the `dismal science' to help USA shake irrational exuberance. USA actually has a $4 trillion deficit that in present value terms is $202 trillion. The below was obvious decades ago but more are seeing it now. Demographics takes a while to become apparent. It is also correct that USA will face some degree:

1) End of Social Security, Medicare, Public Pensions
2) Huge Tax Increases
3) Hyperinflation
4) Sky high interest rates as the market comes to realize we are bankrupt thus exacerbating the above problems.

Tuesday, August 10, 2010

Fuels and Culture

Fuels and Culture

July 19th, 2010

I remember as late as 1967 buying gasoline at the most expensive Shell station on Main Street in a California Barrio for 36.9 cents per gallon. The energy crisis hit 6 years later when I was in Boston and had trouble finding gas for my Opel when gas went over $1 per gallon.

Then I remember in 1989 or so in Sacramento paying 89 cents per gallon at cheap Regal gas/methanol mixture in the nice shopping center on Fair Oaks Blvd near Howe. I remember standing there and thinking “how can they make money.” Sure enough Saddam Hussein invaded Kuwait and Bush I went to war and gas prices shot up again.

Then the price weakened during Clinton. I remember in 1999 getting cheap Arco on Reseda Blvd. in Los Angeles for 89 cents per gallon again! Then Bush II came in and gas prices jumped during the wars to around $3 in many areas.

It would be easy to construct a math example where the average MPG of the US fleet will increase while at the same time more fuel is consumed for the same miles driven. This is what happened during the 1990s when many drivers went from the smaller simpler 1980s vehicles to the SUV’s (the new land yachts to replace what got scrapped during the 1970s crisis.) The math is you move X 25MPG vehicles to 15MPG SUVs and move the same number X from 25MPG to 36MPG vehicles then the average mileage will increase but more fuel will be consumed assuming the same miles driven.

In both cases, the wars and the mileage requirements is the fault of the federal government trying to increase oil use and discriminate against diesels, methanol, electric.

Further the 1986 tax laws were changed to favor home ownership, including giving tax benefits to second homes. These were built in far flung places and people started driving farther to get to them, and illegals were imported to build them and prop up the value of older homes and older vehicles.

Any new technology will not have the lobbying power of established companies who will buy politicians, rap artists, talk radio hosts, etc. to keep the status quo. Laws will force people to use gasoline instead of diesel, alcohols, hydrogen, solar, electric, etc. Other countries can be even more corrupt than the USA.

If prices were allowed to freely vary and reflect the fundamentals then we would probably see more alternative fuels and less obesity, diabetes, stupidity, etc. The problem is corruption in politics. The dysfunctional educational system deprives people from learning about technology and forces them to take liberal worthless classes to get a degree and puts morons in the seat next to you who take up class time with stupid questions so no learning can take place. Fat rap artists having sex in SUVs get students wanting to emulate their success. The media are constantly blasting people with ads for junk food, Viagra and other drugs. With so much of the population drugged and sick then how can we address fuels that require some knowledge of chemistry and engines?