Are We Out of Bullets?

Keep your powder dry. Save your bullets. Invest in a diversified portfolio. Always have a pint of JD laying around.

The above are famous ways to warn people to save for the future. Surely you can empathize with the solider who spent too many bullets practicing at the firing range, only to be out of bullets on the battlefield.  Or imagine the budding new socialite whose daughter sucked down the last of the JD right before the big lawn party. Prudent people know they should save. Even if you save only a little, it can mount up to a nice nest egg in the future.

We ALL know this wisdom. We sometimes don’t follow it, especially in emergency situations. But we know it and we realize we jeopardize our future when we don’t.

Why is it that our own government cannot follow this simple and straightforward advice? Think about it. Most of our elected officials are educated and smart people. They also appear to be motivated to do good things for their country. Yet when they get together and vote, you would think that they just came from cocktails with the devil. 

In 2007-08, we had an economic emergency. Counting on my fingers, we have exited that emergency that started 12 years ago. 12 years ago, I was a young lad of barely 61 years. Nolan wasn’t even thought of. 12 years ago Abraham Lincoln was president. Just kidding on that one. But 12 years was a long time ago.

Point—if we needed to borrow for an emergency that started 12 years ago, we don’t need to borrow for it now. And it would be prudent to pay off the debt. Yet our fearless leader and all those goons we call congressmen are digging us deeper and deeper into debt. Our government was not very good at saving for a very long time – but they have gotten even worse as we approach 2020 and beyond. Our national debt is now big enough to finance a national Tuna convention in Hotlanta.

Who cares? Debt schmet. No big deal. What’s a little bit more debt?

Ask Venezuela. Or ask Greece. Or ask your neighbor who just had his vehicle removed from his driveway. 

There is more to the story. Lately, people are writing stories about how the large debt makes it impossible for our government to save the day when we finally go into a recession. As you know, I don’t yet buy this recession crap but it is possible that we could experience some very slow growth sometime in the near future. The worry now is that if we are already deeply in debt, the government won’t be able borrow more. Their hands will be tied. They will be out of bullets. 

But do you really believe all those goons are going to sit around on their hands as the US goes off into a recession?

Of course not. Those same goons will borrow even more. They will ride in on their white stallions and save the damsel in distress (apologies to my feminist and vegan friends). You can borrow bullets and you can borrow money. They will just borrow more. And then they will spend.

But there will be a difference this time. At some point, if you cannot pay for the borrowed bullets, no one will lend you more bullets. Maybe they will lend them but the price will be much higher. Either way, debtors who want more and more debt will find it more difficult to borrow. The Ds will blame the Rs and the Rs will blame the Ds and so we will spend endless hours in bars and cocktail parties blaming each other.

Notice that the process won't be fun. For example, foreigners might stop lending to us. That means the stock and bond markets will fall and interest rates will rise. It also means that the value of the dollar will fall. The falling dollar might be helpful for export sales but it will mean higher inflation rates and it will be a further reason for foreign money to go elsewhere. During a recession, you definitely don't want stock prices to fall, interest rates to rise, and investors to sell their US assets in a panic. 

That's a horrible scenario. Luckily, the parties can blame each other and no one will have to accept the blame. All this could be avoided by a little prudence. Pay attention to debt. You don't have to bring it to zero tomorrow, but you certainly should try to stop piling up mountains of new debt. And save a little JD for your next party too. 

Annoying Economics

Some of you would agree that economics is always annoying. But so are chemistry and dentistry. I have something different in mind here when I say that economics is annoying. What I am referring to is the total neglect that policymakers show to anything resembling economic analysis.

Imagine that we had national policymakers in charge of cancer. Imagine also that when you said you thought you had a specific type of cancer, the policymaker--without knowing anything about chemistry or biology--decided to give you advice about curing your cancer. Perhaps you should take a vacation to Sanibel Island. Or maybe you should instead lie on a bed of sharp objects. While you might like an excuse to go to Sanibel Island, you still might be leery and ask your best friend, what does this policymaker know about cancer? Really?

Sounds stupid and far-fetched? Maybe, but that’s how I feel about what I have been reading with respect to recent economic policy discussions. Two issues come to mind from the business news lately. First is the idea that the US Fed must follow what foreign central banks are doing. If the Bank of Japan or the European Central Bank decides to reduce interest rates, then of course, the Fed must too. It has no other recourse. It must follow. 

Second is the idea that if the inflation rate in the USA is below some pre-ordained rate, say 2%, then of course the USA Fed must reduce interest rates as a means to prop up inflation. Heaven forbid we should have an inflation rate of below 2% in Alaska or Atlanta. If inflation is too low, then the Fed must attend to raising it.

This is what we are reading today, and serious economists and policymakers repeat these mantras daily. But where do they get this crap from? Clearly they don’t get it from economics textbooks. The common thread among the two examples above is the immediate conclusion that government policy is the first line of defense for all economic problems. While economics does allow for a role for economic policy, economics ALWAYS teaches us about cause and effect and brings policy in only when basic economic forces are somehow missing. Economic policy is the last resort. Economic policy is called upon when basic economic factors don't resolve the problem.

What is this basic economics? Simply put, it is all about supply and demand and how they come to impact price and quantity. Each semester, we teach hordes of freshmen and grad students this stuff. On the white board or classroom screen, it looks pretty abstract and when we put it into math models it looks even crazier. But the formalization of economics is the result of observing behaviors of customers and  providers in real markets. Formalization perhaps overdoes each particular situation, but the formalization captures the interplay of important themes.

Consider a market in which demand greatly exceeds supply. Without naming any specific good or service, our mind envisions a time when it is not easy to find that good. It might be that the scarcity allows firms to charge higher prices for that good. But that is not the end of the story. Economics suggests that the scarcity and the rising prices creates the incentives for firms to bring more of that good to the market. It might take a while to make that happen but the incentives are there. 

Thus scarcity comes and goes and economics explains why. Notice that the basic economics does not immediately conclude that the government must provide the extra goods that are wanted. It does not suggest a business tax cut to create incentives for producers to create more of it. Adam Smith talked about an invisible hand, by which he meant that you don’t need the ever visible hand of the government to solve all divergences of supply and demand.

Economists take the economics one more step. We believe that when markets are not free it might take some assistance from the government to overcome a market failure. But notice that the focus of economics is on a specific failure for government to address – it does not require a government that is everywhere and always solving problems.

Isn’t economic theory fun?

Back to my two spouts for the day. If the ECB reduces interest rates, then the Fed must do so too. What? If the ECB reduces interest rates then people will want to invest money at higher interest rates in the USA. But the very act of all those folks wanting to buy US assets causes US asset prices to rise and US interest rates to fall. We call that a market result. If the EU drives down their rates, our rates in the USA fall too – and the Fed doesn’t have to do a thing. It's just economics. The dollar/euro exchange rate might be affected in the interim but once the interest rates equalize the exchange rate goes back to its previous level.

How about the idea  that the Fed has to push up the inflation rate. Inflation is too low so the Fed must increase it. Really? What about the idea that if goods and services become cheaper in the USA this might affect where people buy goods and services. Better priced items in the USA should divert spending or demand away from other countries and into the USA. That diversion of demand would cause the USA inflation rate to rise. Notice—the Fed doesn’t need to do it.  

If the Fed is pretty sure that inflation is not behaving and is causing real problems then it should ask why. Why is inflation low? Why is it stubbornly low? Maybe there is a reason that requires a Fed policy. Maybe the reason requires some other policy.

I am not saying that government should never intervene into economic markets. I am saying that government intervention is never the first thing to ponder. Economics can be helpful but not if politics is always the primary goal of policymakers. Sad that we seem to put the cart before the horse these days.

Output Change in the First Half of 2019

The table below is pretty long and ugly. But like a good book, a theme emerges across the many paragraphs and chapters.

The data in the table was pruned from the government source bea.gov that holds mountains of information about the US economy. A regular output of the Bureau of Economic Analysis (BEA) is announcement of the latest number's on national output or what we lovingly call real Gross Domestic Product or real GDP.

While one can find data going back as far as Nancy Pelosi's birthdate, today I pirate mainly very recent information from the first two quarters of this year. The columns identified in the chart by Q1 and Q2 show you that the annualized rate of change of real GDP in the first two quarters of 2019 were 3.1% and 2.1%, respectively.

If you do what I do and read all the crapola that gets written/spoken about such numbers each quarter, you probably shake your head at all the detail and reach for your bottle of Jack and your Perry Como CD. Being an unreformed professor of macroeconomics most of my life, I see my place in the world as being one who can look into all those numbers to find a plot. Of course I'd love to charge you for this valuable service but so far no one has volunteered even a farthing, whatever that is.

So here goes. Let's just focus on the first line of the table. We see that output slowed in Q2 from 3.1% to 2.1%. Hey dudes, at least it was still growing. The AVG 2019 column says that the average growth over those two quarters was 2.6%. The first column AVG 3 YRS says the economy has grown at an average rate of 2.3% over the last three years. I chose 3 years because Nolan is twice that old.

The DIFF column says that the average over the first half of 2019 was a smidge (0.3%) stronger than the average over the last three years. I'm sorry to say this but the BEA spent a ton of money just to tell us that the economy grew a smidge faster in 2019. Incredible. Don't you feel better now?

What else? All those lines below the first one help us to find even more golden nuggets -- or maybe even more of a story. So hold on friends. Maybe there is something here. All those lines below the top line refer to different categories of output. For example, take eight of the rows starting with gross private domestic investment. Those lines report what happened to business spending on such things as plant and equipment and what households were spending on new residences (houses, condos, etc).

I pick out those rows because the AVG DIFF column is very negative in 7 of the 8 parts of investment spending. The only one that was not negative was intellectual property products. The negatives imply that for each of those negative categories, the performance in 2019 was much less than in the three years prior. The -4.6% for business structures reveals that after growing by 1.3% per year in the previous three years, it fell by 3.3% in the first half of 2019. That's a swing of -4.6%.

So while overall real GDP was a yawner in early 2019, we are all wondering what the crappy business investment numbers mean for the future. Will US productivity decline in the future? Will firms cut back even more in the rest of the year? Will this cutback cause a recession? Will Bernie Sanders stop gesturing like a traffic cop in Barcelona? We don't know. But we are watching.

What else? Notice that Personal Consumption Expenditures (PCE) picked up in the second quarter of 2019 but even that 4.3% growth rate was not enough to make 2019 better than the previous three years. The laggard in PCE was the services component. What will happen during the rest of 2019? Will spending on goods slow or will spending on services increase?

Farther down the table is the data related to international trade--exports and imports. Lots of negatives there in the  DIFF column.

Looking at the first half of 2019 reveals as many questions as it suggests answers. Should we be worried that a recession is coming? From these numbers it's hard to know. But clearly the numbers on investment spending and trade require close attention.

AVG 2019 2019 AVG AVG 3 YRS Q1 Q2 2019 DIFF Gross domestic product (GDP) 2.3 3.1 2.1 2.6 0.3 Personal consumption expenditures 2.8 1.1 4.3 2.7 -0.1 Goods 3.9 1.5 8.3 4.9 1.0 Durable goods 6.4 0.3 12.9 6.6 0.2 Nondurable goods 2.6 2.2 6.0 4.1 1.5 Services 2.3 1.0 2.5 1.75 -0.5 Gross private domestic investment 2.7 6.2 -5.5 0.35 -2.4 Fixed investment 3.6 3.2 -0.8 1.2 -2.4 Nonresidential 3.8 4.4 -0.6 1.9 -1.9 Structures 1.3 4.0 -10.6 -3.3 -4.6 Equipment 3.4 -0.1 0.7 0.3 -3.1 Intellectual property prods 6.3 10.8 4.7 7.75 1.4 Residential 2.8 -1.0 -1.5 -1.3 -4.1 Change in private inventories NA ......... .......... NA NA Net exports of goods & svcs NA ......... .......... NA NA Exports 2.2 4.1 -5.2 -0.6 -2.7 Goods 2.9 4.6 -5.0 -0.2 -3.1 Services 0.8 3.3 -5.6 -1.2 -1.9 Imports 3.7 -1.5 0.1 -0.7 -4.4 Goods 3.8 -2.8 0.2 -1.3 -5.1 Services 3.5 4.5 -0.3 2.1 -1.4 Government Cons. And Inv. 1.4 2.9 5.0 3.95 2.6 Federal 1.4 2.2 7.9 5.05 3.7 National defense 1.1 7.7 2.8 5.25 4.1 Nondefense 1.7 -5.4 15.9 5.25 3.5 State and local 1.4 3.3 3.2 3.25 1.9

I Hate Hate

Sometimes I depart from macro so I can vent a bit on other subjects. Today the subject is hate. Grr.

I hate hate.

What a great title for a blog post! Think about it. What does it mean to hate hate?

Notice that the first hate in my short sentence is a verb and the second one is a direct object.

Notice also if hate (the direct object) is something bad, then how can you hate (verb) that? If hating is so bad why do you do it?

So that’s what got me started. Everyone hates hate. But nowadays, more people seem to be hateful!

What is hate? Wikipedia is helpful.

• Hate is a heavy metal band from Poland but let’s ignore that one.
• Synonyms for the verb hate: loathe, detest, dislike, greatly abhor, despise, feel hostile toward, find intolerable, recoil from
• Synonyms for the noun hate: feelings of hate and revenge, detestation, abhorrence, abomination, execration, resentment, hostility

Hatred has no positives. Prolonged hate tends to cause fixation on the hated ones and wastes a lot of time and energy -- and in extreme cases leads to violence or retribution. Which most likely causes more hate, violence and retribution. 

Hatred seems to be out of step with most religions. I don’t know many spiritual people who don’t follow the golden rule: do unto others as you would have them do unto you. Surely hatred is not part of any of those religions. I don’t think Buddha taught people to hate each other.                                                   

So there you go. I can’t really hate hate because I don’t want to hate anything. But I sure want to make it clear that hate ought to be less prevalent today.

No, I am not going to get into the trap today of saying this or that about political parties or their followers. My observation is that some people on both sides of the political spectrum are filled with hatred.

Notice one thing about hatred – it is much easier to do when you perceive that the other (bad) guys hate you. As long as anyone believes there are people who hate them, then the hate party will go on.

It’s a bit like the famous Prisoner’s Dilemma. If Joe thinks Bob is going to rat on him, then he is probably going to rat on Bob. Bob and Joe need a private meeting to agree to not rat on each other.

I think all of us need to have a private meeting and decide we are members of the same human race, and we are killing each other by hating each other.

Rant over. Thank you.