Inching Closer to a Homeless USA?

Cartoon by Jim Gibson

Now that we avoided one cliff in October we now have a little time to avoid another one in early 2014. Predictably what gets done will be decided by real and imagined descriptions of past and future government spending growth. During the last standoff we heard about the sequester and how it limited government growth. Some Democrats use that fact today to strengthen their case for more future spending and higher taxes. 

But the government’s own forecasts belie that interpretation of austerity and show a real cause for alarm coming from future federal spending. Lawrence Summers recently argued in the Wall Street Journal that national debt is a secondary issue but I argue here that a continuing debt explosion threatens to make us all homeless.

I wrote on October 8 about the national debt and how the CBO believes that under current budget law the US net debt will hover around 70% through 2023 – staying well above the pre-recession rate and historical norm of about 36% of GDP. The implication is that even with the spending constraint implied by the Budget control Act of 2011 and the sequester, we cannot make even a tiny dent in the swollen national debt. Guest Blogger Jerry Lynch followed up on October 13 with a similar story citing the gross national debt staying at about 100% of GDP. It is one thing for debt to rise temporarily in an emergency like the world recession of 2008/2009 but it is another thing to let it remain so high for another 15 years or so!

Today’s posting reinforces this discussion of debt by focusing on government expenditures. I do that because of the many distortions we are hearing from politicians who do not want face up to tough spending challenges. Some are pointing to the fact that the US government deficit and federal government expenditures fell in 2012 and 2013 and conclude that we have taken care of the government’s financial problems and can now get on with more spending and higher taxes. But just like the debt figures already cited, the spending data show that we are on our way to financial disaster. Okay – so you lost 2 pounds on your new popcorn diet – but if you are 100 pounds overweight this is no time to celebrate with an upside-down pineapple cake with Jack Daniels flavored icing.

It is true that government spending declined during fiscal year 2012 by $61 billion dollars and by $82 billion in fiscal year 2013. That’s a two-year total decline of $143 billion. But that is a small part of a bigger story.  Between 2007 and 2011 – government spending rose by a total of $870 billion dollars. In those four years, government spending rose from $2.7 trillion to about $3.6 trillion. That’s an increase of about 30%. If we account for the spending reductions in 2012 and 2013, we are left with an increase of government spending from 2007 to 2013 of $727 billion – meaning that since 2007 government grew by about 27%.With or without the recent reductions we are nowhere near to anything one might call restraint or austerity.  

Now let’s look at the future. Whatever gains might have been started in 2012 and 2013 they are over, finished. The CBO budget scenarios assume the continuation of the budget caps and so called restraint from the Act of 2011 – but notice they do little to overcome inertial government growth. The CBO estimates that with restraint, government spending will grow by $147 billion in 2014 alone. That is, in just one year the federal government will make up for all reductions in 2012 and 2013. The yearly increases following this $147 billion increase will be (again assuming spending caps in place):

           

            2015  $175 billion

            2016  $261 billion

            2017  $223 billion

Some 10 years after the US recession began and almost eight years after it ended, government spending will have gone from $2.7 trillion in 2007 to $4.3 trillion in 2017. Government spending will have increased by about $1.5 trillion or by 56%.

Governments swear to us that crisis spending is always temporary to get permission to go deep into debt. As soon as someone suggests that the bloat be reduced, they immediate call these requests unreasonable or worse.

Debt problems are real. They won’t go away by raising taxes. The more taxes we raise the more these fiends will spend. The really sad thing is that government has the capacity to do a lot of good. But doing this good becomes harder and harder when the country goes further and further into debt. We put ourselves in the worst jeopardy by not getting the financial crisis under control. What happens if we have another recession? What happens if terrorism requires more military and security spending? What happens if the Fed tapers and interest expense doubles or triples? What happens if Larry needs more JD?

Many people become homeless because they get themselves into debt and then an emergency strikes. What happens when a country goes into debt and suffers a similar crisis? The answer is not good. Don’t listen to Washington crying. Something has to be done about government spending. Even if the progress is gradual – something must be done. For every year we remain with high debt, the more we weaken our economy and open it up to risk of crisis. That is no way to run a country.

Debt Ceiling Redux

*Jerry Lynch has been an economics professor at Purdue for over 30 years.  He also served as Associate Dean and Interim Dean of the school in various past fits of insanity.  He has returned to teaching the core Macro Policy class in the MBA program and is pleased to have this blogging opportunity to spout off.

As of late October 11, 2013, nothing had yet occurred to solve the problem of the debt ceiling.  So hysterical is the rhetoric that one may think bumping into the debt ceiling comes around about as often as Haley’s Comet.  In fact, the government has raised the debt ceiling five times since 2001 typically without this much fanfare.   What started all this? Is it a new phenomenon? Why do we have a debt ceiling anyway?  Let’s look at the history and then think about the consequences to not allowing the debt ceiling to be raised next week.

The government raises tax revenue and spends money and there are three possible outcomes from this.  Tax revenue can equal spending and we have a balanced budget.  Tax revenue can exceed spending and we have a surplus. Or, tax revenue can be less than spending and we a deficit.  What does the government do when it has a deficit?  Up until recently my bet is that most people would have said the government prints money.  Not exactly.  There is not, thank God, a printing press in the basement of the Rayburn office building or in the Oval office.  While only the congress has the power to tax and spend, the Federal Reserve actually controls the money supply. So, if the government spends more than it takes in it sells bonds, borrows money.  What it borrows per year is the deficit and the past accumulation of borrowing is the debt.  There is not a deficit limit.  There is no legislation that states how much Congress can spend over its collection of taxes in a year.  There is, however, a debt limit.  Total federal debt has been limited since the Second Liberty Bond Act of 1917. The statutory limit was denominated in an actual dollar amount and given that government runs deficits nearly every year, it is no wonder we are constantly bumping against that limit.

When the debt ceiling was first established in 1917 it was $11.5 billion.  It has been raised 74 times since March 1962. The first time it was raised during the Reagan administration in 1981, it went just over $1 trillion.  The National Debt right now is just under $17 trillion.   It is difficult to find a source to say what the exact number of the debt ceiling is. Perhaps that is because some of the debt is exempt from the ceiling and the calculation is not all that easy.  The magic date seems to be October 17^th.  The US will reach the maximum amount it can borrow and there will be no new bonds issued. Why are we facing this crisis? There are really two questions there.  The first is: why is there a debt ceiling and the second is, why have we waited so long to address the issue?

When Congress passed a debt ceiling back in 1917 it was trying to impose an external restraint on how much it could spend.  It seemed comforting to know that we would not borrow past a certain limit.  The party not in charge of the Congress can always point to reaching the debt ceiling as a sign of the profligate spending by the group in power. A number of times when the debt ceiling has been raised, it has been raised by a percentage of the existing debt as opposed to a strict number.  Who knows what will happen this time.  We have come to this crisis point in part because of a breakdown in civility in Washington and in part, because the debt has really grown in recent years.  As recently as 2007 the debt was under $10 trillion but more importantly, it was about 65% of GDP. The measure of the scale of the debt is not the absolute number, but its relative size to, say, GDP.  Now, it is bumping up against 100% of GDP and people have become alarmed.  Even though the deficit has fallen in recent years, the debt to GDP ratio continues to grow and that is what is sounding the alarm. We have waited this long to address the issue because Congress, like all people, prefer to kick the can down the road.  In this particular instance, Congress has become the Sebastian Janikowski[i] of can kickers and there are threats that we will let the government reach its limit and stop borrowing.  What will happen?

The big discussion seems to be about the US defaulting on its bond obligations.  In truth, that does not have to happen.  The US can roll over the existing debt it has without surpassing the ceiling and it can pay the interest on the debt.  That said, what could happen is not a pretty scenario. The US government spends about $3.5 trillion a year and brings in $2.7 trillion in tax revenue.  Thus, spending would have to be reduced by $800 billion in order to balance the budget and not have to spend based on issuing bonds.  Some might think that an $800 billion reduction in federal spending would be good.  Without debating the long term consequences, it would not be good in the short run.  In fact, it is such a large cut in spending that it would almost be impossible to carry out.  Even those who might think that an $800 billion reduction in spending would be good would complain as soon as their ox is getting gored.  However, the long term consequences of following our current path are not something we want to see either.

What will happen?  As loathe as I am to forecast, we will come up with some short term deal and may already have done so by the time you read this.  What one hopes this crisis brings about is a meaningful discussion of the size of government and how it should be financed.  There are many concerns about the debt, here is my largest.  Interest payments on the debt come from tax revenue and that is how it should be.  You don’t want to service your debt, whether you’re a country or a firm, by borrowing every time interest payment comes due.  So, interest payments should be made out of revenue which for the government means tax revenue.  How much of that tax revenue will go toward servicing the debt?  Net interest on the debt right now is about $330 billion per year or maybe 12% of tax revenue.   We are currently financing our debt with some of the lowest borrowing rates in history on Treasury bonds and bills.  However, as the debt to GDP ratio continues to rise, and once interest rates return to their historical levels, the interest cost to service the debt will rise.  No one knows exactly how high because we don’t know what will happen to interest rates.  Some sources predict a trebling of interest cost on the debt within the next three years. Of course tax revenue will grow over that time but we could easily be looking at 25% of tax revenue going just to service the debt.   As that happens, our ability to do the kinds of things we want to do with tax revenue is diminished.  If 25% of your income is going to pay the interest on your credit card debt, you have a reduced standard of living.  That is, I think, the biggest long term concern of the size of the debt relative to GDP.

Will we pass a temporary debt ceiling increase and kick this can down the road?  Yes.  Is the debt ceiling an artifice to allow for these discussions to move into crisis mode? Yes.  But, do we need to address the long term implications of the debt in a calm and meaningful way sometime soon? Absolutely yes.  Unfortunately, Congress acts too much like a freshman with a term paper. We won’t get back to it until the next crisis comes to a theatre near you.

---

[i] NFL kicker – known as the Polish Cannon. Larry Davidson will be upset I used this analogy instead of him as he kicked field goals in high school and college football.

An Easy Budget Compromise

Cartoon by Jim Gibson

The President won’t talk to the Republicans because voters elected him to do his thing. Republicans retort that Nancy Pelosi famously said that we would not know much about Obamacare until it was legislated. Well it was legislated and as Pogo once said, “We are confronted with insurmountable opportunities.”

Here’s my take on this current fiscal madness. There are some real economic and political problems coming down the pike in the next 10 years. Neither party is going to like them. They really ought to be doing something about them. Playing Hatfields & McCoys is entertaining but it won’t help. Sorry to say this but one part of what is wrong about the next 10 years is Obamacare or at least our desire to quickly be like other grown up countries that have national healthcare. But the problem is broader than Obamcare.

As usual these guys take us to the brink so there are presently no good choices. But it seems pretty logical that both sides could agree on a truce that would stall things until January 1 while they focus their attention on what they could reasonably do about our budgeting problems. That would, of course, include Obamacare. Some of you call me Laughing Larry (or LL for short) because I am sometimes too optimistic about things and by things I mean politicians. As usual I will use this space to lay out why these guys need to get focused on the right issues. But do I really think they will listen to LL? Of course not. But I have a choice. I can walk the dog or I can hide away in my basement with a half-gallon jug of JD pretending to be solving national problems.

The case is pretty compelling. Both sides have much to gain through some compromises. After all mutual gain is the basis of compromise, right? So below I use some data published by the Congressional Budget Office in Updated Budget Projections: Fiscal Years 2013 to 2023 http://www.cbo.gov/publication/44172

Republicans often stand up for smaller government deficits and debts. The federal budget deficit as a share of GDP will decline as we approach 2023. But hold on. In 2007 the deficit as a percent of GDP was about 1.2%. It went to 10.1% in 2009 but declined to 4% in 2013. It is expected to remain as high as 3.5% of GDP in 2023. The average GDP during the next 10 years will be about $21 trillion so 3.5% of a big number is also a big number!

Keep in mind that every year there is a deficit, it must be funded with brand spanking new government bonds – bonds that add to the national debt. 

Speaking of the national debt – the net debt in 2007 before the crisis was a reasonable 36%. It rose to 75% of GDP in 2013 and is supposed to top out at 76% next year. It is expected by the CBO to remain at 74% in 2023. So the nation’s debt doubled and the best we can do is maintain that doubling over the next 10 years? Seems to me we have it all backward. Why aren’t we trying to move it back to 36%?  Please do not tell me that these elevated deficits and debts will not have a negative impact on long-term economic growth and employment. Business as is in the government is not good business.

The Democrats won’t like the future either because it means that government interest expense, Social Security, and healthcare will eat up an increasing share of government expenditures. Thus both mandatory and discretionary programs will command much smaller shares of the economy in the future. See the table below. There you will see how healthcare, pensions, and interest expense will gobble up an additional 4% of GDP and that the CBO expects much of this will come out of the hides of other mandatory and discretionary programs.

Neither side has much wiggle room – because taxes and spending will be at all-time highs as a share of the economy in 2023. Tax revenues will have risen from 19.1% of the economy before the recession to 22.6% in 2023. Government spending will have gone from 17.9% to 21%. In short, government will be bigger in 2023 – not just absolutely but relative to the size of the economy. This will make it even harder to afford better government programs – military or otherwise.

So while the deficit might fall for a while, everything else really stinks – future debt, interest expense, growth and the flexibility of government to help people who are not sick or old.

My conclusion is that they ought to pay attention to the costs of Obamacare but they really need to get on with the task of changing all the budget lines. Neither side seems willing to do that…at least not yet.

Projected Spending for Major Budget Categories

(Percent of gross domestic product)

     2012       2023        Dif

Major Healthcare                         4.7           6.1        1.4

Social Security                              4.9           5.5        0.6

Net Interest                                  1.4           3.2        1.8

Other Mandatory                          3.5          2.4       -0.9

Defense Discretionary                  4.3          2.7       -1.6

Non-Defense Discretionary          4.0          2.7       -1.3

What is a Healthy Economy?

Cartoon by Jim Gibson

Your tweenage daughter wants to know when she can start dating guys with beards and motorcycles. Your first reaction is to tell her she can have her way when hell freezes over. But you are smarter than that. You tell her she is free to date whomever she pleases once she shows more maturity. Satisfied she goes back to texting her best friend about when they will meet at the mall.

This approach has great merit. What does it mean to show more maturity? Does it mean that she makes her bed every morning or does it mean that she has saved enough money for retirement? Clearly, any time she comes to you with another reached milestone in maturity, you can tell her she is still deficient and cannot yet date guys with beards and motorcycles.

Where is this heading? Has LSD been into the JD this morning? It sure sounds like it. My point is that this is exactly how the FED is treating us. Mr. Bernanke tells us that the economy is not mature enough yet to let it go out alone without a chaperone (Mr. Bernanke).  But Ben, when will we be mature enough to stand on our own? The answer is – when Ben says you can stand alone. Be good and go to the mall and spend a lot of money. Ask Ben again tomorrow.

When will the economy be strong enough for the Fed to taper? When will it be strong enough for the Fed to remove all that unwanted and unneeded monetary flab from the system?

Macro does not make this question easy to answer because there are so many ways to judge the present and expected future health of an economy. Most of us think the unemployment rate is a great macro indicator but we also know that the unemployment rate can go lower simply because more people give up looking for work. So it is possible that the unemployment rate could go to 6.9% and the Fed would still judge the economy too weak to walk without a cane.

So maybe if the unemployment rate was falling AND employment was growing, that would be good evidence of strength? But what if most of the new jobs were low-wage and/or part-time? What if most of the jobs were in occupations featuring pole dancing? 

What if employment was growing while events abroad portended a weakened China, Brazil, Canada or parts of Europe? What if those and other countries actively depreciate their currencies against the dollar? Wouldn’t we worry about exports and the President’s goal to double exports as our engine of growth and stability?

Or perhaps employment and unemployment are both improving but continued ambiguity about regulation in housing and financial markets leaves housing demand and supply weak. With housing at present depressed levels it would be hard to conclude that the US economy was out of the woods. What if interest rates start rising as employment improves? Won’t we worry about another housing crash?

You should be getting my point. If not, try a little more Soju. The Fed says the economy needs to be out of the woods but there always are and there always will be conflicting signals in the US economy. Business investment could remain weak for quite a while. The consumer has not exactly rebounded. So what really matters is not so much this excuse about the strength of the economy but rather the Fed’s intent.

This might sound blasphemous but whether it is Bernanke or Yellen, the truth is that we have two popular leaders who will always have a tendency to see weakness in the economy and worse yet – will not cherish the long fight for Fed independence and credibility. Without an independent and credible Fed we might as well let the Department of the Treasury spew money from helicopters as the government deems necessary. And of course, that will lead us sooner or later to catastrophe.

Surely I exaggerate? I don’t think so. Government debt is in outer space and on a trajectory to reach the sun. Yet the government has no plan to constrain our nation’s debt. Notice that the current congressional debate has almost nothing to do with future debt issues.We have known since about 1964 that the baby boom generation would bust the budget today and have had almost 60 years to deal with that – yet we are not much better off in 2013 than we were when I was 18 years old. 

What does Congress and national debt have to do with the Fed? This government debt has to be sold each year. The Treasury has been selling roughly a trillion dollars of debt each year. While the economic recovery is reducing that amount, the respite is temporary and the government will continue selling a s---load of debt each year. Someone has to buy it. That’s a lot of US bonds to soak up. To make this avalanche of bonds desirable the markets would ordinarily need to raise interest rates on the debt. While this is wonderful for the bondholder we all know this would be bad for the economy.

So the Fed plows in with its capacity to create infinite waves of money and buys government bonds. A trillion dollars for bonds? No problem. Ben just writes a check. One does not need to be conspiratorial to believe Obama “makes” Bernanke buy those bonds – one can simply believe the Fed is trying to help the economy overcome this giant wake of the government’s incessant and huge demands for credit. Thus the Fed acts “as if” it were a part of the liberal democratic administration.

In doing so, the Fed abdicates its independence and along with that goes its credibility and ability to function. You know why credibility is important. Without credibility your threats as a parent go ignored. Honey – don’t put that screwdriver in the electrical outlet or I will put you in timeout with Dr. Phil. If the kid never gets put in timeout – the chances are she will ignore your directions. Likewise if the Fed puts in a policy designed to reduce interest rates and we all know that the Fed never acts against rising inflation – then it is likely that at some point a policy designed to reduce rates and stimulate the economy will fail. Future attempts to reduce interest rates will raise inflation expectations and will raise, not lower, interest rates. The Fed at that point becomes largely redundant.

The Fed needs to be independent. The Fed needs credibility. The Fed needs to point its boney fingers and forcefully lecture the government about proper fiscal finance. The Fed has to admit that the economy is ready to walk if not run. They will always find some data or some excuse to postpone proper monetary policy so long as they are in denial about proper central banking and its limits in solving all of man’s problems. The Fed can wait but in doing so it risks a jump from the frying pan into a volcano!

Trumpet of Doom? Fed Tapering in 2013

Cartoon by Jim Gibson

What to say about Fed policy? The Fed surprised the markets last week by not starting a tapering program. Apparently Miley Cyrus also surprised the markets by not taking proper dancing lessons. Anyway, the result was that the stock market surged on that day and interest rates fell. The next days saw a reversal but stocks remain at record levels.

Why do markets seem to love bad policy? Wait you say – stalling on tapering is not bad policy. The markets know that a tapering program today would be terrible for the markets.  After all, the US economy has a zillion problems and therefore the Fed is the only game in town. The Fed cannot risk the recession that might ensue if they started tapering. That is the story I keep hearing. While I buy that many investors believe this story, that doesn’t make it right. Tapering is the right thing to do despite stock market hyperventilation.

So let’s pretend this popular story is a big ribeye and dig in. Let’s talk about the many problems that make the FED worry about recessionary risk.  One thing mentioned is the government standoff. Maybe there will be a budget shutdown. Another problem is Syria and how future developments might affect oil flow and energy prices. Then there is long-term government budgeting that promises a rising national debt. What about a declining labor force? And Kim Kasrdashian?

There are many problems that threaten a recession. They are as real as that roll around your belly. But let me ask you this. Can you name many months or quarters in the past 50 years in which we were not plagued by similar risks. How many months or quarters in the last 50 years were we absolutely sure a recession was not around the corner? I would say not many.  I also ask you how many times we were five years into a recovery and we were still worried about a double dip recession? Again, not many. 

So why the paranoia today? One reason for the continuing worry is that we had one helluva financial global meltdown. It was not your mother’s recession. This was a perfect storm recession from which some people believe or believed we would never recover. But we did recover. While we are not happy with the strength of the recovery and its impacts on employment, income and poverty, the economy has recovered and grown. These years of growth should reduce some of the paranoia. But not all of it. We are not growing properly and something needs to be done.

A lack of money in the economy is clearly not our problem and therefore seemingly endless monetization of the economy is not what needs to be done. If pouring a container of water on a grease fire does not work then why would pouring two containers of water on a grease fire work better? Notice that we have had substandard economic results despite unprecedented infusions of money. So now we are going to do more? The reason the monetary solution worked in 2008 but not today is because the problem in the US today is not monetary. Keeping interest rates low might be good for the stocks, houses, and cars, but if we keep this up many of us will be leaving pretty houses each morning and driving our nice cars to the unemployment office. Fed policy can feed some sectors but right now what we need is stronger balanced growth.

The President said he wants to grow from the middle out.  I seem to have no trouble growing from the middle out but that’s a different thing. If he wants balanced growth then I am on his side. Balanced growth means, I think, that we pay attention to our real problems. And we have plenty of them. But the difficulty is that we have a government that doesn’t work. These guys and gals can’t even agree on how many Martinis to have for lunch.  So why list again all those problems. Those yokels are not going to solve them anyway.

So that’s the basis of well-deserved paranoia. There is a way to put out a grease fire. But it takes a metal lid, baking soda, fire extinguisher, etc. If you do not have any of that stuff, then it makes absolutely no sense to pour water on the fire. It just makes it worse. That’s our situation in the US. Money has no remedial power for our current problems yet since the government has abdicated its role we keep asking the Fed to pour water on the flames.

But there is still this lingering question – Davidson if you are right then why aren’t you rich? The stock market blessed the Fed’s decision to put off tapering. Those people thought it was a good move. My only answer is that the stock market is only one response to the Fed’s actions…and a few days of changes are hardly evidence of anything.  Investors have benefited from a stock market that has recovered and is now entering new record high values. Who can blame investors for responding positively to more of the same?  But what about the thousands of business organizations that are not doing the wave right now? After the QE bonanza why are banks still sitting on hoards of excess reserves? Why are firms reluctant to borrow? Why are workers dropping out of the labor force?  Those actions speak louder than one day’s change in the Dow Average. Those behaviors are crying for a non-monetary appropriate solution.

Okay so maybe extending the current Fed policy is not helping but won’t tapering be too much for the economy to take now? I don’t think so. If you take away something that doesn’t add anything how can that lead to a subtraction? Taking away QE does not mean the Fed cannot increase the money supply. But QE is adding almost a trillion dollars of reserves each year. Even if the economy was growing at 5% it would not need that much more money each year.

In the 10 years from 1998 to 2007, the average increase in the US money supply (the version called M1) was $30 billion per year. The highest annual increase of $77 billion was in 2003. In 2012 the US money supply increased by $301 billion. We injected in 2012 more than 10 times the amount of money we usually need in one year – and we did that after increasing the money supply by $267 billion in 2011. It looks like 2013 will find another huge dose. This stuff does not disappear. It accumulates. We have enough money out there to support economic growth for about 30 years! We don't need more money -- we need bankers who want to lend it and firms who want to borrow it!

Tapering will not cut off liquidity in the US economy! I can’t be sure how the markets will react right after an announcement to taper, but I will bet a week’s supply of JD that after the initial reactions we will find ourselves with another Y2K…much ado over nothing. Get on with the tapering Ben and Janet.

Rising Mortgage Rates will not Kill the Housing Recovery

Cartoon by Jim Gibson



I do not know how many credit market columns I read last week that announced, lamented, and frantically worried about rising mortgage interest rates. It is as if a young couple fretted about the fact that their baby was reaching 22 pounds. For you people not from the US a pound is a unit if weight similar to a stone or a rock.  Most babies start at about 6 pounds and keep gaining weight until they become tackles for an NFL team. It is perfectly natural for the child to reach 22 pounds at some point.

According to the press, interest rates should not be allowed to grow up.  I will admit that US interest rates got very low. In fact a graph of the 30 year Conventional Mortgage Rate (let’s call this interest rate Mort) shows that Mort has not been lower since 1965.  http://research.stlouisfed.org/fred2/graph/?id=MORTG  Despite recent increases in Mort, he is still below every single data point since 1965 except the very recent time period starting from August 2010.

So rates are rising but they are rising only in comparison to about two years of historically low rates. Imagine living through a time period when the temperatures in Miami in July were 180 degrees F. You would have to admit that 185F in Miami in July is not normal. But then imagine when the temps went to 170F everyone started to worry about a coming freeze. People started cancelling vacations in Florida because they thought it would be too cold. Crazy right?

The graph of Mort is very clear. Starting in 1980 when interest rates rose to very high levels, the trend has been downward. That is right, for almost 35 years, Mort has been getting lower and lower. Of course there have been cycles around the trend and that means there have been times when Mort rose. But every upward phase was always followed by a downward one – one that left rates even lower than when the phase started. Consider these average Mort rates ---

          

            1985 to 89   10.7%

            1990 to 94   9.2%

            1995 to 99   7.6%

            2000 to 04   6.7%

            2005 to 09   5.9%

            2010 +        4.2%

As I write today Mort is about 4.5%. So it is higher than the 3.4% at the end of 2012 and the 4.2% average since 2010, but it is now considerably lower than any of the averages of the 5 year periods since 1965. It is also much lower than the average of recent years before the world recession.

Why are we so worried about Mort? The answer is that we are really worried about his cousin Heloise (Housing Starts). Heloise has not been well. Heloise is a shadow of her former self but has been improving of late. After coming in at a low ebb of 478,000 units in spring of 2009, Heloise has been rising hitting about a million starts in March of this year but settling in at a pace of over 850,000 starts since.

There is a worry that if Mort rises more that this will diminish Heloise. But this does not make any sense because it leaves out all those other variables that might impact the demand and supply for housing. Even at one million units per month, Heloise is more than a million starts below the previous annual peak and is probably only 60% of what might be considered a past normal result. Heloise remains weak despite super-record-low Mort. That means that there must be something else besides Mort that is bothering Heloise.

That something else is the same list of things that is keeping the general national recovery at a slow pace and restraining employment. Among the items in that list is an unfinished reform agenda that leaves banks and households uncertain about the future of housing, banking, energy, healthcare and more. Interest rates can and will increase.  But that should not be an alarming factor. It should be just the opposite. The rise in interest rates is signaling a stronger economy.  The risk of another major financial recession is slowly receding into the past. Output and incomes are rising. Employment is increasing, albeit slowly. This foundation means that the housing market will not vanish just because mortgage rates hit or exceed 5%. 

While we might not feel lucky the gradual US and world economic recovery will be a good thing for Mort and Heloise. As Europe, Japan, China, and emerging nations expand at a gradual rate, this puts less pressure on commodities and other markets and should keep inflation in check for a while. This will keep Mort in check as well. Note from the history cited above that trend Mort has come down for almost 35 years. Much of that can be explained by a secular decline in inflation and inflation expectations. So a key to Mort and Heloise happiness is keeping those inflation expectations damped.

In short the sky is not falling. Interest rates are going to keep rising as the economy gradually recovers. Housing will not be unduly troubled as housing demand marches back to more normal monthly starts. But a gradual recovery is not enough to guarantee success. Much would be improved by a return to sane monetary and fiscal policy. Removing stimulus means anchored inflation expectations. A sustained recovery is impossible without it. 

The G20 Blame Game

As the world puts Syria under the microscope you might need a little change of topic to keep from going mad. So I decided to write about my gall bladder. People my age spend at least 74% of their time talking about their physical ailments and while I feel pretty good today I could share a lot of medical information with you. But as I was researching shingles and Dupuytren’s contracture I ran across an article about the G20.

Apparently the G20 is meeting in Russia and there were many photos of Mr. Obama and Mr. Putin playing darts with hand grenades. Since most of you think the G20 is the latest sports car made by Pontiac I thought it might be helpful to explain what was going in Russia with the G20 and why we should care.

The letter G in this context refers to the word Group and the word Group applies to countries that want to discuss politics and international relations. G2 is used when the US and China get together to chat about common issues. More popular is the G7 which includes the largest and most wealthy countries in the world when they do not want to include China in their meetings. This includes such stalwarts as the US, UK, Canada, France, Germany, Italy, and Japan.  The Canadians usually bring the beer. Eh. 

Anyway, the G7 has been meeting to solve global problems since 1975 and most people would agree that this group of overweight and sex addicted world leaders have solved almost no problems except for increasing Canadian beer exports. But they do meet regularly and have spectacular meals and the meetings are always followed by much back-slapping and a published summary of meeting accomplishments and common goals. For example hardly a meeting goes by when the G7 does not underscore their sincere interests in global harmony and world peace.

At one meeting it was pointed out by one G7 member that there are other countries that have gone beyond national potty training and ought to be included as formal members of the group. Since the name of the group was G7, they were met with an immediate mathematical challenge of how they could have more than 7 members and still be called the G7. I think it was France who suggested that they add Russia to the group and call it the G8. Problem solved!

As you can imagine, once Russia was added, the other members of BRIC – Brazil, India, and China -- felt lonely, rejected, and insulted and demanded that they be added to the G7 as well. Of course, this caused a stampede of other countries like South Africa, South Korea, and South Carolina who demanded they be included. So far we now have 19 countries in something we proudly refer to as the G20. Apparently the European countries didn’t get enough face time so they added the EU as the 20^th member. If your head is spinning at this point you may refer to the authority of all authorities – Wikipedia – for more information about the G20 at http://en.wikipedia.org/wiki/G-20_major_economies

The interesting thing about this most recent meeting in Russia is how the focus is on the US – and not just because of Syria, spying, and Miley Cyrus.  One issue has to do with US Federal Reserve policy. You know as a loyal reader of this blog that the Fed is talking about thinking about discussing and voting on the possibility that we might begin at some uncertain point in the future and in amounts not to be discussed in mixed company the idea of tapering. Tapering is now a four-letter word that brings out the worst fears in us. As a result of tapering discussions, the Eiffel Tower tilted and Al Gore admitted he did not in fact invent the whole Internet or fantasy football.

While I jest the truth is that the mere suggestion of reducing the rate at which we are dumping money into the US economy (think of water going over the Niagara Falls into a small cup) has already caused US interest rates to start rising upwards and hot money to flow away from many countries – and of course away from many G20 countries. The result is a chorus of countries singing in unison Amazing Grace. But I jest again. These countries sound like a chorus but the song is something more like the Everly Brothers’ Bye Bye Love or Hank Williams’ Your Cheatin’ Heart.

Despite triumphant announcements in 2008 that the emerging markets were finally de-linked from the US business cycle, we have seen how optimistic and wrong such pronouncements were. First they complained that the US was putting too much money into the world economic system. All that money was floating overseas and causing havoc in their financial systems and driving up their currency values. Now they complain of the opposite. Just the mention of tapering in the US and money is exiting these countries in waves. This is driving down their currency values. Apparently they are not as de-linked as they previously thought.

What are we to think about all this howling?  First, we are guilty as charged. One does not have to live in an emerging nation to dislike a very unstable US monetary policy. We in the US disliked how the Fed flooded the US economy with liquidity and then has gone well beyond the prudent point to begin withdrawing this stimulus. The Fed has generated a lot of uncertainty and unnecessary economic gyrations so that banks can sit around with mountains of excess reserves and the Fed serves as Obama’s lap dog dutifully running out into the street and collecting as many bonds as the government can sell.

So we can all be critical of the US Fed. But wait – don’t the other guys have some responsibility? After all, it appeared that they were less reliant on the US economy when China became the Miss Piggy of global commodity demand… or when they diverted much of their international trade to a growing list of other countries as globalization created more international opportunities. Perhaps some emerging market ire should be aimed at China for its failure to continue 10% plus economic growth or to Europe for having almost no coordinated economic policy despite being called a “European Union”. In short, these emerging market countries might spread their dissatisfaction beyond US monetary policy.

But if we are going to play the blame game – let’s not forget that these emerging nations have some responsibilities when it comes to economic growth. Globalization makes possible huge gains as emerging nations exploit comparative advantage and compete for manufacturing locations and exports on a global scale. But as the last 20 or more years have shown, to benefit from those opportunities these emerging nations had to be competitive. This meant that they had to transform what were often highly centrally planned economies into more decentralized capitalistic systems. These countries deregulated prices and wages; they privatized many formerly state-owned enterprises; they changed laws so that property could be protected and they allowed foreigners to own domestic assets and companies.

Some countries have moved farther along the transformation curve than others. Depending on the politics, some have taken two steps backward after moving forward. And this lack of completion of transformation is very telling. When the US catches a cold many of these countries get pneumonia. Why? Because we all know that these countries do not have balanced economies. All their eggs – so to speak – are in one or a few baskets. It is great when you create a lot of employment and income by selling copper to China. But when China slows its purchases from you, it is not so great. You can’t love hot money inflows one day and then deplore them the next when funds flow out. Hot money is hot money. If you allow your economy to rely on hot money or on China then you have to take the good with the bad. Or somehow find more balance.

It is this balance that is so elusive to an emerging market. If exports to China or hot money flows create great benefits, it is tempting to want to keep the benefits flowing. But this growth strategy is unreliable and risky. Most countries strive for self-sufficiency while they enjoy the benefits of international trade and investment. But economic broadening comes slowly and often means slower growth as the economy adjusts from the very risky unbalanced model to one that is more stable. Broadening also means tough  new policies that essentially replace government edict and protectionism with capitalism and competition. It is easy to blame other for your misfortunes but these major emerging markets have no one to blame but themselves. Blame the Fed if you want to but get on with the transformation process.

Don't Stop Believein' by Guest blogger Jerry Lynch

Jerry Lynch has been an economics professor at Purdue for over 30 years.  He also served as Associate Dean and Interim Dean of the school in various past fits of insanity.  He has returned to teaching the core Macro Policy class in the MBA program and is pleased to have this blogging opportunity to spout off.

Don’t Stop Believin’

                Just a city boy

                Born and raised in South Detroit

                He took the midnight train goin’ anywhere

The headline news just one month ago, now usurped by the crisis in the Middle East, was that the City of Detroit had filed for bankruptcy claiming to be unable to meet the payments to its creditors.  One of the questions asked when it first filed was whether or not it was legal for a city to file for bankruptcy.  That question seemed to be answered on a federal level when the city of Stockton was allowed to file last April.  However, a state judge ruled that the Detroit bankruptcy petition violates the Michigan state constitution. 

The declaratory judgment came in lawsuits filed by Detroit pension funds, retirees and workers, which sought to prevent a bankruptcy filing that would ultimately impair retirement benefits in violation of constitutional protections for those benefits.

Legally Detroit is at an impasse now on its bankruptcy proceedings.  While the legal wrangling is of interest to many, of more interest to me as an economist is the role that pension funds played in getting Detroit to where it is.  Let’s start by exploring pensions in general, then look to the specific case of Detroit, and finish with a little speculation about how far this might go in terms of other municipalities meeting their pension obligations.

There are essentially two kinds of pension plans, a defined benefit plan and a defined contribution plan.  In a defined benefit plan the benefit that a retiree receives is based on some formula that typically includes years of service times some multiplier per year times some final earned value.  For example, a pension may pay 2.5% per year worked times the last year’s earnings.  If someone worked thirty years then their benefit would be 30 (years) * 2.5% (per year) * last year’s earnings or 75% of their last year’s earnings.  There are many variations on this in terms of the multiplier or last year versus average of the last x number of years.  However, all defined benefit plans carry this in common -- Once you are retired, your employer/sponsor will pay you that benefit for as long as you live.  The complete liability for the program falls on the employer/sponsor.

In a defined contribution plan either you, your employer, or in combination make a defined contribution each month into a pension plan.  Typically your contribution is pre-tax.  Once you retire, you have that pot of money and can pretty much choose to draw it out any way you like.  Once you retire, your employer/sponsor has no liability for you.  You are on your own.

The defined benefit plan is going the way of the dinosaur in the private sector.  Employers do not want that liability. Shareholders in public corporations do not want it either as there is uncertainty about the present value of that future liability.  The defined benefit plan, however, is alive and well in the public sector as 88% of public employees are covered by a defined benefit plan.  The municipal employees of Detroit are “covered” under this type of program.  There are charges of abuse of the system in that employees will work a lot of overtime their last year of work so that the base for their pension is higher.  While that is no doubt of some concern, it is not the major reason why Detroit and other municipalities are in trouble.  A question you may ask yourself is, if I promise to pay you x number of dollars per year until you die, how much money will I need to set aside?  Good question, even if I had to prompt you to ask it.

Defined benefits programs can either be funded or unfunded.  In an unfunded program no assets are set aside and the employer pays out of current revenue as needed.  This is also known as PAYGO for pay as you go.  Up until the early 1970s about all defined benefit plans were unfunded.  Companies figured that revenue would keep growing and they would be able to pay pensioners out of those funds.  This is essentially how Social Security works but we’ll save that for another day.  As retirees started living longer the liability of the pension payments increased and the extent of underfunding grew.   Recognizing the impending storm the Employee Retirement Income Security Act (ERISA) was passed in 1974 that put restrictions on private pension funds and also required them to participate in the Pension Benefit Guaranty Corporation (PBGC) an independent agency of the government that insures pensions.  One of the restrictions imposed on private pension funds by ERISA was that an unfunded/PAYGO system would no longer be allowed.  Thus corporations, and probably also their employees, have to contribute to a pension fund even if it is a defined benefit program.  By the way, General Motors went from a defined benefit program to a 401(k) in the spring of 2012.  ERISA does not apply to public pension funds and they are not insured by the PBGC.

Back to Detroit.  Detroit has a defined benefit program that is neither unfunded nor funded.  It has what is the most common type of defined benefit fund today, an underfunded one.  Back to our question above, how much money needs to be set aside to fund the defined benefit obligation of Detroit and other municipalities?  The biggest uncertainty in all of this is the expected rate of return on the funds set aside to make future payments from.  If I expect to get, say, an 8% rate of return, I need to set aside a lot less than if I expect a 5% rate of return.   Detroit’s impending financial problems led Governor Rick Snyder to appoint Kevyn Orr as Emergency Manager of Detroit’s finances.  Mr. Orr, a former bankruptcy attorney for the Jones Day law firm in Washington DC, says the pension fund has underestimated the present value of its future liabilities by assuming a nearly  8% return on assets.  Not all of Detroit’s problems are related to its pension obligations.  The city’s population is half of what it was in the 1960s which has obviously reduced tax revenue.  It also has a history of corruption and overspending in awarding contracts, former Mayor Kwame Kilpatrick is awaiting sentencing in October 2013 for a pattern of extortion, bribery and fraud.   

Still, the pension fund is a large contributor to the problem.  Mr. Orr says Detroit has $18 billion in debt which includes $3.5 billion in unfunded retirement liabilities. The managers of the city pension fund said in a news release earlier this summer that they are no more than $700 million short.  Still not a comforting thought.  Their disagreement hinges on the expected return the pension fund will earn and thus what discount rate to use when bringing future liabilities back to their present value. A conclusion on how underfunded the pension funds are has more than academic implications as it will impact how much of a haircut both bondholders and the city’s pensioners are going to be asked to take.

News about Detroit’s troubles have temporarily taken a backseat to the conflict in the middle east and A-Rod’s steroid use but it is not a problem that will go away by ignoring it.  And, it is not Detroit’s problem alone.  Cities across the country with defined benefit programs assume they are adequately funded because they are assuming relatively high returns.  An argument over the appropriate discount rate to arrive at the present value of the pension liability will determine in large part what the payout of pension funds will be.  The Government Accounting Standards Board last year called for underfunded pension plans to use a discount rate in the 3 to 4 percent range. That is well less than most pension funds expect to earn and, if followed, will likely lead to pensioners receiving less in benefits.  Don’t expect this issue to be resolved any time soon.  As unglamorous as a defined contribution fund may be, at this point, be happy if you have one.

Is Inflation like Cooking with Gas?

Cartoon by Jim Gibson

If you ever want to be really popular at a cocktail party or a high school swim meet, just drop the term “unit labor costs”. I jest but now I have your undivided attention at least until you get a text from your local pizza delivery service.

I would not say that unit labor costs (ULC) are the key to world peace or eternal personal salvation but I would claim that ULC is the least known and most helpful economic indicator for understanding the economy and especially what will come in the way of future inflation. Most of us are riveted now to stories about the Fed and I will not discount the fact that Fed policy is critically important to future economic growth and inflation. But let’s face facts, even if her majesty Hillary Clinton were to become the next Fed chair, we would still be stuck with ULC and she would have very little to do with that. What I show below is that sub-par inflation today is the result of two labor market factors – the rate of labor usage and wage increases. If these are temporary aberrations that disappear as we exit a very slow growth period, then we should be worried about inflation. But if longer term forces are at work in the US labor markets, then inflation could remain tame for some time despite massive monetary overhang.  

Most of us have learnt well that inflation is all about too many dollars chasing too few goods. Many of us have tattoos that say as much. Since the Fed is in charge of how many dollars rain down on the economy we usually associate inflation with Fed policy and how that policy affects our decisions to spend and/or save. The typical story is that the Fed injects money into the system, thereby reducing market interest rates, resulting in flash mobs at your local car and real estate companies.  All that new demand for goods and services, according to this tale, stimulates Charlie Sheen and others to buy stuff and this increases output, employment and prices.   It is a demand-side story and it is told over and over and over in our universities and art galleries.

I am not writing today to deny that story though if you will look at my thousands of past posts, you will find plenty of ammo that suggests some inconsistencies in that theory. But today is instead about why that story isn’t enough. It is a nice macro/market story but it doesn’t really get into the nitty gritty of price setting. Price setting is done by firms. Companies do not change their prices randomly and in the US most firms do not get a note from the government telling them what price to charge today. Clearly the demand for a company’s goods is important to the price setting decision but much also depends on internal production issues.

Economists believe that companies either seek profits or market share when it comes to pricing. When demand increases that will get their attention. But will meeting that extra demand mean a larger profit? To know if more production will generate larger profits the firm has to answer two questions – how productive is the labor input? and how much will the extra labor cost?

Unless a company has excess labor sitting around eating handfuls of chips loaded with onion dip, a sizable permanent increase in output usually entails more workers or more worker hours. Suppose there is a demand for 100 more units of chicken noodle soup. If in one company the workers are not very productive but they are expensive, that company might not make much money by meeting the extra demand. In another company the workers are highly productive but not as expensive then that company might expect higher profits from meeting the extra demand. Depending on the productivity and labor costs either company might want to raises prices to bring in even more profits – but that might come at the expense of market share.

The point is that a demand change is not sufficient to predict changes in employment, output, or price. We also need information on what is happening to productivity and compensation costs. Which gets me to today’s topic. Despite the Fed and despite record attempts at stimulating demand in this country, we have not seen much inflation. The table below helps us see why we have seen lackluster inflation and gives us some pointers when it comes to thinking about the future and what might happen to inflation once we distance ourselves from the world recession.

I compare the last five years (2007 to 2012) of recovery from the recession (first column of the table below) to a similar period in the previous five years (2002 to 2007, last column). Using two different measures of inflation (based on the GDP price deflator and the CPI) it is clear that the last five years has shown a marked decline in inflation. Inflation has been growing at a little more than half of the previous period. We see this behavior has a lot to do with ULC. ULC measures the cost-side. It tells you how much more it COSTS to produce an additional unit of output. Firms didn’t need to raise prices much in the second period because their costs per unit of output were barely rising. Whereas ULC grew at more than 8% before 2007, they grew at just a little over 1% since 2007. That  is a remarkable change in the cost of producing an additional unit of output.

The table helps us to understand why business costs have been rising so slowly. Notice that in the last five years, labor compensation rose by 11.2%. That is half the rate of the previous five years when compensation increased by 22.2% rate. Productivity, in contrast, could not keep up the former pace of almost 13% but did manage to grow by nearly 10%. The decline in productivity growth means added costs of production but this upward impact on costs was swamped by the rapid deceleration of labor compensation.

The productivity part of the story is interesting. The decline in productivity had two major sources. First, total output of firms grew by only 3.9% in the past five years – much slower than the 18.4% in the previous five years. Equally dramatic was the reduction in labor hours – which showed a decline of 5.3% in five years. Firms were using fewer labor hours in 2012 than they did in 2007. Productivity has grown recently because firms have dramatically cut back on employment and hours worked.

We summarize all this as follows:

• Inflation is lower because costs per unit of production are growing more slowly.
• Costs per unit are growing more slowly because wage and non-wage compensation have slowed and because firms have cut back on employment.

The US economy is growing and output is rising albeit at a modest pace. The usual situation is that once the economy’s growth returns to something more normal, compensation growth will accelerate and employment will expand. This natural progression implies that productivity growth will decline, ULC changes will increase, and inflation will rise. It’s like microwave popcorn. Put the bag in the microwave, set the timer to 3 minutes, remove the bag when the popping stops, open the bag and add a little salt. Then eat. It’s like cooking with gas.

But is inflation like cooking with gas? Is it going to come back when economic growth resumes? Or will longer-term factors impede the usual employment, wage, and benefits progressions? What do you think?

                              Table: Percentage Changes

      2002-2007              2007-2012

Hours                            4.5                        -5.3

Output                         18.4                         3.9

Productivity                  12.7                         9.7

Compensation/Hour      22.2                       11.2

Unit Labor Costs            8.4                          1.4

Unit Non-Labor costs   17.3                        14.8

Inflation (GDP deflator) 11.9                          6.8

Inflation (CPI)               15.2                        10.8

Sources:  http://www.bls.gov/news.release/prod2.t06.htm

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Doubling US Exports

Cartoon by Jim Gibson

While everyone is so focused on the beginning of fall sitcoms and American football it might be time to revisit the hopeful goal of the President to double US exports. He stated that goal in 2010 as he announced a five-pronged program to increase America’s focus on selling goods and services abroad. It sounded like a neat idea at the time because people who live outside the US just can’t get enough US produced goods like Kentucky bourbon and Mississippi River cruises. It sounded good to the President because when these foreign folks buy more of our stuff it should increase employment in the US. Of course the President never mentioned an import policy to go with the export policy because I guess when American’s buy Samsung ovens and phones that does not have a negative impact on jobs in the US. But I get ahead of myself.

The President is a clever guy. He knows that it is always much easier to reach a goal if you never exactly define it. Try as I might, I cannot find any clear cut definition of what the president was going to double in five years between 2010 and 2015. As it happens exports can be defined many ways. The balance of payments statistics (BOP) define exports in terms of current prices. The National Income Accounts (NIA) defines them two ways: in current prices and constant prices (Real, or chained).  As you might imagine these measures that include current price change can make a big difference. If we are interested in a version of exports, however that correlates to employment – then it is usually better to use the NIA constant price version. 

Another issue regards whether or not you want to focus on exports of goods and services or goods alone. The President never made it clear which one of these two variants was in his sights. This measurement issue implies that we can never be sure how to determine if the goal has been met. Maybe he was thinking of exports of Chevy Volts?

But semantic issues will not deter us. Let’s focus on NIA’s version of real US exports of goods and services. In the first quarter of 2010, US exports of goods and services reached $1.7 trillion. A doubling by 2015 would imply an increase of $1.7 trillion.  As of the second quarter of 2013 – much more than halfway through the five year period, real exports of G&S reached $1.986 trillion. That is an increase of $286 billion. In three and one half years we have managed to move 16% towards the target. To put that into some perspective, if we were well on target to meet the goal, exports of G&S should have increased by about $1.2 trillion.  Clearly we are way behind schedule if exports of G&S are going to double by 2015.

During this same time period imports of G&S into the US were not standing still. In the last 3.5 years imports of G&S rose from $2.1 trillion to $2.4 trillion – the increase was $324 billion. Exports rose by $286 billion while imports increased by $324 billion. Thus real net exports of goods and services decreased by $38 billion. If exports increase employment and imports decrease it – then in the last 3.5 years the President’s Export plan has worsened the employment situation in the US. We are moving away from the stated goal.

Perhaps you say, we should focus instead on goods. Perhaps the services numbers are not helpful. In that case exports of goods increased by $190 billion in those 3.5 years while imports increased by $277 billion. Net real exports of goods declined by $87 billion. Focusing on goods instead of the broader aggregate of goods and services makes the situation look even worse.

We are now 14 quarters into the plan – 70% on our way to 2015 and only about 16% closer to the export goal. 

Perhaps the apparent failure is because the value of the dollar increased more than expected. A rising dollar would hurt US exports and raise imports. But the dollar has been on a downward trend for quite a while. It is true that the dollar has fluctuated but between 2009 and 2012 the dollar depreciated 8% against the euro, 15% against the yen, and 8% against the Chinese renminbi. In those same years the dollar depreciated by 5% against our major trading partners. It was down 31% against our main trading partners between 2002 and 2012. The dollar is not the problem.

The real problem is that the policy was mainly wishful thinking.  Despite being barely one year out of a world recession in 2010, the administration believed we would believe that it could wave a magic wand and make exports grow at a rate that was almost historically impossible. We would have to go back to about 1995 to get a doubling to today’s figure. That is it took 18 years for real exports of goods and services to double. President Obama thought we could double them again in the five years following a world economic recession. Really?

Exports are not the issue. Net exports makes a little more sense because it admits that trade is a two-way street both creating and destroying jobs. But even net exports are not the point. The US needs a vibrant competitive economy. Making up silly plans is not the way to make that happen. 

Stock Futures are Down Because of Good News?

Imagine the following conversation....Mom, the good news is that my temperature is down and my white cell count is back to normal. I feel much better. The doctor says I am definitely on the road to recovery. But I am really depressed. The doctor says he will have to reduce the amount of pain medicine I am taking.

I don't usually post short blurbs on Thursdays. But it is 9:20 am and the stock futures are falling like a rock. According to one Bloomberg article the markets do not like newly published indicators that show a stronger economy because it means the Fed may start tapering soon.

Does this make any sense to you?

How can good news be bad news?

Or maybe the so-called good news about the economy is really bad news about the economy? These snipets of news about last month's unemployment and inflation are simply heralding bad news about future inflation and unemployment?

Maybe the stock market was already over-valued and the sell-off this morning has nothing to do with monthly economic data.

Maybe journalists have to write about every little thing that happens.

Lots of maybes. My first reaction upon reading the news this morning was to try to understand a market that hadn't even opened yet. My better senses tell me to ignore all this noise and go back to playing darts.

It will be interesting to see how all this plays out in the coming months....