Friday, February 29, 2008

Fodder from the Fed

So according to his testimony before Congress, Ben Bernanke seems to think that inflation -- currently greater than it's been for twenty-five years -- will somehow peter out in just a little while. He didn't say how that was going to happen, of course. Will demand for oil by China and India miraculously contract so as to reduce the price of a barrel of crude? Will agribusiness stop growing corn for highly profitable subsidized ethanol, put those fields back into wheat and soybean production, and bring down the price of food? Will the dollar suddenly start getting stronger, bringing down the price of imports?

I don't think so -- but I'm not a world-class economist and Chairman of the Federal Reserve Board. On the other hand, unlike Bernanke, I don't have to worry about my words having a chilling effect on the markets or on consumer confidence. Hardly anybody reads this blog, so I'm free to say what I believe without worrying about consequences.

Bernanke strongly suggested that we can expect more cuts in interest rates. That probably will make Wall Street speculators happy for a while, but the longer-term effects of further cuts are not likely to make the rest of us too happy. Even though the Fed slashed the federal funds rate by almost a third in January, consumer interest rates haven't declined at all. Some variable rate mortgages will reset at lower rates than they might have otherwise, but the rates for new fixed rate mortgages are still drifting upwards -- for the smaller numbers of families who actually can get new mortgages. Credit card rates are just as usurious as they were before the Fed actions.

In other words, the January rate cuts have done nothing to increase consumer spending, and so have done nothing to stimulate the economy. The main effect of further rate cuts by the Fed will be to further weaken the dollar -- and, by definition, a drop in the value of your money is inflation.

Now that the rest of the country has caught up with me and started talking about stagflation, lots of people (including Bernanke) are desperately denying the possibility that it ever could rear its dreaded head again. Of course, there still are plenty of people denying that we're in a recession too, and for very similar reasons. Formally, a recession is defined as two consecutive quarters of negative growth, so we won't officially know if we're in a recession now until the figures for both this quarter and the next are in, sometime around the end of August.

Clearly, if there's no recession, there can't be stagflation -- and anyway, many of the naysayers maintain, you have to have both economic stagnation and inflation for years before you can properly use the term stagflation.

Big deal. Call it what you will, we'll still have to contend with economic contraction, higher unemployment, and inflation at the same time. The Fed isn't very good at doing that, because it can't raise interest rates to counteract inflation at the same time it cuts them to counteract recession.

Dammit, we're going to have to look to Congress again! I'll describe some of the useful things Congress won't do in a later post.

Saturday, February 23, 2008

Speaking of stagflation...

According to a front page article in the Wall Street Journal, I'm not the only one concerned about the threat of stagflation -- but I'm pleased to say I beat the WSJ to it by more than a month. (Check out my original post here, and next time, maybe you'll listen! ;-)

Mind you, I don't expect an exact repeat of the stagflation of the 1970s because I don't see much chance of a wage-price spiral. Back then, we still had unions capable of negotiating higher wages when prices went up. Just the same, keeping labor costs low won't necessarily hold inflation down -- not in a global economy where we are so heavily dependent on imports. Inflation in China is running at 7.5%, which will spill over into the cost of goods sold here, and the weakness of the dollar will continue to push up the prices of imported goods.

When higher production costs from rising commodity prices and lower demand due to recession combine to threaten CEO annual bonuses, the prices of many products will be increased just to maintain corporate profit margins -- and in industries where competition is limited, the trick will work. We'll still buy food and gasoline and electricity, and most of us will hang on to our cell phones, cable TV, and internet access.

Let's see what Ben Bernanke has to say next week.

Friday, February 22, 2008

But, on the other hand...

...maybe there are some, in the Republican establishment, who are beginning to think that Obama actually might be able to beat McCain.

New York Times columnist David Brooks -- who has long provided the conservative "balance" on the Times editorial page -- was suspiciously enthusiastic for Obama in the early days of the primary season. In point of fact, it was Brooks who first got me wondering if there might be some Republican money going to the Obama campaign.

Then, a couple of days ago, I read a column by Brooks called "When the Magic Fades." With uncharacteristic sarcasm, he describes "Obama Comedown Syndrome," with observations like "His Hopeness tells rallies that we are the change we have been waiting for, but if we are the change we have been waiting for then why have we been waiting since we’ve been here all along?" (I admit it: I thought that was moderately clever.)

Well, what do you think? Is it a good sign that Brooks has gone negative?

On the other other hand, however, the Times recently added another conservative columnist, William Kristol. (A prominent neo-con, Kristol actually balances Paul Krugman a lot better than David Brooks ever could. Brooks may now be relegated to balancing Nicholas Kristoff.) A recent column by Kristol absolutely revels in Obama's wins over Clinton. Of course, Kristol typically revels in any defeat of any Clinton by anybody.

So, who knows? As for me, I'd vote for Zippy the Chimp if he got the Democratic nomination. I'm anticipating our current economic problems getting significantly worse, and lasting a lot longer than most of the "experts" would like us to believe. A McCain administration will be about as effective as the Hoover administration was in the 1930s. This is not to say that I think Hillary, Barack, of Zippy could be a new FDR, but I'm sure we're ready for a little less Milton Friedman and a little more John Maynard Keynes.

Thursday, February 14, 2008

And your next president will be...

That's right. John McCain. This time, however, I can't just blame it on the Democratic penchant for self-destruction. As a matter of fact, I'm beginning to think the alleged self-destructive tendencies of the Democratic Party always had quite a bit of outside help -- and this time around, the Democrats couldn't possibly have done it on their own.

Some will call the following analysis a "conspiracy theory," but to me it's just another chapter in the ongoing saga entitled, "How to Buy an Election." There are a few new wrinkles, and the cost of buying the upcoming presidency will be higher than the cost of previous presidencies, but hell -- thanks to the policies of the Bush years, the buyers are much better able to afford it than ever before. Okay, so let's follow the money.

The first thing that catches your attention is that most of the money, this time around, went into the Democratic primaries and caucuses. The next thing you notice is that a very big chunk of it went to... excuse me, but am I seeing this correctly?... Barack Obama!

So who the hell is Obama? Well, he delivered a lovely, inspiring speech at the last Democratic convention. Apart from that, though, what has he done? Answer: he defeated Alan Keyes for an Illinois Senate seat. And how did Alan Keyes, designated loser and "black friend" of the Republican Party, get the nomination?

Well, it seems that Jack Ryan, the original Republican candidate, found himself embroiled in a sex scandal. No Republican with any real political ambitions wanted to step into Ryan's sleazy shoes, so Alan Keyes (who actually lived in Maryland at the time) came to the rescue. Hooray, Obama! What a stunning victory!

The logical next step, of course, would be for Obama to run for President. (I can't be the only one to notice the craziness of this particular sequence of events, can I?) When the results of the "money primary" came in, well ahead of the Iowa caucuses, all the media said the Democratic contest was between Hillary and Barack. John Edwards, the southern white man championing traditional populist Democratic values, was discounted from the start. Stop and think about that. All the big money, and all the media coverage, went to the woman and the black guy.

Meanwhile, back in the Republican Party, the biggest bunch of weenies in the electoral history of the United States (even Alan Keyes!) all were (1) trying to look like Ronald Reagan, while (2) distancing themselves from the gloriously unpopular George W. Bush, while (3) endorsing every program that made Bush unpopular.

The only one of them who conceivably could beat Hillary in a general election was the alleged "maverick," John McCain, who draws independent voters. His only problem was the Republican base: the talk-radio fascists attacked him for his failure to support the patriotic persecution of Latinos, and the Christian right attacked him for his failure to protect frozen embryos from stem cell research (ignoring his consistent opposition to abortion.)

Fortunately for McCain, though, he got to compete in plenty of open primaries, where the Republican base vote is diluted. It helped even more that Mitt Romney carried the taints of both Massachusetts liberalism and Mormonism. Even Rush Limbaugh couldn't help Romney. Hey, but what about those Huckabee voters in the south? Will they come out for McCain?

That brings us back to Obama. While the "social conservatives" of the southlands might not be too enthusiastic about McCain, you can count on them to come out against that uppity nigra with the terrorist-sounding name. The same thing is true of plenty of working-class white voters -- the "Reagan Democrats" who currently lean towards Hillary Clinton.

When Hillary won the New Hampshire primary and split Super Tuesday with Obama, a huge infusion of cash suddenly appeared in the Obama coffers. At the same time, Clinton found it necessary to lend her campaign $5 million of her own money. It seems very unlikely that any significant portion of the Obama contributions came from college students sacrificing their beer money. An Obama candidacy is the best guarantee of a McCain victory in November, and a McCain presidency is the best thing that could happen for corporate America. You do the math.

McCain now says he will make the Bush tax cuts for the super-rich permanent, even though he voted against them when they first were proposed. His support for the Bush immigration bill is certainly pro-business, since it will establish a 21st century bracero program -- create a pool of low-paid temporary foreign workers to depress wages and deter unionization in both agriculture and the service sector. Universal health coverage, of course, will be off the table.

And so, in conclusion, it looks like the Democrats are screwed again -- unless Hillary Clinton somehow can win the nomination without driving the Obama cultists into the arms of John McCain.

"But, wait," you may innocently insist, "Obama can win! America is ready for a post-racial, post-partisan president! Oh, ye of little faith!"

Indeed. Me of little faith. Every Republican success since the election of Richard Nixon has been grounded in an appeal to racism. America may be a little less racist now than it was in the past, but it hasn't changed that much -- and the Republican attack machine is ready. For a hint of what is to come, check out Sean Hannity's interview of the Reverend Jeremiah Wright, Obama's pastor and adviser. If you think the swift-boaters did a job on Kerry, you ain't seen nothing yet!

Saturday, February 9, 2008

On partisanship

"Bipartisan legislation means that everybody gets screwed."

I can't find the first use of that quotation, but I've heard it, in one form or another, time and time again. It's kind of amusing if you're a cynic (I plead guilty), but to what extent is it true?

As a rule, bipartisan bills emerge when both Republicans and Democrats are beholden to the same special interests. A prime example is the most recent agriculture bill, which protects and subsidizes agribusiness in both Republican and Democratic congressional districts (at the expense of consumers and our trading partners overseas.) If you're not part of some powerful interest group, though, forget bipartisanship. It's of no use to you at all.

Beyond that, I'm convinced calls to "bring the country together" are frankly idiotic if they imply that Democrats should be trying to "negotiate" with Republicans. The Republican Party is controlled by extremist ideologues, and Republican legislators are too well-disciplined to break with the party without specific permission from party leaders. It's not a negotiation when it's all give and no take.

"But," you may protest, "there are plenty of times when Republicans cross over and vote with the Democrats, especially if the Democrats are willing to compromise a little."

Bullshit. Let's look at a very recent example: the (failed) Senate version of the alleged "economic stimulus package," which would have expanded the food stamp program and extended unemployment insurance. Harry Reid needed the support of nine Republican senators to stop a filibuster and pass the bill. And how many did he get?

He got eight, exactly eight. Each of the eight is a senator facing a difficult re-election bid this November, in districts where appearing to support a bill that might actually help the poor may improve the chance for electoral success. You can be sure that each of the eight had approval to vote with the Democrats, and that if a ninth tried to join them, one of the eight would have changed his vote to "no."

Forget about "working with" Republicans. The only way for progressives to make any real progress is to crush the Republican Party, weakening it to the point at which individual Republicans will be willing to break party discipline and force the ideologues out of power. If the party can get back to the way it was before the "Reagan Revolution" -- working to help small businesses and middle class wage earners rather than just the super-rich -- then cooperation and negotiation can be fruitful once again.

Wednesday, February 6, 2008

Confusion, confusion!

As anticipated, Super Tuesday made no particular difference in the Democratic race. Did Obama do better than expected? That depends on whose expectations you were talking about. One thing this election season is doing, to my extreme delight, is demonstrating the extreme shortcomings (inch and a half?) of the alleged pundits. The goddamned media might as well hire you or me. I don't know about you, but I really think I could do better than the goddamned "pundits."

But what do the data say? Well, the young certainly seem to be lining up for Barack Obama, while we old farts seem to prefer Hillary Clinton. Maybe I shouldn't admit this in virtual print, but I'm pretty sure we elderlibs would, as always, line up at the voting booths to vote for the Dems no matter who wins the primaries.

Those youngsters, however, are far less predictable. Quite a few would be considerably pissed if their "rock star candidate" came in second. Some of them would retreat to their usual apolitical inactivity, but others would remember that John McCain made several appearances on Jon Stewart's "Daily Show."

If the Republicans win the presidency this time it will be, as always, with the full participation of the moron vote. I'm hoping the newly emergent youth vote will be less moronic than that of their elders -- who elected Ronald Reagan, George H. W. Bush, Bill Clinton, and the catastrophic Dubya. Really, let's all pull together. Bear in mind that the difference between Hillary and Barack is less than the length of a pundit's dick.

Sunday, February 3, 2008

Endorsing Hillary

Clearly, I was not happy when John Edwards tossed in the towel. It's not that often I have a vaguely viable candidate saying the things I want to hear. Paul Krugman tells me Edwards had a genuine impact on both the Clinton and Obama candidacies. I hope he got that right.

So, like a lot of Edwards supporters, I found myself trying to decide between what looked like the black Bill Clinton and the female Bill Clinton. (While I might have a certain admiration for John McCain as an independent thinker, I don't much care for where his independent thoughts might take us.)

I was really torn! Barack or Hillary? (Most often, those internal conflicts ended with, "Well, really, who gives a shit?") For reasons I couldn't put a finger on at the time, I found myself drifting towards Hillary. But why? (I don't easily let myself get away with emotionally based choices -- at least not without some analysis.)

Well, here's what I came up with: of the two remaining Democratic candidates, the one who reminds me more of Bill Clinton is Barack Obama. Since I really don't want another Clinton Administration of the 1990s variety, I'm supporting Hillary. Am I nuts? Maybe. Nevertheless, I believe that Hillary will be less like Bill than Barack -- less style, and more substance. I also think Hillary has the political skills to achieve genuine progressive goals by reaching out to specific Republicans on a bill by bill basis, not by reaching out to the Republican Party, which is still mired in its ideological tar pit.

Anyway, we boomers deserve at least one more presidency -- look how long we had to wait for the World War II crowd to get out of the way! My sincere hope is that somewhere inside Hillary's technocratic armor beats the heart of a sixties idealist; tempered by time and (yes) experience, but not willing to give up the fight.

Friday, February 1, 2008

Economic stimuli?

Ben Bernanke is among the world's foremost experts on central banking, so presumably his grasp of the economy is superior to mine. On the other hand, I'm under no pressure from either Washington or Wall Street. I just call it the way I see it, and you can decide for yourself which of us is more credible.

Did it really make sense to drop interest rates twice in nine days, all the way down to 3%, and hint that further cuts may lie ahead? I just can't see it. Granted, it seems to have encouraged Wall Street as stock prices have edged upward for the past four days, but if you're not an executive whose bonus depends on your company's stock price or a retiree planning to cash out your 401K next week, that's meaningless. Credit remains very nearly as tight as it was before the rate cuts. As long as banks and other businesses continue to write down multi-billion dollar losses, loans will be hard to find.

The main thing the rate cuts are likely to do is further depress the value of the dollar, making it harder for both government and corporate America to borrow from overseas. If our creditors lose any more confidence in the dollar and insist on denominating our future loans in euros, for example, we'll be in a hell of a lot more trouble.

Just what I need! A tax rebate!
Ideologically constipated as always, the administration can't think past tax cuts -- and since giving away money is a proven vote getter, Congress is right on board. The idea, as you know, is to stimulate the economy by giving people more money to spend. But how will they spend it?

The poor, certainly, will spend what they get in short order. Items like food and rent usually are a safe bet, especially given the job losses reported for January. There will be some multiplier effect, as grocers and landlords re-spend some of the money they receive. So far, so good. If Senate proposals to extend unemployment insurance and food stamps become part of the final package, so much the better. The poor can be counted on to spend whatever they get.

The middle class is a different story. Faced with recession (and the concomitant threat of job losses, less overtime, and giveback demands from their employers), the middle class tendency is to circle the wagons. Many will use their rebates to pay down existing debt. A few will try to save their rebate money as a hedge against unexpected problems. In those cases, the multiplier effect will be zero.

Many will pump their rebate checks directly into the tanks of their SUVs, or use them to offset increases in the price of corn. That will help maintain demand for oil and ethanol, keeping fuel and food prices high.

I continue to be concerned about the threat of inflation, even though the current wisdom tells us that inflation is entirely a thing of the past. It may be true that labor is too debilitated to contribute to a wage-price spiral, but there are new possibilities arising out of globalization. Buying power in the developing world is growing faster than the global supply of goods, so demand-pull inflation is inevitable -- and the Fed can't control that at all. The impact of demand on fuel prices will generate cost-pull inflation as well.

A few weeks ago, I cautioned against the threat of stagflation, and nothing has happened since then to change my outlook. While the economy continues to tank, inflationary pressures continue to grow. Today's New York Times reports that labor shortages and an increase in the cost of raw materials in China -- combined with the weakness of the dollar -- are likely to increase the price of Chinese-made goods in the United States by as much as 10% this year. (I'm betting on more than that, especially if the Fed continues to cut interest rates.)

Buy anything made in China lately?