A Blessing from the Past
Whenever I get a spare moment (it last happened in 1977), I try to soak up the wisdom of those sages from the past. The current economic situation clearly could use a dose of such perspective—one untainted by the incessant torrent of confusion and hoopla. Fortunately, we only have to travel back less than a century to find such an oracle.
Many brilliant minds dominated the first half of the twentieth century—Bohr, Freud, Picasso, Heisenberg, and Joyce, to name but a few. At the half-century mark in 1950, however, two stood above all others—Albert Einstein and John Maynard Keynes. As of now, Einstein’s light is certainly brighter, but Keynes’ star is once again on the rise. His influence from the 1930s through the 1970s is difficult to exaggerate. He was on the cover of Time in 1965, two decades after his death, and even Milton Friedman and Richard Nixon grudgingly acknowledged that “We are all Keynesians now.” No less an intellect than Bertrand Russell, who frequently engaged him in debate and also knew Einstein and many others among the contemporaneous luminaries, believed Keynes to be the smartest person he ever encountered. If his wasn’t the finest mind ever, it was definitely amongst ’em.
Keynes was a British economist, Cambridge don, leading figure along with Virginia Woolf in the Bloomsbury Group, art collector, investor, and currency trader—to name but a few! To give you an idea of his genius, he helped his country finance World War I and as a result was a part of the negotiations that led to the Treaty of Versailles. He realized the terms were not realistic, and, in a burst of anger and acerbic wit, immediately dashed off (in about a week) a little book entitled The Economic Consequences of the Peace in 1919. He predicted hyperinflation in Germany and the rise of a radical movement that would lead to another and even larger war. Not surprisingly, world leaders followed his advice in dealing with Japan and Germany after World War II, thus setting the stage for the most remarkable period of growth in human history. Among many other things, Keynes was the inspiration for the Marshall Plan.
As another example, he attended the 1944 Bretton Woods Conference in picturesque New Hampshire just a short while before he died. It was at this historic meeting that the global monetary system for the post-World War II era was established. Keynes liked most of what occurred, but felt that pegging the value of the dollar to gold could not be sustained more than about a quarter century. Twenty-six years later, President Nixon floated the dollar.
In between these two startling insights came his most amazing and lasting contribution. In 1936, in the midst of the Great Depression, he published The General Theory of Employment, Interest, and Money. In the 1980s, it became popular to associate this book and its author with the notion that all government spending was good and markets were bad. Nothing could be further from the truth. In fact, even during his lifetime, his followers and popularizers had so distorted his original concepts that he felt led to declare that “I am not a Keynesian.”
In point of fact, Keynes loved markets. He recognized they were not perfect, but reveled in their possibilities. During a five-year period when the British stock markets lost 15%, a trust that he managed grew by 500%. He amassed a personal fortune by engaging in currency trading for a few minutes each morning while still in bed. His basic message in General Theory was quite simple. Capitalism in the “real world” can get into a “liquidity trap” in which fear and lack of trust can stall economic activity no matter how low interest rates go (sound familiar?). When that happens, government needs to step in and stimulate activity. That’s it!!!
He even went so far as to say that infrastructure spending would be a good thing, but even if you just buried money in jars and let people dig it up, it beats nothing. The point was to get things moving immediately, because, while markets might eventually get there, “In the long run, we are all dead.” He further suggested that we should use some of the revenue generated by the subsequent expansion to pay down the debt, a fact which has been completely forgotten in the efforts to make him the whipping boy of limited-government advocates and the scapegoat for every hair-brained scheme to spend public money that somebody suggests.
In our current cataclysm, many leaders of all philosophical persuasions are coming around to the notion that we have no realistic choice but to provide a strong “Keynesian” stimulus. It is more than a little ironic, however, that a few loud voices have labeled the current efforts as “socialism.” First, during the 1930s when the horrific global plight of workers (one of every four with no job) might logically have led to precisely the type of uprising and socialist revolution that Karl Marx described, it was the sheer power of Lord Keynes’ vision that beat back this tendency. Second, his impact on leaders around the world (including Franklin Roosevelt) set the stage for a dramatic rebirth of economic self-determination. In fact, a few years ago, when Time magazine was assessing the monumental achievements of the previous millennium, it was noted that Keynes’ simple suggestion that governments should deficit spend in time of crisis “saved capitalism.”
We are now in the season when people of many faiths pause to take stock of their blessings. Even in this time of seeming crisis, there are many. One of our greatest is that we have the benefit of the wisdom of this self-proclaimed “academic scribbler” to guide us toward the next round of prosperity and progress. Happy Holidays!!
posted @ 07:45 AM CST [link]
Friday, December 19, 2008
The Rest of the Story
There is plenty of gloom and doom in the economic news these days, and more than a few mixed messages, misunderstandings, and mangled missives. Predictably, some groups are now contending that the whole thing never happened and is just an attempt to take care of fat cats (that is wrong). Others say that it is a dire situation and that it will take years to recover (that is equally wrong). Still others say that if we ignore it and don’t do anything, markets will solve everything (that is probably accurate, but irrelevant—unless you’re patient enough to wait until we suffer mightily and unnecessarily through more pain than you can imagine).
In the midst of all of the hysteria, a major piece of good news has surfaced and gone almost unnoticed. When the US Treasury went to borrow money a week or so ago, the short-term notes carried an interest rate of virtually zero. The final average was around 0.1%, with a few trades even at negative levels. That’s right! Sophisticated investors literally paid for the privilege of providing money to the government. Even securities of longer maturity were sold at historically low interest rates, with people lined up in a frenzy to buy them.
As an aside, zero interest rates seem to be getting popular these days, with the latest Federal Reserve actions essentially making “free money” available to banks. This move will obviously lower the cost of funds, but is unlikely to stimulate a lot of short-term lending. Interest rate policy can do many things, but it can’t force people to borrow. When the turnaround occurs, the low rates will help it to gain momentum and accelerate. The rate cut was good policy under the circumstances, but is not an immediate fix.
Getting back to the Treasury auction, the financial media reported it extensively and cited it as further evidence of the credit malaise. While that is certainly one aspect of the issue, it completely misses the critically important “rest of the story.”
If you stop and think about it, this situation is truly remarkable. The US has poured hundreds of billions of dollars into credit markets, all of it “printed” rather than raised through taxation. While the nation is staring a trillion-dollar-plus deficit in the face during the next fiscal year, it is also implementing stimulus programs and rescue packages at an unprecedented pace. Much of the world is upset (justifiably) with the US policies that allowed the financial fiasco to occur. Others are mad at the US for myriad other political and economic reasons.
Yet, in the midst of all of this turmoil, smart folks all around the planet are practically trampling over one another to buy US debt. They are essentially giving us the money to use with little or no return on their investments. We are borrowing far more than we ever have before, and people are scrambling for more.
What does this phenomenon mean? Simply stated, despite everything that is going on, the global community craves US debt. It remains the “definition” of a risk-free asset. No matter how our recent debacle is perceived, market participants of all stripes have absolute and unwavering confidence in the capacity of the US to honor its obligations. This pattern in interest rates is an affirmation of the strength and stability of our political system and the basic soundness of our economic institutions. It is also a universal recognition of our long-term economic viability and potential.
In short, the entire world has assured us in no uncertain terms that we will weather the current storm and come through it with a healthy and viable business complex. I am not in any way saying that we are done with this mess. We are in for a few more months of dismal headlines, disappointing statistics, and genuine hardship for millions. We also have a few more rounds of never-before-seen policies and will have a day of reckoning down the road with the amount of debt we are accumulating. I am saying, however, that we have witnessed an extraordinary and completely unintended expression of the very factors that will get us through these trying times. And now you know “the rest of the story!”
posted @ 07:55 AM CST [link]
Friday, December 12, 2008
Employment
The roll call of businesses announcing job cuts is continuing along its grim path, now set to enter its second year. Over the past 11 months, almost 2 million have seen their paychecks dry up. The lion’s share of these losses has happened just in the past three months, with more than 500,000 in November alone. While the pink slips have been passed out mainly in larger companies, many smaller businesses have also slashed their payrolls, and it appears that the difficulties will continue for some time.
As a result, workers in many states are not only facing a loss of income, but also future challenges with pensions, health care, and other services. In addition, there are fears among most of those with jobs that if the labor market continues to deteriorate, salary levels could be bid down with so many out of work.
The November employment loss of 533,000, the largest monthly decrease since the December 1974 drop of 602,000, saw shrinkage in practically every part of the economy from factories to retailers. While construction and manufacturing continued to suffer severe losses, the vast majority of the layoffs (370,000) were in services-related sectors (not overly surprising since these industries account for upwards of 85% of the US economy). Only education, health care, and government were spared.
While some states are experiencing greater job losses than others, the employment drain continues to widen. In August, just 18 states reported monthly losses, but by September, the number had risen to 41, along with the District of Columbia.
It should be noted that even in boom times, job losses are inevitable as new technology eliminates some positions and creates others. From 1993 to 2002, there were some 327.7 million private-sector jobs created while various changes forced the elimination of approximately 309.9 million. The goal, of course, is to have a greater number of net new workers while assuring that those displaced have reasonable access to emerging opportunities. Today, the dramatic job losses are exceeding new employment opportunities, and job openings have been trending downward for about a year.
Although the job market has always been a major factor in assessing the health of the nation’s economy, the current slide is fast emerging as a generator of economic distress, because the loss of employment impacts so many other areas of our lives.
Some 7-10% of mortgage holders are at least one month behind in payment and up to 3% are in foreclosure proceedings, though government actions may delay this process in some cases. Moreover, housing prices are still falling in most parts of the country, particularly in California and Florida, which also have been hit hard by unemployment.
Industrial production, which is a vital factor in the overall output of the nation’s economy, has been highly volatile over the past year. Recently, it has been showing signs of stress typical of a recession and suffering a decline.
The economic difficulties we are experiencing are prompting a plethora of suggested solutions including stimulus packages, government workforce activities, and a reduction of the Federal Reserve short-term interest rate target. None of these band-aids are expected to be the end-all which will immediately lift our economy out of the doldrums, but each of them will probably have some positive effect.
Although the Lone Star State has been fortunate during this dramatic downturn due to its relatively healthy economy, as the national situation continues to plummet, it is likely that Texas could experience some slowing. In fact, we are already seeing tell-tale signs. Even so, the state should dodge the worst of the problems and lead the way into recovery.
posted @ 08:05 AM CST [link]
Friday, December 5, 2008
Trying Times
In December 1776, one of America’s most vocal and articulate founding fathers, Thomas Paine, penned in his essay entitled The Crisis this sentence, “These are the times that try men’s souls.” The American Revolution was in its early phase and the situation facing the people at that time was certainly considered grave by any definition.
While the situation these days is nowhere near as challenging as the one in 1776, Paine’s words nonetheless strike a chord, especially since this week the National Bureau of Economic Research (NBER) declared that the nation was in the midst of a recession that began in December 2007. The announcement undoubtedly confirmed what many Americans have lately been experiencing in their everyday lives.
The word “recession,” of course, differs in definition among economists, media, and the general public. However, traditionally, a recession has been defined as two consecutive quarters of negative growth in gross domestic product (GDP). The common usage of the term denotes a contraction phase or period of time where economic activity is reduced, not just slowing in the rate of expansion. By that definition, we are not there yet, and never got there in the so-called 2001 recession. Nonetheless, we are likely in the midst of our second quarter of decline, and the feeling among consumers and investors is undeniable.
The NBER, a leading nonprofit research organization created in 1920, characterizes a recession as a significant decline in economic activity which is spread across the economy and which lasts several months. The NBER cites as evidence of its declaration of the current recession the slippages the nation has faced over the past 12 months in GDP along with decreases in employment, real personal income, industrial production, and wholesale-retail sales. The length of the downturn noted by NBER means that the financial difficulty the nation is currently facing is already longer than the average of the myriad economic dips since the mid-1940s. While the peak in employment occurred in December 2007, it is not at all clear that it would have been designated by NBER as the beginning of a recession if it were not for subsequent events. It is not exactly like the future is causing the past, but there are some similarities.
The NBER includes prominent economists from various facets of the business world, research programs, and major colleges and universities. Through the years, the organization has focused its studies on numerous issues facing our society. Their operations concentrate on empirical research, statistical measurements, economic behavior models, and the effects of public policies. This illustrious pedigree is why any pronouncements from the organization are viewed as one of the major indicators of the state of the economy.
There are no reliable predictors of a recession, but frequently a significant drop in the stock market has preceded the beginning of a substantial decrease in business activity. However, approximately half of the time since 1946 when the market has dipped more than 10%, there has been no recession. On the other hand, about 50% of major market drops have occurred after a recession has already begun.
While there has been some fear and many media reports that the economic crisis we are now facing is the worst since the Great Depression of the 1930s, there is really no comparison. That depression was worldwide and lasted some 12 years. It was ended only by the numerous business and manufacturing activities related to World War II. Additionally during the Great Depression, around a third of the nation’s banks failed and the market dropped approximately 90%. Moreover, over that period, the GDP fell by about one third.
Another important consideration in trying to compare the current situation with the 1930s and early 1940s is that in that timeframe, policy makers essentially allowed the financial system to collapse before they started trying to fix the problem, and the Federal Reserve did little to help the thousands of banks that failed.
Today, of course, different government entities have taken broad and bold pro-active steps to stop the drift and heal the wounds around the world. Their actions are well known and vary from stimulus plans to special rescue packages. Moreover, new programs are being developed to upright the tilting financial system. The level of success of each of these endeavors will be different, but the facts that steps are continually being taken to rectify the situation and the current and incoming administration are in agreement that much more needs to be accomplished bodes well for future positive results.
posted @ 07:36 AM CST [link]