Greenspan comments of a flexible economic system is, in my opinion, an ideal case. I'm amazed at Greenspan's admiration of Adam Smith's “Wealth of Nations”. (Here's the link ) The biggest problem with Smith's works is that he makes no reference to “Third World or Developing Countries”. This is his view of Colonies:
“The colony of a civilised nation which takes possession either of a waste country, or of one so thinly inhabited that the natives easily give place to the new settlers, advances more rapidly to wealth and greatness than any other human society.
The colonists carry out with them a knowledge of agriculture and of other useful arts superior to what can grow up of its own accord in the course of many centuries among savage and barbarous nations....”
The world is different now. Greenspan's ideal economic system is just as utopic of Owen, Marx and the Fabian socialists. This is a shame because a free market has no business being involved with China's Communist government and its command economy. Greenspan's view on China is in direct conflict with his views on a flexible economic system.
Greenspan has stated that the US economy is on a firm foundation, however, his concern with the housing market is a sign that there is a problem. Katrina has shown, in my opinion, the weakness of the incomes of US consumers. The sharp rise in energy prices is just the tip of the economic iceberg the US economic ship is heading toward. The global financial system is under stress, due mainly to China's command economy. The global market needs clear price signals to re-allocate its resources to meet the needs of the US. A very large dollar amount of investments must flow into the US to rebuild the Gulf coast. China is a investment “Black Hole”. The global financial community have no real ideal of what is happening to “their” investments.
Greenspan, White House economist and others have stated that there is no national housing bubble. It is possible to have a “sink hole” or economic shocks that “liquefies the ground” on which the US's economic foundation is on. This “sink hole” is the result of problems with the global financial plumbing. Its nature is the fact that portfolios are stress tested for interest rates, but not for connections that are part of the plumbing.
Example: Fannie Mae and Freddie Mac's accounting problems can lead to a reduction of home values in the secondary mortgage market. This in turn can shut off some of the financial instruments used to finance a mortgage. This in turn will lead to a reduction of housing activity, in areas that depended on them. Which in turn will be reflected in the housing data. Which in turn will result in a hesitation of capital spending. Which will result in a reduction of GDP. Which will go on and on....
The banking and hedge fund world needs to understand that part of the US “Banking” industry was wiped out by Katrina and Rita. The part of the US “Banking” industry I'm referring to are home values. A region's value has been destroyed and it is up to the US government to bail that region out. Sort of a FDIC for the landowners. Let's face it, the insurance industry is NOT going to pay for the water damage. This is a good time for the coastal regions to set up a catastrophic insurance funds because the rest of us will not bail them out the next time a hurricane comes. Technically, the cost of insurance should drive some home owners out of the region.
The spike in energy cost will force the true nature of some of the economic statics out in the open. Wages and incomes are not what they seem. The US economy is being forced down a path of serfdom and feudal lords. If you do not own a home, you are disfranchised by the White House and others. Rowing back wages only reinforces my concept of the link between US government deficit and the trade deficit (see my blog: Neoclassic Theory of Production). The source of the US's protection against inflation is also the source of the rapid unraveling of our income. As the current account deficit goes up, income must come down. One only needs to look at the auto, airline and now the survivors of New Orleans and other coastal regions to prove it. Bush repealed the prevailing wage law.
Greenspan is right that a flexible economic system will allow the global economy to expand, however, this expansion is at the cost of the US economy which is currently being flushed down the toilet.
I agree that energy prices will spike this coming winter, however, I'm not in agreement to the percent. Consumers will begin the substitute phase during the winter. My mom and sister bought electric space heaters (on my advise) not because I believe that their will be shortages of natural gas, but because the cost per BTU between electricity and nature gas will narrow and it will become cheaper to heat by electricity rather than natural gas. A period of sun, space heater and lower than average furnace usage will, I think, average out to a lower cost than sun and furnace use and still maintain a comfort level. My what a year can do to prices. (if any body agrees with this, I suggest that they part with their money now before a shortage of space heaters become evident)
The only way out of the “rebuilding of New Orleans and who's going to pay for it” peril (sinking of the US economic ship type peril) is to go into deficit spending. This is the “good” type of spending. It will be a direct shot into the local economies and in fact will prevent the US “Banking” (home values) industry from collapsing, aka 1929 ish.
As a side note to those who believe that the refining capacity problem is due to environmentalist, I have a few words: I went to Roosevelt High School in East Chicago, Indiana (look at the Indiana map). Down pass a one and a half block wide city park and across a barge canal (that had a history of catching on fire (the canal)) was a refinery. It is a wounder that I know how to use this blog, because of the smell one gets on a light, breezy day. Environmentalist are right on this issue.
Thursday, September 29, 2005
Wednesday, September 07, 2005
Federal Reserve and Monetary Policy: Katrina and the Fed
The editorial staff at the Wall Street Journal should be “boiled in oil”. Painting the economic landscape with a “very wide gouging” brush just shows what a bunch of amateurs they are. The price signal gouging sends has different meanings depending on whether the product and/or service is elastic or inelastic. The very definition of elastic, in the economic world, means that it is easy for consumers to substitute product B for product A if product A's price is too high. Gouging with respect to elastic items is, in general, a test of price.
It becomes difficult to gage whether gouging sends the correct sign with respect to an inelastic item. One must know the distribution of the items uses. Example: The current housing boom has force the consumers to look for affordable housing outside cities. If there is a large percent of those who drive, live in the large metropolitan areas then the demand for gas is very inelastic (with respect to that group). Consumers' behavior is also effected by duration.
It also become necessary to determine if the consumer has the ability to switch from car A to car B. Buying a new/used econo-box may not be an option. In this case, demand can not decrease. It is better, in the long run, to have prices trend up. This price signal gives consumers time to make the adjustment. The Federal Reserve's Beige Book is indicating consumers are changing their spending behavior.
The current gas situation is not a long term event. The price signs have gone out and laws have been changed to allow the reallocation of global resources to proceed. The US of A imports about 40% of its oil now. Price gouging, with respect to refined petroleum products, sends the wrong signal. There is no global shortage.
I think Wall Street Journal's editorial staff is trying to proect the oil companies. The oil comapnies need no protection. I also think the staff do not give enough credit to the people of the US. We do not need propaganda to car pool. An empty wallet is all the signal that is needed.
Note the use of “GLOBAL”. The US of A is in a global economy, whether people like it or not. The global economy needs the unhindered flow of BOTH currency and INFORMATION. The information that there was a disruption of refined products in the US of A was all the global market needed to begin the process of reallocation global resources. The information the Federal Reserve's Open Market Committee needs to make a decision on short term interest rate is being transmitted by the price action of US Treasuries, the U$ Dollar and the fact that corporate bonds have not tanked.
Long term bonds are signaling that in inflation and inflationary expectations are contained (in the US of A). The dollar has held up. It is signaling the dismay of the global financial market that the US's current account is going to be somewhat of a problem, however, the current trend and sentiment of the dollar index is indicating that there is inflation and inflationary expectations globally. The Fed needs to watch the primary brokers. The watch words are “availability of credit” and “credit quality” (credit is a important as the M2 money supply).
Katrina is an event that can expose the weakness of the Employment Situation Report. If this report has flaws, which is my opinion, Katrina's aftermath will expose these flaws. If Katrina's effect blows through the Credit Derivatives Market and or Hedge Funds World, then the US economy is in big trouble. The housing boom was responsible for 50% of GDP this and last year. The Credit Derivatives Market and Hedge Funds World are the place were credit issuers protect them self. These markets are also the place were airline hedge their fuel cost. In general, these markets are use by companies to hedge their cost. There may not be a Long Term Capital operating, however, there can be many hedge fund companies that can get into trouble and add up to a Long Term Capital problem.
It becomes difficult to gage whether gouging sends the correct sign with respect to an inelastic item. One must know the distribution of the items uses. Example: The current housing boom has force the consumers to look for affordable housing outside cities. If there is a large percent of those who drive, live in the large metropolitan areas then the demand for gas is very inelastic (with respect to that group). Consumers' behavior is also effected by duration.
It also become necessary to determine if the consumer has the ability to switch from car A to car B. Buying a new/used econo-box may not be an option. In this case, demand can not decrease. It is better, in the long run, to have prices trend up. This price signal gives consumers time to make the adjustment. The Federal Reserve's Beige Book is indicating consumers are changing their spending behavior.
The current gas situation is not a long term event. The price signs have gone out and laws have been changed to allow the reallocation of global resources to proceed. The US of A imports about 40% of its oil now. Price gouging, with respect to refined petroleum products, sends the wrong signal. There is no global shortage.
I think Wall Street Journal's editorial staff is trying to proect the oil companies. The oil comapnies need no protection. I also think the staff do not give enough credit to the people of the US. We do not need propaganda to car pool. An empty wallet is all the signal that is needed.
Note the use of “GLOBAL”. The US of A is in a global economy, whether people like it or not. The global economy needs the unhindered flow of BOTH currency and INFORMATION. The information that there was a disruption of refined products in the US of A was all the global market needed to begin the process of reallocation global resources. The information the Federal Reserve's Open Market Committee needs to make a decision on short term interest rate is being transmitted by the price action of US Treasuries, the U$ Dollar and the fact that corporate bonds have not tanked.
Long term bonds are signaling that in inflation and inflationary expectations are contained (in the US of A). The dollar has held up. It is signaling the dismay of the global financial market that the US's current account is going to be somewhat of a problem, however, the current trend and sentiment of the dollar index is indicating that there is inflation and inflationary expectations globally. The Fed needs to watch the primary brokers. The watch words are “availability of credit” and “credit quality” (credit is a important as the M2 money supply).
Katrina is an event that can expose the weakness of the Employment Situation Report. If this report has flaws, which is my opinion, Katrina's aftermath will expose these flaws. If Katrina's effect blows through the Credit Derivatives Market and or Hedge Funds World, then the US economy is in big trouble. The housing boom was responsible for 50% of GDP this and last year. The Credit Derivatives Market and Hedge Funds World are the place were credit issuers protect them self. These markets are also the place were airline hedge their fuel cost. In general, these markets are use by companies to hedge their cost. There may not be a Long Term Capital operating, however, there can be many hedge fund companies that can get into trouble and add up to a Long Term Capital problem.
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