Greenspan's testimony on Captial Hill was as I feared.
It is a conflict of interest. Here's the link:
Greenspan's Testimony Future of the Social Security program and economics of retirementHis reason for private accounts is to get the surplus out of the hands of Congress is not a sufficient condition to change the “life-line”. Doubly so, when it will not fix the problem.
Senator Hillary Clinton's exchange was pretty much right on.
Here's my opinion as to the state of the economy:
Ahh yes, the debate between Bulls and Bears. In this highly charged political season, it is no wounder there is no real consensuses on whether the equity or the bond market is right. If the “BULL” is from the equity market, then one can predict that the probability of his or her opinion is a “marketing scheme”, is high. It is to push Bush's agenda, particular Social Security and tax reform.
Let's make the assumption that the recent release of Personal Income and GDP are being used by the “BULLS” as a bases for their argument that the US economy is running on all cylinders. Also, the “BULLS” point to a strong housing market as more evidence that the US economy is strong. One can see the validity of this usage. It is most certain that their non-institutional clients are individuals that own Micro$oft and other types of incomes.
Is there a housing bubble? The answer to this question really depends on consumers' incomes. In general, wages and salaries.
First let's look at GDP. 3.8% increase is okay, but one needs to look at the possible mechanism for this increase. I think it was because of 2 rare events, the 4 hurricanes slamming into a density populated region of the country and the $35 billion Micro$oft dividend payout. These 2 events only added $140.2 billion dollars into economy. In other words, houses had to be repaired and replaced, toys and cloths had to be replaced, boats had to be repaired and replaced, infrastructure had to be repaired. All of these actions plus a lot more percolates through out the economy. See links: Effects of the Third-Quarter Hurricanes on Income Measures
and Microsoft's Special Dividend
One needs to look at disposable incomes. See link: Gross Domestic Product
Table 10's wages and salary and disposable incomes
difference between 2003 – 2002 was 332.2
difference between 2004 to 2003 was 468.1
468.1 – 332.2 = 135.9
considering the trillions of dollars pumped into the economy by tax breaks, US government's deficit spending and the Fed's open market action, this number is very poor. This begs to ask the question: “Do we need 4 more hurricanes to make Wall Street's expectations”?
We still have yet to hear from the IRS and its aggregate income numbers.
Evidence Number1:
No evidence of strong income growth to match the increase in housing prices. This is very important because the authors pointed this out in their paper: Are Home Prices the Next Bubble?
This alternative affordability ratio thus suggests that astandard single-family home still remains quite affordablefrom a cash flow standpoint, even though home prices haveincreased rapidly in recent years. This in turn implies thathome prices have risen in line with declines in mortgageinterest rates and increases in median family income. Both of these conclusions argue against the existence of a homeprice bubble.
And
Looking forward, we note that one concern prompted by this recent rise in equilibrium home prices is the effect of anincrease in interest rates. However, we believe that higherinterest rates would not necessarily lead to a large decline inequilibrium home prices. In the current environment, rising rates probably would result from stronger employment and income growth. Therefore, while the contribution from user costs would be negative, the economic-strength contributionwould counteract it.
This implies that disposable incomes need to be high enough to offset any price shocks from other parts of the economy.
Evidence 2:
A representative of the Real-estate group made a comment that in the high price housing market, one needs to move further away. The US does not have a very good public transportation system. This implies that those consumers, who do not have a large income and still own their own homes, needs to spend more on transportation. This implies that high prices at the pump have already bit into that small disposable income.
Evidence 3:
The above paper cited that it is low interest rates that is driving the “speculation” in the housing sector. If you remove the “second” and “luxury” market, then this “speculation” can be a problem considering the comment made by a real-estate agent; “home owners are leverage to the hilt”.
My answer:
If the yield curve starts to steepen, as Greenspan expects, and if GSEs have to reduce their lending activities then a Bubble will form.
The housing bubble during the periods 1975 – 1980 and 1984 – 1990 have different characteristics. Saving rates were higher during these periods. See BEA's interactive site at: NIPA Line 34; Personal Savings as a percent of Disposable Income.
I went from 1975 to 2004 on table 2.1.
I average the numbers.
1975 to 1980: 9.42%
1984 to 1990: 8.06%
1996 to 2000: 3.32%
2001 to 2004: 1.55%
Net Goods and Services line 13 from table 1.1.5 GDP from BEA site.
Minus is my indication of a deficit.
(Net Goods and Services) / GDP x 100%
1975 to 1980: -69.8 / 13142 x 100% = -0.53% of GDP
1984 to 1990: -669.7 / 29813.9 x 100% = -2.29% of GDP
1996 to 2000: - 997.7/ 43953.6 x 100% = -2.27%
2001 to 2004: - 1899 / 43347 x 100% = -4.38%
Take a look at BLS's Labor Productivity numbers for the time period 1987 to 2002 at Federal Reserve Industry Production Numbers.
BLS's Labor Productivity and the Fed's Industrial Production numbers indicate high labor cost during the first 2 bubbles.
One can imagine their marketing scheme, I mean their argument, to borrow huge sums of money (~$2 trillion) and set up private accounts, is going to help out SS in the long run. It is a belief that Bush has a one year time window to get his SS overhaul through Congress. A rising equity market can be an effective “product placement”.
I say that this is a major negative impression of US's economic stability. The equity market has a supply and demand issue. What better way to prop up the equity market than with a multi-billion dollar shot in the arm. In other words, increase the demand WITH NO REGARDS TO THE UNDERLYING ECONOMIC FUNDAMETALS AND WITH NO KNOWLEGDE OF MARKET MECHANISMS. All it takes is one bad day in the derrivates market to make a good “feeling” go bad. Middle class and the working poor can not afford any bad days.
There is the question of a Guaranty Minimum Return on Investments. This concept fits in nicely Corporate America's agenda. Make everything a “Federal Case”. Can not have States AG's, like Spitzer, going after senior management, who are only trying to make a dishonest buck. One can also imagine that in the future, Congress and the American public would want the President of the US to run interference in the equity market to save the multi-trillion dollar investment.In short the BULLS are talking up the supply and demand of equities.
Let's take one more look at the Personal Income release. The most important part of this number is wages. See link: Update Summary of NIPA Methodologies. Compensation of Employees (pg6).
BLS has a statistical analysis part. At least they try to compensate their data, but judgment trends, come on, who are they kidding? (Whoops, apparently their rich clients)
The Personal Income lacks a distribution analysis. The only thing one can say about the data is that some people have other types of incomes while others do not. This report is not detailed enough to postulate the future direction of the US economy.
BEA tried to examined if outsourcing (their term, off shoring my term) is showing up in GDP. See link: Q and A on GDP and Outsourcing. They give a link to their latest study: Revisions, Rationality and Turning Points in GDP.
Two paragraphs that caught my eye.
Percent changes in the money supply, either M1 or M2, provide measures of whether monetary policy is expansionary or contractionary. The unemployment rate proxies for either monetary or fiscal policy incentives. The 10-year Treasury bond interest rate, the 90-day Treasury bill interest rate, and change in the spread between the two also portray monetary policies. In particular, the change in the spread between the two interest rates is a rough measure of yield curve changes; a narrowing spread is consistent with a loosening monetary policy, and conversely for an increasing spread.
Short term rate are increasing while long term rates are flat, in other words the spread is narrowing. This is happening at a time of a tight monetary policy. No wounder Greenspan said that the yield curve is a conundrum. The above paragraph is a contraindication to BEA's claim;
“The most recent reliability study found (as have previous studies) that the early estimates of GDP present a useful picture of economic activity. ... In addition, the latest study found that the average revisions to GDP are small and positive, indicated a tendency toward upward revisions, and found that the GDI estimates have not contained information that would have improved the prediction of future revisions to GDP growth.“
Excerpt 2:
However, the change in the spread between the 10-year Treasury bond interest rate and the 90- day Treasury bill interest rate is significant and has a positive coefficient (equation 5.12).14 As noted above, this is consistent with upward revisions in GDP estimates at times when short-term interest rates–which are controllable by the Federal Reserve–are declining relative to long-term interest rates, and conversely.
Hence, Off shoring (outsourcing) has a big effect on GDP because it is effecting the expected change of the yield curve (my opinion). (QED).
Everybody from Wall Street to Washington DC points to a “MARGINAL” piece of data from which job numbers and wages are picked out of. I remember the time when Wall Street and Washington DC. said that there was no problems at Saving and Loans institutions. There are time you just can not trust these people.
I think that the “Global Market” is focused on the debt burden relative to disposable income of the consumer. There is nothing the Fed can do to stop a recession in the US. Central banks dumping dollars is NOT going to happen. However, I do believe that the lack of a strong future position in US assets will drive up interest rates.
Possible scenarios:
The spread between the long and short end will narrow if central banks recycle their dollars to prop-up their importers. This action will only keep the long end of the bond market from increasing, in yield, while the short end of the bond market goes up due to Federal Reserve raising short term interest rate. The result is high borrowing cost.
Both the long and short term bond market goes up in tandem. Again, this will increase borrowing cost.
The currency market is not concerned with the gap between consumers incomes and consumers spending, they are concerned with the gap between consumers spending and output. This output is being fed by another source of investment, the consumers use of their homes as a source of investing dollars. Wall Street is showing that they do not have a clue to reality. Import prices, and Producers' Prices will continue to increase with no pass thru to the consumer. This will result in corporations needing cut cost. Slow to no hiring. Europe is in a economic funk. There will be no increase in US exports to offset imports. There is a global economic slow down in progress. Global risk appetite will come down to a point were the US economy will also slow down. High oil prices will only accelerate the pace.
It is a possibility that in the near future the Federal Reserve may come out with a statement encompassing the following: "Risk is balanced between inflation and deflation". I'm going to coin a new phase and show that it is possible that the US economy can go into a deflationary period.
Economic Engineering Systems
When a physics is faced with a "many body" problem, he/she will often recast the problem into a "one body " and a "field". In my opinion, macro-economic theory is too granular and isolated than the current real world. Recasting economic theory into an engineering system allows the reinterpretation of such concepts as "Supply and Demand".
Transportation cost are low and the advent of the "Information Superhighway" has expanded, currently, the "tradable" sectors at the expense of the "non-tradable" sectors. National Banking and Government Sponsor Entities have connected the once isolated regions of the US. A problem in one region can now blow thru the "back door" and effect other regions. Fannie Mae and the Pension Guaranty Corporation has already shown this weakness. Economic Engineering Systems is my attempt to recast the complexity of the "Global" economy into a form that does not depend on the details of one sector or region, but the connection. Concentrating on the connection allows the use of such mathematic tools such as topology, etc...
Failure of a complex system often have characteristics. The probability of one component failing is low. However, under certain circumstances, more than one component can fail, leading to a cascade failure of the system. Another characteristic of a complex system's failure is that it will do so during a "transition".
Apply My "Simple Engineering Model" to the US Economy
DATA AND SOME THEORY
The Net Birth and Death Model used by the BLS has a problem.
Let's look at the the Employment situation report. Specifically. look at Household's table A-10, Unemployed by duration. See interactive link: Household Data and CES Net Birth/Death Model
Excerpt
The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend. BLS will continue researching alternative model-based techniques for the net birth/death component; it is likely to remain as the most problematic part of the estimation process.
Chapter 2. Employment, Hours, and Earnings from the Establishment Survey
and
Table 2-B shows the net birth/death model figures for the post-benchmark period of April 2003 to October 2003.
“ Seven models are tested, and the model exhibiting the lowest average forecast error is selected for each series”. This one statement castes a shadow over the “off-shoring of jobs is good for America”. This is were reality and theory collides. Reality states that if your competitor off-shores to cut cost, so must you.
As for all the “cow patties” about off-shoring is only 4% of total layoff, the following should make one re-think their position.
The following was an e-mail I recieved to an inquiry as to the status of temp workers and Mass Layoff Statistics.
"The Mass Layoff Statistics (MLS) program is concerned with layoffs and plant closings that involve at least 50 workers. Mass layoff monthly data series are based only on administrative statistics (weekly filings for unemployment insurance) and are without regard to duration of the layoff. These data are available from April 1995 through May 2004. A mass layoff event in the monthly series is defined as 50 or more initial claims for unemployment insurance benefits filed against the same establishment during a consecutive 5-week period.
Our extended mass layoff data series are the result of employer contact to confirm the existence of a layoff which lasted more than 30 days. An extended mass layoff event occurs when 50 or more workers file initial claims for unemployment insurance benefits against the same establishment during a consecutive 5-week period, with at least 50 workers separated for more than 30 days. The extended mass layoff data are available from the 2nd quarter 1995-1st quarter 2004.
In the MLS program, all questions asked of the employer pertain to the employees paid by the company experiencing the layoff and exclude employees paid by contractors. Therefore, the answer to your specific question: workers from temporary help service firms working onsite at companies that subsequently move work to another company are not included in the separation counts associated with the movement of work.
Please do hesitate to contact me if you have any further questions.
Patrick Carey
Economist
202/691-6414
carey_p@bls.gov
Wages have a statistical analysis problem. See links: County Employment and Wages Technical Note and Handbook Contents Chapter 2.
The basic problem boils down to the employment numbers. If they can not get the right established data, then they can not get the right wage number. There is way to determine if the Employment Situation report is accurate. A currency reporter said that the sampling error is about +- 100, 000. I believe that is -100, 000 or more.
There are 2 benchmark corrections:
1) The March 2004 benchmark level for total non-farm employment is 130,019,000. This figure is 203,000 above the NAICS sample-based estimate for March 2004, an adjustment of 0.2 percent.
2) The net birth/death model figures for the super-sectors over the post-benchmark period. From April 2004 to December 2004, the cumulative net birth/death model added 827,000, compared with 889,000 in the previously published April to December estimates.
See links:
Benchmark Article,
Benchmark Tables.
Also see the following link:
Demand Deposits at Commercial Banks. Demand Deposits peaked around the 1996 period.
Are Home Prices the Next Bubble?
It is my opinion that after the 1996 time frame consumers started to use their homes as a “Bank”. This is a another transition of state.
Excerpt:
We subscribe to the definition from Stiglitz (1990): If the reason the price is high today is only because investors believe that the selling price will be high tomorrow—when “fundamental” factors do not seem to justify such a price—then a bubble exists (p. 13). Accordingly, the key features of a bubble are that the level of prices has been bid up beyond what is consistent with underlying fundamentals and that buyers of the asset do so with the expectation of future price increases.
A bubble will form if disposable income starts to decrease. See page 7's calculation of rent to price and look at the following footnotes in the Bubble.. paper: 29 (interest rates are increasing), 30 (what happens if one wage earner is laid off). Decrease of disposable income can come in the form of higher import prices, mainly oil and petrol-chemicals. Inflation due to U. S of A’s consumption in the form of a weak dollar and of higher energy cost.. It can also come from other countries, like China, biding up commodities; basic metals like copper to finished products like steel. During the dot COM bubble the underlying economic fundamentals were great.
What Changed? The Impact of Exchange Rate Movements on U.S. Foreign Debt
January 2003 Volume 9, Number 1JEL classification: F31, F36, F32
In 2001, the United States' net debt to the rest of the world jumped to $2.3 trillion, a level double that recorded in 1999. Much of the increase reflects the new borrowing undertaken by the country to finance its mounting current account deficit. A third of the change, however, can be traced to a simple accounting effect—the impact of a rising dollar on the value of U.S. assets held abroad. See paper for details.
To What Extent Does Productivity Drive the Dollar?
August 2001 Volume 7, Number 8JEL classification: F31, F41
The continuing strength of the dollar has fueled interest in the relationship between productivity and exchange rates. An analysis of the link between the dollar's movements and productivity developments in the United States, Japan, and the euro area suggests that productivity can account for much of the change in the external value of the dollar over the past three decades.See paper for details.
Part of this paper: The Theory behind the Link
The impact of productivity gains on a currency’s value depends on the distribution of the gains across the "traded" and "nontraded" sectors of the economy. The traded sector is composed of those industries, such as manufacturing, that produce goods for export or goods that compete with foreign imports. The nontraded sector consists of industries—chiefly services—that produce solely for domestic markets from which foreign producers are absent. Price behavior differs markedly in the two sectors. In the traded sector, the price of goods is constrained by international competition: companies tend to keep their prices (in common-currency terms) fairly closely aligned with those of producers abroad so as not to lose customers to foreign rivals. By contrast, in the nontraded sector, where industries are not subject to competition goods prices tend to vary widely and independently across countries.Theoretical work has shown that productivity growth will lead to a real exchange rate appreciation only if it is concentrated in the traded sector of an economy. Productivity growth that has been equally strong in the traded and nontraded sectors will have no effect on the real exchange rate.The reasoning behind the theory is most easily grasped through an example. Suppose that the United States experiences faster productivity growth in the traded sector than in the nontraded sector, creating what we will call a positive sectoral productivity gap. The price of traded goods in the United States will not change, because—as we have seen—it is tied to that prevailing in world markets. The productivity gains in the traded sector will, however, lead to higher wages for workers in these industries. Wages will also rise in the nontraded sector, as employers there seek to retain their workers by offering salaries competitive with those in the traded sector. However, because the productivity gains, if any, in the nontraded sector are smaller than those in the traded sector, firms producing nontraded goods will be unable to absorb the wage increase fully and will be compelled to raise prices. With prices constant in the traded sector and rising in the nontraded sector, the overall U.S. price level will increase. Consequently, if the foreign price level is unchanged, the rise in domestic prices will translate into an appreciation of the dollar in real terms. Using similar reasoning, we conclude that a negative sectoral productivity gap—that is, slower productivity growth in the traded sector than in the nontraded sector—leads to a real depreciation of the dollar.
What this paper means to me is that as long as we have a positive sectoral productivity gap the US dollar should be stronger (relative bases). Yes, the global economy tanked in 2000-2001, however, the US’s economy was stronger relative to our trading partners and maintained that positive sectoral productivity gap. I do not believe that 9/11, nor any other terrorist attack, had a lasting impact (stock market recovered). As this paper points out, these events are sort term in nature. However, the dollar is weaker (relative bases). I think the reason for this is that the US is not “trading”. Some our “tradable” industries have gone offshore for cheaper labor and tax purposes. Labor is no longer needed.
One can speculate on the following:The US of A’s wage difference with respect to China and India is low and out of balanced. It is so out of balanced that floating the Yuan would not correct the wage difference. This has produced a negative sectoral productivity gap. Despite the US’s positive sectoral productivity gap with Europe and Japan, the dollar is still weak. Also, it looks like more gains were in health care, a non-tradable good. Again, this forces the dollar weaker. The weak dollar forces the US to pay higher commodity prices ( YIKES!!! PRICE SHOCKS!!! 1970‘s ALL OVER) and a higher current account.
Our tradable goods are physical stuff and any thing related to information. It’s interesting on what a few years can do to a theory. See paper for the particulars, but it is very upsetting that this paper says that the US’s increase in productivity should make the dollar stronger not weaker. If one looks at real wages then one can see the effects of non-tradable sectors. The majority of the jobs created during Bush’s term is of the low wage type. Economic conditions are worst because China, India and other low labor cost countries have the US’s productivity gains. Greenspan often makes the comment that there is excessive capacity in the market place. The FOMC often make the connection between any job creation to that of lower productivity gains in the US. This is a contradiction to the real world. China is "number one" in direct foreign investments. China is building capacity like there is no tomorrow. India has gained the lion share of technology jobs. Bangalore, India now has more tech workers than Silicon Valley. This rhetoric is part of the illusion. Currency traders see thru this baloney and sell the dollar. “The trend is your friend”.
You can combine both of these papers to make an argument that exporting jobs just for the benefit of labor cost upsets the theoretical assumptions behind current economic theories. The real bad news about all of this, is that current fiscal and monetary policies were made using some really bad theories.
“Trade in Goods Within Multinational Companies: Survey-Based Data and Findings for the United States of America”
I know it is old, but it was the most current article I could find.One can concentrate on two results. The first one is avoiding the “TAXMAN”.
Excerpt:
Clausing (2001) uses BEA’s annual data on the trade and other operations of U.S. multinational firms to investigate the extent to which tax-minimizing behavior influences intrafirm trade. Noting that multinational firms may be able to shift profits between countries by underpricing U.S. goods sold to affiliates in low-tax countries, and overpricing goods sold to the United States by affiliates in low-tax countries, she shows that tax considerations imply that U.S. intrafirm trade balances between U.S. parent companies and their foreign affiliates should be larger with affiliates in high-tax countries than with affiliates in low-tax countries. A measure of the intrafirm-trade balance with a given host country in a given year is regressed on the host country’s effective corporate tax rate and a number of control variables that would be expected to determine the trade balance. The results show a positive relation between the intrafirm trade balance and the effective tax rate, which supports the hypothesis of income shifting through transfer-price manipulation.Note the driving force behind this strategy is the low labor cost, not the tax rate.A second conclusion can be made by looking at two items in the US Intrafirm Exports and Imports of Goods, 1987 - 2000 (tables 1A and 1B).
The items I think that are the most important to US job growth are the columns labeled
| Exports from U.S. parent companies to their controlled affiliates abroad | Imports by U.S. parent companies from their controlled affiliates abroad |
|---|
| Year | $M | $M |
| 1987 | 65248 | 55867 |
| 1988 | 78204 | 65464 |
| 1989 | 86050 | 71281 |
| 1990 | 88375 | 7521 |
| 1991 | 95779 | 7758 |
| 1992 | 100737 | 83260 |
| 1993 | 10827 | 93205 |
| 1994 | 132394 | 107203 |
| 1995 | 147622 | 118359 |
| 1996 | 161359 | 133388 |
| 1997 | 185065 | 143841 |
| 1998 | 173431 | 149925 |
| 1999 | 158575 | 158958 |
| 2000 | 167646 | 172643 |
If one where to place the data in their favorite spreadsheet application and make a line graph, one would notice that around 1999 intrafirm imports exceeded intrafirm exports. It is my opinion that this inversion of imports over exports led to the recession of 2000. Businesses had no need to invest in the U. S. of A. A side effect of this import/export inversion was that disposable income did not go down, as one would expect. This inversion coupled with low interest rate kept the housing market alive. Disposable income was transferred into real estate value. A 25 bases point rise in the short-term rate by itself will not cause a market melt down. People with ARM’s will feel the impact, however, most people with ARM’s are in the housing market for the money. They are short-term duration occupants of the house.
If one uses the assumption that personal spending and investments are the same from 2000 to the present then it becomes possible that an interpretation of the M1 component Demand Deposits can forward. It shows the lack of savings, it also shows no income growth and I think it also shows that the majority of the jobs were of the low wage and no benefits type.
The airline sectors exposes, in my opinion, the errors of the BLS's wage and compensation calculations. This sector has a deflationary trend. I'm going to put my neck out and say that the trucking sector will go through the same shake up. Mexican truckers no longer have to stop at the border and transfer their load. They have lower labor cost, lower cost of trucks, lower cost of maintenance and lower cost due to EPA restrictions. Guess what? This trend is also deflationary.
Wall Street, at the time of the budget release, were re-enforcing each other on how this budget is going to fix the US budget deficit. They also pointed out that Greenspan said that the current account deficit is going to be fixed. Some of Wall Street elites even went as far as saying that the US economy is hot and the Federal Reserve is no long concerned about the current account deficit. He is the link: M3 Money Stock) to prevent a currency crises. No soup line.
However (this is a big HOWEVER), US homeowners use their homes as the “Bank”. Unlike a bank, with FDIC insurance, the homeowner is out of luck if the housing market softens. There is more than $11 trillion dollars of home loans out there. If the “Bank” folds, then there would be a crash that makes the 1929 crash pale in comparison.
I do not agree with the White House's OBM saying that reducing the government current account deficit will increase the savings rate. Look at line 34 from table 2.1 at BEA's site: Greenspan's Speech on the Current Account), I think there is enough evidence that indicates they have to.
See link: The General Theory of Employment, Interest, and Money
From Chapter 3.
excerpt
When employment increases, aggregate real income is increased. The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income.
One can assume that the Fed was concerned that the aggregate consumption has out paced incomes. The resulting difference was being made up by foreign investors. Let's go back to the “Legacy Airline” effect. It can be argued that the cost of fuel and lack of pricing pressure were the predominate forces in the union's agreement to take pay cuts. The lack of pricing is believed, by some, to be due to the residual effects of 9/11 and lack of business travelers. I say that this is a bunch of “Cow Patties”. All they had to do was to reduced capacity. I'm going to redo this “Legacy Airline” effect in another way.
When Corporate America off – shored its “LOW MRGIN” goods and services, they effectively stop “trading”. This placed their company in direct competition with 2 billion low wage labors of all types and education. The result of this was to instantly revalue their high “market value” equipment at a lower value. This new value was not set by the “rules” of competitive trade. This simple rule states that neither parties will lower their price below the other (except product dumping, etc...).
I'm going to take a very simple view from the following Chapter 6:
“since the income of the rest of the community is equal to the entrepreneur's factor” cost ...
and
“The amount paid out by the entrepreneur to the other factors of production in return for their services, which from their point of view is their income, we will call the factor cost of A”
Lowering the “market value” means that the entrepreneur is not willing to pay the price he/she was once willing. This lower factor cost means that the community has less to spend. Real income has been reduced. The new “market value” for a plane is lower that it was before off – shoring. Hence. The “Legacy Airline” effect is not due to the reasons Wall Streets says, but due to a lower real income. One can see that this is happening in corporate America like Global Crossing, Taco and IBM. This is one of the reasons why I believe that investments in the US is not maintaining “market value”.
The basic problem is that real income is falling and consumers are still spending. One can now ask were is this money coming from. Part of it comes from foreign investors. They are getting antsy because it is draining money out of their economies. The other part comes from consumers, specifiably, homeowners.
From Chapter 6:
Income = value of output = consumption + investment.
Saving = income - consumption.
Therefore saving = investment.
We know that Americas do not save, therefore the investment is coming from their home. Consumers buy an expensive home in the hopes that its value “will not go down” and then take out a Home Equity Line of Credit. The home generated wealth, therefore, it became a “bank”. If for some reason interest rates come down and their value of the home is not effected, they refinance. The home has again generated wealth. Homeowners get many offers of easy credit (can you guess were this is going?) Homes are not FDIC insured. If this drop in real income does not abate then a housing bubble will emerge “like a shark from under the waves”. Pop goes the housing bubble. The stock market crash 1929 is replaced by the housing bubbling popping. Easy credit to those who wanted to buy on margins is replaced by easy credit to those who what to buy on credit. Bank failures is replaced by homeowner bankruptcies. The Federal Reserve, at that time, raising interest rates is replaced by foreign investors fleeing (note: this is opposite of the result after the crash).
BushCo's plan for America is “Emptying out the heartland of America”. It's gist is to show that the major growth areas during BushCo's first 4 years was due to over development in major “interstate” corridors. Many economist agree that the strong housing sector is due to population migration in such areas as the North Eastern seaboard, Southern Cal and Southern Mid and Eastern states.
I'm not saying that this migration is another one of those cyclic patterns. However, I do suspect that BushCo's trade policies, I mean the lack of trade enforcement, is a major driving force to this current population migration. All one has to do is take a look at his budget proposal (framers are going to hit during this period of high oil prices).
I do believe that BushCo has used fast track authority to bypass Congress and effect his own brand of Foreign Policy (this is Congress's' fault). It doesn't take a rocket scientist to conclude this. My argument:
There is a business strategy in trade negotiations. This strategy is the following: I'm going to get the best deal at the expensive of the other party. If both parties use this strategy then the outcome of the trade negotiations is beneficial for all. This is a zero sum argument (Game Theory) for trade policies. A “natural” outcome of trade is one in which the sum is zero. China, India, Petrol and other Latin American countries have trade agreements that is costing millions of Americas their job and draining trillions of dollars out of the US economy. One can imagine that these so called trade policies are in fact “defense” treaties. In general, this is not a bad ideal, however, it is apparent that the “rich folks” are not paying their fair share of this defense.
Here's a little tidbit: It looks like there is a correction mechanism “built” into the global currency. The dollar is weak which puts pressure on the Federal Reserve to increase short – term interest rates. Central Bankers, who are scare at the prospect of having their importers lose market share in the US, buy dollars to prop up their own currency. Some of these dollars are then reinvested back into the US and in US Treasuries (mainly into the long end of the yield curve). The “global” market is one of the driving force inverting the yield curve. The “global” market is acting to protecting its investments. This action is to force a recession in the US in order to reduce the trade deficit. The “global” market is one hell of an investor.
How hard is to understand the flatting of the yield curve? It is a reality, not a figment of Greenspan's imagination.
I will explain it in plain english:
People have been using their homes as a “Bank”. This adds a new factor in the money velocity equation. This also adds a constraint on how a rise or fall of interest rates are distributed. This constraint will allow interest rates to slow or increase the US and by the very nature of the “Global Market”, other economies as well. The distribution of the interest rates will be such that the economic imbalance is addressed with out over compensating.
The US housing market has not collapsed. Foreign investors are still willing to finance US debt. By the shear act of “Greed”, they allow the long maturities to remain flat despite short – term rates increasing.
The currency market is worried about the US's twin deficits. China has not floated the Yuan. Us incomes are flat. No help in paying off the huge twin deficits. Europe and Japan are slowing, no help in the export side of the trade equation. US corporations are still off shoring jobs. If you look at Keynes “The General Theory of Employment, Interest and Money” and pay particular attention to this statement from Chapter 10.
See link: The General Theory of Employment, Interest, and Money
In an open system with foreign-trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries, since a proportion of the increased consumption will diminish our own country's favorable foreign balance; so that, if we consider only the effect on domestic employment as distinct from world employment, we must diminish the full figure of the multiplier. On the other hand our own country may recover a portion of this leakage through favorable repercussions due to the action of the multiplier in the foreign country in increasing its economic activity.
Keynes is the “back – bone” of this administration's fiscal policy. The trade deficit with China and India, as a matter of fact with Mexico and other developing countries, is indicating that the US is not receiving the “favorable repercussions” in an economic sense. The Bush administration has probable “traded” economic “favorable repercussions” for foreign policy “favorable repercussions”. Foreign policy “favorable repercussions” do not pay off the twin deficits. Therefore, the dollar remains weak.
Central bankers and Petrol nations who recycle their dollars will probable put their dollars in the long end of the bond market (take advantage of the US housing market). This allows the yield curve to remain flat.
The dollar's behavior in the “Global Market” is on the Fed's radar screen. If Fed-speak can not talk the dollar into a position of strength, the only rational course of action is to continue the “measure paced” of short – term interest rats hike. Prime rates are likely to continue its climb, therefore consumer's borrowing becomes more expensive. Short term rates goes up and long term rates remain flat, the yield spread narrows and financial activity that takes advantage of the yield spread is reduced. Again, increase in borrowing cost.
The result of all of the “Global Market” is clear. The act of “Greed” and “Fear” has conspire to reduce consumer spending without the collapse of the housing market. QED!!!!!
March 17, 2005
I got a reply form my e-mail from one of the authors of the working paper: “
Financial Market Developments and Economic Activity during Current Account Adjustments in Industrial Economie”
The question:
Question #1; Did you take into account the fact that China has pegged the Yuan to the dollar?
I notice that you reference the US in 1987 and 1989. Have you noticed the import and export trade weights (See link:
http://www.federalreserve.gov/releases/h10/Weights/ )
Year Export Import
1987 1.582 1.697
1989 1.812 2.871
2005 4.382 14.490
Despite China's quality problem, manufactures are still willing to to take the plunge. See link: http://ecoustics-cnet.com.com/Sourcing+in+China+not+a+sure+bet/2030-1069_3-5561137.html
Question #2: Did you take into account the fact that people are using their homes as “Bank”?
Greenspan has made note of this several times. It seems to me that this “Bank” adds a new term to the money velocity equation. This term is a measure as to how fast home equity can be converted to cash through something like a home equity line of credit, a higher credit limit or higher resell value. I also think this new term adds a new constraint on how any given interest rate environment is distributed. The flatting of the yield curve is an illustration of the applied interest rates constraints.
I personal do not think household debt ratio is a good measure for future economic activities. The aggregate income part relies on the home's value which in turn relies on the local economic state. I think the important measure is disposable income. See link:
http://www.newyorkfed.org/research/directors_charts/us_all.pdf
Disposable income is going to indicate if price shocks from other parts of the economy like oil prices and health care cost are going to impact consumers' spending. Looking at the household debt burden indicates that consumers are at their credit limit. No big upside movement of GDP in the future once we end the “tax refund season”. What this means is that a small movement in interest rates can have a large impact on the US economy.
Response:
Thank you for your interest in our research, and apologies for my delay in responding. In our paper, we took account neither of China's peg nor of the use of homes as 'Bank". Obviously, there is only so much one can do in a single paper. Regards, Steve Kamin
Be prepare for a economic disruption in the US due to a re-balancing of the current account.
There may be a insidious reason why the review of IBM's sell of its PC devision and Tyco's pending sell of its fiber optics cable was conducted in secret. BushCo is helping to cover up an accounting problem before it becomes public.
In The General Theory of Employment, Interest, and Money
Chapter 3
THE PRINCIPLE OF EFFECTIVE DEMAND
This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment.
Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.
But worse still. Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate;
and
Chapter 10
THE MARGINAL PROPENSITY TO CONSUME AND THE MULTIPLIER
(iii) In an open system with foreign-trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries, since a proportion of the increased consumption will diminish our own country's favourable foreign balance; so that, if we consider only the effect on domestic employment as distinct from world employment, we must diminish the full figure of the multiplier. On the other hand our own country may recover a portion of this leakage through favourable repercussions due to the action of the multiplier in the foreign country in increasing its economic activity.
And
Chapter 18
THE GENERAL THEORY OF EMPLOYMENT RE-STATED
We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organisation, as well as the social structure including the forces, other than our variables set forth below, which determine the distribution of the national income. This does not mean that we assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them.
Our independent variables are, in the first instance, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest, though, as we have already seen, these are capable of further analysis.
Our dependent variables are the volume of employment and the national income (or national dividend) measured in wage-units.
The factors, which we have taken as given, influence our independent variables, but do not completely determine them. For example, the schedule of the marginal efficiency of capital depends partly on the existing quantity of equipment which is one of the given factors, but partly on the state of long-term expectation which cannot be inferred from the given factors. But there are certain other elements which the given factors determine so completely that we can treat these derivatives as being themselves given. For example, the given factors allow us to infer what level of national income measured in terms of the wage-unit will correspond to any given level of employment; so that, within the economic framework which we take as given, the national income depends on the volume of employment, i.e. on the quantity of effort currently devoted to production, in the sense that there is a unique correlation between the two. Furthermore, they allow us to infer the shape of the aggregate supply functions, which embody the physical conditions of supply, for different types of products;—that is to say, the quantity of employment which will be devoted to production corresponding to any given level of effective demand measured in terms of wage-units. Finally, they furnish us with the supply function of labour (or effort); so that they tell us inter alia at what point the employment function for labour as a whole will cease to be elastic.
The schedule of the marginal efficiency of capital depends, however, partly on the given factors and partly on the prospective yield of capital-assets of different kinds; whilst the rate of interest depends partly on the state of liquidity-preference (i.e. on the liquidity function) and partly on the quantity of money measured in terms of wage-units. Thus we can sometimes regard our ultimate independent variables as consisting of (i) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment. But these again would be capable of being subjected to further analysis, and are not, so to speak, our ultimate atomic independent elements.
The division of the determinants of the economic system into the two groups of given factors and independent variables is, of course, quite arbitrary from any absolute standpoint. The division must be made entirely on the basis of experience, so as to correspond on the one hand to the factors in which the changes seem to be so slow or so little relevant as to have only a small and comparatively negligible short-term influence on our quaesitum; and on the other hand to those factors in which the changes are found in practice to exercise a dominant influence on our quaesitum. Our present object is to discover what determines at any time the national income of a given economic system and (which is almost the same thing) the amount of its employment; which means in a study so complex as economics, in which we cannot hope to make completely accurate generalisations, the factors whose changes mainly determine our quaesitum. Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live.
II
Let us now attempt to summarise the argument of the previous chapters; taking the factors in the reverse order to that in which we have introduced them.
There will be an inducement to push the rate of new investment to the point which forces the supply-price of each type of capital-asset to a figure which, taken in conjunction with its prospective yield, brings the marginal efficiency of capital in general to approximate equality with the rate of interest. That is to say, the physical conditions of supply in the capital-goods industries, the state of confidence concerning the prospective yield, the psychological attitude to liquidity and the quantity of money (preferably calculated in terms of wage-units) determine, between them, the rate of new investment.
But an increase (or decrease) in the rate of investment will have to carry with it an increase (or decrease) in the rate of consumption; because the behaviour of the public is, in general, of such a character that they are only willing to widen (or narrow) the gap between their income and their consumption if their income is being increased (or diminished). That is to say, changes in the rate of consumption are, in general, in the same direction (though smaller in amount) as changes in the rate of income. The relation between the increment of consumption which has to accompany a given increment of saving is given by the marginal propensity to consume. The ratio, thus determined, between an increment of investment and the corresponding increment of aggregate income, both measured in wage-units, is given by the investment multiplier.
Finally, if we assume (as a first approximation) that the employment multiplier is equal to the investment multiplier, we can, by applying the multiplier to the increment (or decrement) in the rate of investment brought about by the factors first described, infer the increment of employment.
An increment (or decrement) of employment is liable, however, to raise (or lower) the schedule of liquidity-preference; there being three ways in which it will tend to increase the demand for money, inasmuch as the value of output will rise when employment increases even if the wage-unit and prices (in terms of the wage-unit) are unchanged, but, in addition, the wage-unit itself will tend to rise as employment improves, and the increase in output will be accompanied by a rise of prices (in terms of the wage-unit) owing to increasing cost in the short period.
Thus the position of equilibrium will be influenced by these repercussions; and there are other repercussions also. Moreover, there is not one of the above factors which is not liable to change without much warning, and sometimes substantially. Hence the extreme complexity of the actual course of events. Nevertheless, these seem to be the factors which it is useful and convenient to isolate. If we examine any actual problem along the lines of the above schematism, we shall find it more manageable; and our practical intuition (which can take account of a more detailed complex of facts than can be treated on general principles) will be offered a less intractable material upon which to work.
III
The above is a summary of the General Theory. But the actual phenomena of the economic system are also coloured by certain special characteristics of the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest, about which we can safely generalise from experience, but which are not logically necessary.
In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence. Fluctuations may start briskly but seem to wear themselves out before they have proceeded to great extremes, and an intermediate situation which is neither desperate nor satisfactory is our normal lot. It is upon the fact that fluctuations tend to wear themselves out before proceeding to extremes and eventually to reverse themselves, that the theory of business cycles having a regular phase has been founded. The same thing is true of prices, which; in response to an initiating cause of disturbance, seem to be able to find a level at which they can remain, for the time being, moderately stable.
Now, since these facts of experience do not follow of logical necessity, one must suppose that the environment and the psychological propensities of the modern world must be of such a character as to produce these results. It is, therefore, useful to consider what hypothetical psychological propensities would lead to a stable system; and, then, whether these propensities can be plausibly ascribed, on our general knowledge of contemporary human nature, to the world in which we live.
The conditions of stability which the foregoing analysis suggests to us as capable of explaining the observed results are the following:
(i) The marginal propensity to consume is such that, when the output of a given community increases (or decreases) because more (or less) employment is being applied to its capital equipment, the multiplier relating the two is greater than unity but not very large.
(ii) When there is a change in the prospective yield of capital or in the rate of interest, the schedule of the marginal efficiency of capital will be such that the change in new investment will not be in great disproportion to the change in the former; i.e. moderate changes in the prospective yield of capital or in the rate of interest will not be associated with very great changes in the rate of investment.
(iii) When there is a change in employment, money-wages tend to change in the same direction as, but not in great disproportion to, the change in employment; i.e. moderate changes in employment are not associated with very great changes in money-wages. This is a condition of the stability of prices rather than of employment.
(iv) We may add a fourth condition, which provides not so much for the stability of the system as for the tendency of a fluctuation in one direction to reverse itself in due course; namely, that a rate of investment, higher (or lower) than prevailed formerly, begins to react unfavourably (or favourably) on the marginal efficiency of capital if it is continued for a period which, measured in years, is not very large.
(i) Our first condition of stability, namely, that the multiplier, whilst greater than unity, is not very great, is highly plausible as a psychological characteristic of human nature. As real income increases, both the pressure of present needs diminishes and the margin over the established standard of life is increased; and as real income diminishes the opposite is true. Thus it is natural—at any rate on the average of the community—that current consumption should be expanded when employment increases, but by less than the full increment of real income; and that it should be diminished when employment diminishes, but by less than the full decrement of real income. Moreover, what is true of the average of individuals is likely to be also true of governments, especially in an age when a progressive increase of unemployment will usually force the State to provide relief out of borrowed funds.
But whether or not this psychological law strikes the reader as plausible a priori, it is certain that experience would be extremely different from what it is if the law did not hold. For in that case an increase of investment, however small, would set moving a cumulative increase of effective demand until a position of full employment had been reached; while a decrease of investment would set moving a cumulative decrease of effective demand until no one at all was employed. Yet experience shows that we are generally in an intermediate position. It is not impossible that there may be a range within which instability does in fact prevail. But, if so, it is probably a narrow one, outside of which in either direction our psychological law must unquestionably hold good. Furthermore, it is also evident that the multiplier, though exceeding unity, is not, in normal circumstances, enormously large. For, if it were, a given change in the rate of investment would involve a great change (limited only by full or zero employment) in the rate of consumption.
(ii) Whilst our first condition provides that a moderate change in the rate of investment will not involve an indefinitely great change in the demand for consumption-goods our second condition provides that a moderate change in the prospective yield of capital-assets or in the rate of interest will not involve an indefinitely great change in the rate of investment. This is likely to be the case owing to the increasing cost of producing a greatly enlarged Output from the existing equipment. If, indeed, we start from a position where there are very large surplus resources for the production of capital-assets, there may be considerable instability within a certain range; but this will cease to hold good as soon as the surplus is being largely utilised. Moreover, this condition sets a limit to the instability resulting from rapid changes in the prospective yield of capital-assets due to sharp fluctuations in business psychology or to epoch-making inventions—though more, perhaps, in the upward than in the downward direction.
(iii) Our third condition accords with our experience of human nature. For although the struggle for money-wages is, as we have pointed out above, essentially a struggle to maintain a high relative wage, this struggle is likely, as employment increases, to be intensified in each individual case both because the bargaining position of the worker is improved and because the diminished marginal utility of his wage and his improved financial margin make him readier to run risks. Yet, all the same, these motives will operate within limits, and workers will not seek a much greater money-wage when employment improves or allow a very great reduction rather than suffer any unemployment at all.
But here again, whether or not this conclusion is plausible a priori, experience shows that some such psychological law must actually hold. For if competition between unemployed workers always led to a very great reduction of the money-wage, there would be a violent instability in the price-level. Moreover, there might be no position of stable equilibrium except in conditions consistent with full employment; since the wage-unit might have to fall without limit until it reached a point where the effect of the abundance of money in terms of the wage-unit on the rate of interest was sufficient to restore a level of full employment. At no other point could there be a resting-place.
(iv) Our fourth condition, which is a condition not so much of stability as of alternate recession and recovery, is merely based on the presumption that capital-assets are of various ages, wear out with time and are not all very long-lived; so that if the rate of investment falls below a certain minimum level, it is merely a question of time (failing large fluctuations in other factors) before the marginal efficiency of capital rises sufficiently to bring about a recovery of investment above this minimum. And similarly, of course, if investment rises to a higher figure than formerly, it is only a question of time before the marginal efficiency of capital falls sufficiently to bring about a recession unless there are compensating changes in other factors.
For this reason, even those degrees of recovery and recession, which can occur within the limitations set by our other conditions of stability, will be likely, if they persist for a sufficient length of time and are not interfered with by changes in the other factors, to cause a reverse movement in the opposite direction, until the same forces as before again reverse the direction.
Thus our four conditions together are adequate to explain the outstanding features of
our actual experience;—namely, that we oscillate, avoiding the gravest extremes of fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life.
But we must not conclude that the mean position thus determined by 'natural' tendencies, namely, by those tendencies which are likely to persist, failing measures expressly designed to correct them, is, therefore, established by laws of necessity. The unimpeded rule of the above conditions is a fact of observation concerning the world as it is or has been, and not a necessary principle which cannot be changed.
The short explaination is the following: Given a total aggregate income, the “community” effectively distributes that income. Off-shoring expands the “community”.
Section (iii) When there is a change in employment, money-wages tend to change in the same direction as, but not in great disproportion to, the change in employment; i.e. moderate changes in employment are not associated with very great changes in money-wages. This is a condition of the stability of prices rather than of employment.
There is no reason to doubt this conclusion. Gas prices are in fact raising, however, goods made in China have remained stabled. (Oil prices are subject to conditions out of the control of the “community”)
Section (ii) When there is a change in the prospective yield of capital or in the rate of interest, the schedule of the marginal efficiency of capital will be such that the change in new investment will not be in great disproportion to the change in the former; i.e. moderate changes in the prospective yield of capital or in the rate of interest will not be associated with very great changes in the rate of investment.
This section indicates that the weak dollar is no help to our “community”. The weak dollar effectively changes the prospective yield of capital.
When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of the asset. This series of annuities Q1 , Q2 , . . . Q n it is convenient to call the prospective yield of the investment.
Over against the prospective yield of the investment we have the supply price of the capital-asset, meaning by this, not the market-price at which an asset of the type in question can actually be purchased in the market, but the price which would just induce a manufacturer newly to produce an additional unit of such assets, i.e. what is sometimes called its replacement cost . The relation between the prospective yield of a capital-asset and its supply price or replacement cost, i.e. the relation between the prospective yield of one more unit of that type of capital and the cost of producing that unit, furnishes us with the marginal efficiency of capital of that type.
The weak dollar does not necessary mean that there is going to be a great change in the rate of investments.
The ever increasing current account deficit indicates that the US has stopped trading. However, the expanded “community” do not pay for the “community's” taxes. The tax system of the “community” is, in effect, the tax system Greenspan brought up in his testimony: Testimony of Chairman Alan Greenspan The tax system
This part of the “community” do not pay taxes, nor is the output associated with this part, credited to the “community” as a whole. In other words, the associated cost for price stability is an ever increasing US government debt and current account deficit.
This paper is indicating that the market value of companies, that off-shores, need to be adjusted to reflect the expanded “communities” net worth. Since the output of the expanded “community” is not credited to the US part of the “community”, the problems with GM and any other company that is facing high legacy cost are going to get worst.
This is the gist of my opinion that there is going to several companies with accounting problems.
