Monthly Archives: December 2008

Blagojevich, Shlabojevich. Senate Needs to Seat Burris Right Away and Get to Work.

The media, Fitzgerald, and the Illinois leg. can do with Blagojevich whatever they want.  Harry Reid and our friends in the Senate have to get ahold of their damn selves, though, and seat this new guy, Roland Burris.

First, he has been legally appointed by the sitting Governor of Illinois, per the laws of that fine state.  There is a lot of bluster about that Governor right now, but he remains unconvicted and unimpeached.  Further, unless everyone involved is even stupider than we think, the selection decision seems to have been made cleanly, regardless of how messy the early part of the process was.  All in all, this is a legal pick, Illinois’ problems are Illinois’ problems, and we need to uphold the rule of law.

Second, from a pragmatic standpoint, Roland Burris seems to walk on water from our vantage point on the liberal left.  He’s a godsend!!  He is unapologetically in favor of abortion rights, he is proudly in favor of expanding the rights of gay men and women, and he started his career, you won’t believe this, as a bank examiner!  I can’t think of a skill set we need more in the Senate right now than bank examining and bean counting!  Further, according to political voices in Chicago, he is squeaky clean and there has “never been a breath of scandal about him”.

Thirdly, since the pick seems to be clean and reasonable despite the shenanigans, the Senate has to get to business right away.  The global economy is in free fall, our domestic economy has been devastated, our government has been filled with corrupt, incompetent, and cynical bureaucrats that have caused untold billions in damage, we have one war that needs to be ended, another war that needs to be won, the Middle East is aflame again, we have trade pacts to renegotiate, a health care system to overhaul, and India and Pakistan are pointing nuclear tipped missiles at each other.

Fourth, look, if Harry “Spineless” Reid can agree to let Joe Lieberman keep his chairmanships because we’re that desperate for his unprincipled vote… then surely to God we are desperate enough to want Burris’ vote too.  He is actually a real-life, true, unashamed, unabashed, liberal Democrat!  We need him in Washington yesterday!

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You have an opportunity to place an important vote but you only have one day to do it!

Change.org has solicited ideas to present to the Obama administration on a variety of subjects.  My idea for Fair Trade (my own definition of it) is currently in 1st place and gaining ground, but if you agree with it, it needs your vote.

Here’s where you vote: http://www.change.org/ideas/view/replace_free_trade_with_fair_trade

And here’s why:

My definition of Fair Trade may be a little different from the common one.

To me, trade is fair when nations gain competitive advantage based on quality, productivity, innovation, etc.  Trade is not fair when nations gain competitive advantage by despoiling their environments, enslaving their workers, employing child labor, putting workers into unreasonably dangerous or depraved conditions, opting to not have or not enforce safety regulations and consumer protections, etc.

When we have to compete against nations that don’t care about their environment, their children, their workers, their investors, their consumers, etc.; nations that will do anything to gain competitive advantage, we end up in a global race to the bottom… we race every nation in the world to minimize the costs associated with protecting the environment, keeping workers safe and whole, providing living wages, educating people, making sure there isn’t melamine in the milk, etc.

We shouldn’t be wanting that, while we should always still be welcoming competition based on quality, productivity, innovation, efficiency, etc.

To balance things, there should be a global index that allows all nations to be compared to each other on various dimensions and tariffs should be put in place to compensate for cost advantages achieved by “unfair” or predatory competition.

If you think this through, this would maintain incentives to compete with healthy competition and penalize unhealthy competition.  Economies that implemented and enforced the best worker protections, environmental protections, investor protections, consumer protections, education systems, healthcare systems, etc. would benefit economically because there would be no tarrifs on their exports and lots of tarrifs on their imports.

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Vote for a BRAC Commission for Policy Review

Vote for this idea on change.org if you agree.

A BRAC-like commission that would review regulatory agency policies, tax policies, and perhaps even have some role in the legislation design process, could provide at least some counter to the corrosive influence of money in politics and add some weight to the public interest in policy decision-making.

According to Wikipedia, the BRAC [Base Closure and Realignment Commission] process for base closures begins when The Pentagon officials submit a list of bases to be closed, shrunk, or enlarged. An independent nine-member commission evaluates the list by taking testimony from interested parties and paying visits to affected bases. The BRAC Commission can add bases to or subtract them from the list. The commission submits its list to the President, who must either approve or disapprove the list in its entirety. If approved, the list then goes to Congress which has the opportunity to disapprove the entire list within 45 days by enacting a resolution of disapproval – if Congress does not enact such a resolution, the BRAC recommendations are final.

http://www.change.org/ideas/view/brac_base_closure_and_realignment_commission_for_policy_reviews

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When is deflation real and when is it imagined?

One of the few things that scare economists more than inflation is deflation.  Inflation insidiously transfers wealth from lenders to borrowers, freaks everyone out when prices rise faster than wages, spirals out of control when wages have to go up to keep up with higher prices, etc.  “We” who work always feel like prices rise faster than our wages, but to some degree they go hand in hand over the long run.

Deflation transfers wealth from borrowers to lenders.  That can put borrowers into default.  It also forces companies to lower prices, which reduces their profits until and unless they can lower the wages they pay.  Companies can do this in two ways.  One thing they can do is toss people onto the unemployment line.  This reduces demand for goods and services and creates deflationary spirals.  Worse luck, companies can come to workers for salary give backs instead of raises.

People don’t like prices going up.  People do like raises.  People do like prices going down.  But people really, really, really, hate unemployment and getting rewarded for their effort with pay cuts.  When these things happen, people shift money rapidly from consumption to savings, which causes demand to plummet… and more deflationary spirals.

In line with economists’ distaste for deflation, a number of people have been decrying the loss of value of stocks, the loss of value of commodities, etc.  They are essentially saying that the price of gas going down is not a good thing.  I’m fine with that to a degree.

I think all of our markets have been so distored for the past couple of years, though, that it is really hard to tell what the real price of things ought to be.

For example, the chart below shows US prices for regular gasoline since 1990.  Prices have fallen drastically since September and are at levels that haven’t been seen since about the beginning of 2004.  But to call this deflation seems misleading.  We know that China and India increased their oil consumption significantly over the last decade.  And we can kind of see the increased price due to increased global demand start to take hold around 1999.  Then there is a pause after 9/11 and then steady upward pricing pressure.  Until about the end of 2004.  Starting in 2005, or maybe even as early as 2003, it certainly looks like something aberrant was going on.  Prices shoot up, then plunge down, shoot up again, plunge down again, and then by 2007 they go stratospheric.

US Regular Gasoline Prices Since 1990

US Regular Gasoline Prices Since 1990

This isn’t inflation.  What has happened since 2005 results from a speculative bubble in the oil market, I think largely the result of artificially low interest rates.  Investors used massive amounts of debt to leverage their own capital, speculated on oil futures, and drove prices way beyond where production and consumption would have had them.  Then in 2007, with the debt markets starting to rumble, I think a tidal wave of money flowed from investing in mortgage backed securities to commodities in general, and oil in particular.  This giant slosh of money sent the price through the roof, and then the bubble finally burst with all the other bubbles this Fall.  The astronomical gasoline prices we saw did have an inflationary effect on lots of goods and was starting to have an impact on services… but it really all happened too fast to be reflected in wages.

So… can we call it inflation at all?  What seems to have happened is that gasoline consumers got royally shafted for a couple of years, the oil companies benefited beyond any rationality, and now things are getting back to “normal.”  Consumers should not expect pay cuts as a result of gasoline prices falling from levels that were artificially high to start with.  This isn’t deflation, it is a market correction.

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Why are gas prices so low now?

I was asked this question today and found that the more reasons I gave, the more reasons I thought of.  I think this speaks to the perfect storm elements that have put us where we are.

Traditional Supply and Demand

  1. Two million American jobs have been lost so far this year.  I saw an estimate that 10 million people are under-employed, which the government defines as working part-time when they want to be working full time, rather than the more logical problem of working as a bartender when you have proven ability to run the joint.  If 2 million have actually lost jobs, there have to be a hundred million at this point who are nervous that they might.  These folks drive less and use less gas.  That reduces demand, which makes the price go down.  Some.
  2. They also buy less, which means fewer trucks are needed to move goods around the country.  More fuel savings.
  3. Whatever fuel and energy went into supporting these 2 million jobs gets reduced.  Factories have been shut down, machines idled, and office buildings emptied out. Air conditioning and heating of these facilities is gone.  Fed-ex shipments have been reduced, restaurant food deliveries have been reduced, office supplies have been reduced.  All of this reduces demand, which lowers the price.
  4. Oil is still being pumped out of the ground pretty quickly.  OPEC has voted to reduce supply, but to some degree the reduced price is encouraging member countries to cheat, sell more, and recoup some of the revenue they’ve lost.  It turns out OPEC can’t usually just turn off the spigot over night.  So supply hasn’t fallen as quickly as demand, tanks and tankers are filling up, and the oil companies have no choice but to lower price to stimulate demand so they don’t end up having to drink it.

Supply and Demand That’s Less in Our Faces

There have been huge, gigantic, almost unfathomable tidal waves of money sloshing around the globe and bouncing off markets for over a year now.  These waves of money turn entire markets into competing products that have their own supply and demand.  This isn’t new, but the size and drivers of the money movements, to a degree, are new.

  1. Zillions of dollars, apparently, had found a happy home in all the mortgaged backed securities we keep hearing about.  As the risks of those securities became known, they outweighed the returns they offered.  Investors sold these securities en masse.  That money that had been parked in mortgaged backed securities had to go somewhere.  Some of it, over the last 18 months or so, went into equities or stocks.  The infusion of money into the stock market pushed it to record highs.  But with stock prices so high, yields were relatively low and those who could see the storm clouds on the horizon saw greater risks there than those low yields warranted.  So a lot of money got “parked” in commodities.  Which bid up the price of commodities in a way that had nothing to do with actual production and consumption of commodities and everything to do with the supply and demand of commodity based financial instruments.  The distortion this caused made commodities “hot”, which created a brand new speculative boom as giant investors started gambling on commodity futures.  This is a lot of what caused the enormous spike in oil prices and the spike in corn and rice prices that threw several developing nations onto the brink of mass starvation.  It wasn’t that people were suddenly eating too much rice or had stopped making enough of it.  The problem was that too many people wanted to own the rice for its investment potential instead of its food potential.  But now.the economy has been in recession, technically, since last December.  As per the traditional supply and demand issues above, consumption has been reduced which has, finally, popped the latest bubble that had driven up commodity prices.  So where is that money going now?  I’m glad you asked.  Debt is seen as too risky, the equity markets have been killed and remain extremely volatile, commodities are crashing… what’s left?  Investors are basically down to two options.  Mattresses and US Government Treasury bills and bonds.  The demand for US Treasuries has gotten so intense, as these untold billions of dollars smash around the world looking for a safe place to land, has pushed yields on them so low that at times they have actually gone negative.  That means that some investors have been willing to pay the US Government to hold onto their money for them in exchange for the gaurantee that only the US Government can make that their losses will be limited to only a small amount.
  2. The giant hedge funds and many other investors had been taking advantage of the debt and equity markets by leveraging their investments many times beyond what was safe.  When it got harder to borrow money, they had to start “de-leveraging.”  So, say a hedge fund had $1 billion of investor dollars in it, but had used that as collateral to get $30 billion in loans, which is what it actually invested in the markets.  If now they can only borrow $20 billion, they have to sell $10 billion of various financial instruments.  This dynamic is largely what was behind the stock market crash in October.  To some degree investors were predicting lower profits due to recession, but to a large degree, the crash had nothing to do with the “real” economy and everything to do with investors refusing to lend money to these hedge funds and, instead, putting their money into Treasuries.
  3. The hedge funds also have lost a lot of their luster to the giant investors because they did not provide the degree of protection against market risk that they were supposed to be able to do.  They got swamped instead and to a degree became a failed experiment.  So investors have been pulling their investments out and the expectation has been that much, much, much money will be pulled out of them by the end of this year.  If that hedge fund knows that it is going to have to fork over $250 million of its $1 billion in investment capital, it A) has to raise that cash, and B) means that it can no longer support the $30 billion it had borrowed.  So it has to liquidate investments, which means, it has to sell stocks.  Hedge funds haven’t wanted to get to December 31st and suddenly all of them sell trillions of dollars of equities and commodities at once, so they have been dumping stocks since about August or September. Most people seem to believe that they are done now, which, all else being equal, means that we are less likely to see catastrophic stock market crashes again, for now.
  4. All of this has led to huge deflationary pressures, which have further reduced prices of things and increased the value of cash… see the next post for some thoughts on this.

So… that’s why gas prices are lower.

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Blagojevich: Remember this is the Bush Justice Department We’re Talking About… Not a Real One.

If and when Blagojevich is found guilty of the unbelievable corruption he is charged with, I’ll be the first to read him for filth.  I just have to say, however, that we need to be just a tad cautious.

I haven’t read the actual complaint the FBI has filed, but the excerpts that I’ve heard repeated again and again as damning evidence do not, to me, sound like they are evidence of anything except a lot of bluster.  I have heard quotes talking about how valuable an opportunity he has, about how upset he is that the Obama camp will only give him appreciation, a lot of uses of the f-bomb, and a bunch of statements that don’t seem becoming of a sitting governor… but none of the quotes I’ve heard so far actually consist of him soliciting bribes.  Talk about his ability to solicit bribes? Yes.  Actual soliciting?  Maybe it’s there, but I haven’t heard it.

Remember that the preferred tactic of prosecutors today is to win cases in the media before anything ever makes it to the courtroom.  We’ve saw this notoriously in the Clinton’s Whitewater dealings, in the Duke La Cross rape case, and in several recent FBI cases that have been dismissed or dropped because of insufficient evidence.

I don’t want to be an apologist for Blagojevich.  If he did these deeds, he deserves whatever he gets.  We just need to be a little patient and remember that the justice department we are dealing with today is still in the perverted Bush mold, and needs to be understood on those terms.

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Want Bailout Money? Fine. No More Lobbying.

New rule:   Any company that receives bailout money is forbidden now and forever from spending any money whatsoever on lobbying government officials or making campaign contributions and/or doing business with any customers, suppliers, unions, investors, lenders, associations, nations or any other entities that spend any money on lobbying government officials or make campaign contributions.

What do you think?

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