Comments on: Today In Troubling Financial News

By: 53_3

53_3 — Wed, 03 Dec 2008 19:04:09 +0000

I'm going to have to disagree with et al. These numbers are so large that I'm of a mind that if one focuses on the simplest aspects of this situation, one can easily see this could get into an "expert"-driven shell game based on theories that may or may not have any utility. . I just don't think there is enough money in the wasteful portion of the budget to accomodate the need for 7.1 trillion dollars. . In one swoop, we grow the national debt by what, maybe 40 to 45%? . It all looks so good on paper, but the fact remains that $7,100,000,000,000 (7.1 x 10^12) dollars is a good 3.2 times the entire national budget in any one year! . I think for the forseeable future, raising taxes will be the only way to go that even has a chance of rederessing this issue, if all the other smoke-and-mirrors wave-the-wand "procurement" strategies work. . And China or someone else doesn't get any big ideas about divesting. . Any takers?

By: rose83

rose83 — Wed, 03 Dec 2008 18:14:54 +0000

It really isn't difficult to manage this, politics aside. You just shift about a third of defense spending into domestic infrastructure refurbishment and extension, including green energy initiatives. -- Yes, the Obama Administration's success in confronting the economic problems will depend on foreign and military policy. And maybe, in this context, the HRC choice is smart. Her primary interest seems to be domestic policy, unlike pretty much everyone else in the foreign policy establishment. Which at first glance made the choice seem a little weird. But maybe if Obama says we need to downsize our foreign policy to save our economy, environment and help those "invisible" people, HRC will be more willing to think outside the box and make that happen than a more conventional choice like Kerry. Domestic policy is her passion, and that could make her a great Secretary of State.

By: bryanfromhouston

bryanfromhouston — Wed, 03 Dec 2008 17:26:56 +0000

What jayackroyd said.
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Deflation can contained but not stopped. Further, the real problem will exist in trying to shift agency costs. Nobody wants to make a single sacrifice until forced to do so.

By: cincinnatus est exterminata!

cincinnatus est exterminata! — Wed, 03 Dec 2008 17:11:36 +0000

...also wouldn't hurt to end the War on Drugs which is nothing more than a welfare program for the police state and a job security program for prison guards.
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Again, debt must increase every year at a rate large enough to cover the interest rate on the the previous year's debt. This is an exponential equation. Example of an exponential equation on a graph:
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http://hotmath.com/images/gt/lessons/genericalg1/exponential_graph.gif
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Graph of inflation in the US over 200 years:
http://one-simple-idea.com/InflationHistory1800-2003.gif
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Note the similarities. Once the deflationary period ends we'll resume the upward trajectory which eventually becomes a straight line up.

By: jayackroyd

jayackroyd — Wed, 03 Dec 2008 16:38:09 +0000

You left out wages, 53_3.
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It really isn't difficult to manage this, politics aside. You just shift about a third of defense spending into domestic infrastructure refurbishment and extension, including green energy initiatives.
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You cut agency costs by reverting to civil service employees doing the work, firing the contractors. Likewise the military. End the occupation of Iraq, fire all the contractors, reduce total troop levels. Unbundle the department of homeland security, and get rid of the feet inspectors and other money wasting instances of security theatre.
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We've been hearing our whole lives about waste and fraud, but this administration has set records, and that provides budgetary opportunity.
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The political problem is getting all the private interests that have keys to the Treasury out of there.

By: 53_3

53_3 — Wed, 03 Dec 2008 16:09:56 +0000

MS, Jayack, et al: . "The reason the money is good is because people have faith in the future output of the U.S. economy. The danger of such a policy is hyperinflation that would come if people began to lose faith in U.S. currency and countries like China decided they no longer wanted U.S. money." . Which, in a nutshell, is what I thought. So the real strategy is: . 1. Hope like hell no one (like China) decides to divest (which they've already threatened once...), or, no one loses their nerve, er, I mean, faith in the US. If that happens, we'ze in big, big, doodoo that only a banana slug would appreciate. . 2. Hope like hell that we can raise enough tax money to pay it all off. I don't know about this one, gentlemen, Obama will have to do a tweensy bit more than just let the Bush tax cuts sunset, in my rather sorry opinion. . It looks like that really, bottom line, the possibility of hyperinflation is a very serious threat, far more serious than the possibility of deflation. So far, the only things I've seen deflate are: . 1. The number of GOPers 2. Really sound economic solutions to the present problem 3. Oversight of the whole shebang 4. Electronics (which always deflate, so who cares...) 5. Real Estate (won't last long) 6. Price of gas (maybe a while longer than real estate, now that we've gotten rid of the Neocons) . I don't know about you, but I'm not reassured, and I think, as little as I really do know about eocnomics, in the end, we might just be printing money, but are using economic expedients to explain it away so no one keeps looking.

By: jayackroyd

jayackroyd — Wed, 03 Dec 2008 15:58:02 +0000

Cincy's point is that disposable income is dropping like a stone. Formally, disposable income is income net of tax. Less formally, as when talking about the disposable income of teenagers, it refers to money available to spend on stuff.
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Wages are flat to falling. Credit lines are being cut, dramatically, right before Christmas. Just as inflation is too much money chasing too few goods, deflation is too little money chasing too many goods. Like those cars parked in California ports of entry or in dealer lots.
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The Black Friday reports were "Sales were UP!" but prices were apparently cut dramatically.
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What makes this different, and in some ways scarier than the Depression, is that everybody has a lot of inventory at home. That is, most Americans have stuff they haven't used up, or even used, that in the last twenty years or so they would have supplemented with another item. Televisions. MP3 players. Coffee makers, ummmmm Cars.
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So it's not just retail inventory available for consumption. It's also accumulated consumer goods. People could very easily buy next to nothing, aside from food, shelter and transportation for a couple of months. They could give Christmas presents out of inventory this year.
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Paul's observation that the decline in energy prices is a symptom, not a cause is well made. There's no harm to the American economy if oil prices fall--but if core inflation goes negative, that may mean a negative wage price spiral.
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By: michaelscherer

michaelscherer — Wed, 03 Dec 2008 14:01:54 +0000

Paul and Plu, Declining prices of things like oil, or Xboxes, do not mean deflation. It has to be a widespread, systematic decline in prices across the board. I don't think anyone is saying we are in a deflationary spiral yet, despite all the sales at Banana Republic. But the danger is there. Here is Bernanke's definition from the same 2002 speech i linked to higher in the comments. "Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines."

By: Paul Dirks

Paul Dirks — Wed, 03 Dec 2008 13:57:26 +0000

Bottom line, the current appearance of "deflation" is merely the other side of the inflationary impact of higher oil prices last spring. The problem with that argument is that the general slowdown in economic activity is what driving the fuel prices back down. So the fact that oil is at the center of the activity doesn't negate the idea of deflation.

By: plukasiak

plukasiak — Wed, 03 Dec 2008 09:48:38 +0000

from the cincinattus bloomberg link at 65... Dow Chemical Co., the largest U.S. chemical maker, is among producers hurt by a drop in demand. The prices Dow charges for two of the most-used plastics, polyethylene and polypropylene, fell as much as 40 percent since September, giving up gains achieved since June, the company said. Midland, Michigan-based Dow is closing more factories as sales decline. this is supposed to be evidence of deflation? Polyethylene and polypropylene are freaking petrochemicals, and since june the price of crude has dropped from over $140/barrel to under $50/barrel. When the cost of your raw materials go up, prices go up -- and when prices go up that much, alternatives to those plastics (like paper grocery bags, glass bottles, natural fibers, etc) begin to look a lot more attractive and demand goes way down for the petrochemical products. it should also be noted that "core inflation" (i.e. excluding fuel and food) continues to be up (0.4% or about 5% annually). When consumers were screaming for relief from the impact of high gas prices last spring, the same bozos who are now talking deflation were pointing to the fact that "core inflation" wasn't that high, and no relief was needed. Bottom line, the current appearance of "deflation" is merely the other side of the inflationary impact of higher oil prices last spring. The financial sector was not panicked when consumers were suffering because of high gas prices, nor is anyone that concerned with the fact that heating prices will be high this season because of commitments made by utility companies to buy oil and natural gas when prices were still high (and thus much of the current low prices of oil and natural gas won't be passed onto consumers.)