Mish's Global Economic Trend Analysis

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New Job Opportunity - Spitting at the Moon Posted: 04 Sep 2010 11:30 AM PDT In multiple posts Paul Krugman is saying "I told you so". For example, please consider Nobody Could Have Predicted Pictures support the view that stimulus worked as long as it lasted, boosting the economy — which is the same conclusion Adam Posen drew from Japan's experience in the 1990s: Fiscal policy works when it is tried. But the stimulus wasn't nearly big enough to restore full employment — as I warned from the beginning. And it was set up to fade out in the second half of 2010. So what was supposed to happen? The invisible cavalry were supposed to ride to the rescue. I never understood why the Obama administration thought this would happen so soon; history tells us that the effects of a financial crisis on private spending are normally protracted. And sure enough, the cavalry has not arrived. Stimulus and Full Employment The idea we can stimulate the economy to full employment is about as silly as silly gets. Krugman wanted double the stimulus we got. Well, we got zero benefit unemployment-wise from the stimulus and in my book infinity times zero is still zero. Yes, unemployment fell from 10.1% to 9.5% but all of that decrease, if not more than all of that decrease, was a result of a falling participation rate. The bottom line is neither the Fed increasing its balance sheet by $trillions nor a $1.4 trillion deficit did a thing to lower unemployment. Of course the Keynesian clowns will holler things would have been worse in the absence of stimulus. Really?! Would banks be lending more? Would small businesses be hiring? Full Employment Made Easy Krugman wants full employment. I suppose the government could easily employ everyone who does not have a job. Then again, didn't we effectively do just that? Here is a snip from "Contained Depression" that suggests we did. We are certainly in a depression. However, 40 million people on food stamps as of August 2010, masks that depression. The cost of the food stamp program is on schedule to exceed $60 billion in fiscal 2010. For comparison purposes, there was just over 11 million on food stamps in 2005. Please note there are 14.6 million unemployed, but of them 4.5 million of them are receiving regular unemployment benefits and another 4.7 million are receiving extended benefits. Thus 63% of those unemployed are receiving benefits. Being paid while not working also masks the depression. Spitting at the Moon Suppose that instead of handing out free money to 9.2 million unemployed, we hire them at minimum wage to spit at the moon. GDP would rise because all government spending by definition adds to GDP, regardless of how unproductive the activity really is. Such a move would allow Krugman the wonderful opportunity to crow about rising GDP. Moreover, unemployment would crash to seven percent or so. That would really get Krugman crowing. Yet, would anything have changed about the true state of the economy? Clearly the answer is no. Suppose government hired all 14.6 million unemployed to spit at the moon. Would that get the economy humming? For any longer than the jobs to spit at the moon lasted? The above examples may sound absurd, but the the result is much the same whether we hire people to spit at the moon vs. paving roads that don't need to be paved. The main difference is money will run out faster hiring road workers because of the wasted material and equipment costs. Practical Example In actual practice, tax credits for housing was an abysmal failure. Would doubling that program have achieved different results? Would wasting the same out of money to repair schools or build new schools have done any better? Once again the answer is no. The only difference in any of these examples is the burn rate at which stimulus money is wasted. Only Genuine Demand Will Fix Economy What will get the economy humming is better tax policy, scrapping Davis-Bacon, dumping public union workers wherever possible, slashing defense spending, and letting home prices bottom. Real demand for housing will step up as soon as there are bargains. Instead we have policies to prop up home prices. Lesson of Japan The lesson of Japan is the same as the lesson of home tax credits in the US - Stimulus programs do not work period, regardless of size. In Japan, every program failed. Japan is now in debt to the tune of 200% of GDP. Some suggest Japan is no worse off for it. Nothing could be further from the truth. Japan squandered massive savings in the stupidest manner possible, building bridges to nowhere, and now its citizens are aging, in need of drawing down their savings. Unfortunately those savings were squandered. Japan is poised to blow up, however, the timing is uncertain. Sadly, the US is on the same path and Krugman is hellbent to get us there faster. Consumer Credit Inflection Point Let's review Are we "Trending Towards Deflation" or in It? The key problem for Bernanke is we have reached the Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge Keynesian Policies Fail Keynesian stimulus measures have failed and will continue to fail. Please see Three Mish Segments on Tech Ticker, on Stimulus, Retail Sales, the Markets, Alternatives for details and an online interview. We have wasted $2 trillion fighting deflation. It has not produced any jobs. The correct way to spur growth is by fostering an economy that supports economic growth. For details, please see Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It. Keynesian Cures Worse than the Disease Krugman has the wrong definition and the wrong worry. However, he is correct in his call for deflation. Unfortunately, this will lead to a bunch of "I told you so" kinds of posts from Krugman, in spite of the fact his cures are worse than the disease. Indeed, Keynesian "cures" are one of the reasons this economy is in the mess it is in. The final analysis shows that the real threat is not of deflation, but of absurd Keynesian and Monetarist attempts to prevent it. The Greenspan-Bernanke housing bubble (and subsequent crash), and decades of futility in Japan should be proof enough. Nobody For another "I Told You So" Krugman post, please consider Nobody The truth is that some of us were practically screaming back in January 2009 that the administration was proposing too small a program. Start with Stimulus arithmetic (wonkish but important) and work forward. And no, the point isn't that I'm so smart — it is that given the forecasts we had at the time, and given historical experience of recessions after financial crises, it wasn't at all hard to see that the plan was too small. Things have been worse than expected — but not that much worse. And why does this matter? Because the best chance Obama et al have to change things now is to make the case that we need to do more, and that Republicans stand in the way. Yet here they are, apparently trying to run on the claim that they had it right all along, or something. Is this just boneheaded political strategy? Is it about the egos of the advisers who called it wrong? I Told You So The easiest predictions in the whole world were .... 1. Stimulus would fail no matter how big. 2. Krugman would brag "I Told You So". Three things about Krugman that irk me to no end are ... His failure to look at the seen and unseen consequences of his proposals His failure to address the question as to what happens when stimulus ends His failure to look at structural problems Ability for government borrowing is not infinite (at least without major economic repercussions). One easy to see problem is interest on the national debt will consume all tax collections if we stay on this path. Moreover, expiration of housing tax credits provides a clear example as to what happens when stimulus ends. The Invisible Cavlalry My friend HB has written an excellent article on similar lines. It turns out prosperity is not around the corner after all. Please consider Paul Krugman and the Invisible Cavalry Averting the Great Depression Again Throwing money at problems cannot ever work, but that especially holds true when structural problems like union salaries and public pension promises are left intact. Just because Krugman was correct that stimulus would fail does not make him correct about the reasons why, or what the correct policy actions should have been. The irony as my friend points out, is Krugman's 2009 proclamation "So it seems that we aren't going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government". Now we need big government to save us again. Spare me the sap. Big government is clearly the problem, not the solution. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Voters Strongly Favor Non-Incumbent GOP Newcomers in Midterm Elections Posted: 04 Sep 2010 01:14 AM PDT More than any other class, including Republicans in general, voters have a decided preference for non-incumbent GOP challengers. Moreover, three in four believe an influx of new members would improve Congress, says Gallup. Please consider Americans Most Likely to Favor GOP Newcomers for Congress Suppose you had a choice among each of the following four types of candidates for Congress. Which one would you be most likely to vote for? Republican serving in Congress - 15% Republican who has not served in Congress - 38% Democrat who has not served in Congress - 16% Democrat serving in Congress - 24% Other - 3% No Opinion - 4% Overall, a majority of Americans prefer a Republican candidate (regardless of experience) to a Democrat, 53% to 40%. And a majority also prefer a non-incumbent (regardless of party affiliation) to an incumbent, 54% to 39%. The fact that Americans who prefer a Republican candidate want one who is new to Congress suggests that these voters want both GOP control of Congress and the new perspectives that come from members with no prior Washington experience. Americans who favor Democratic candidates, on the other hand, apparently are more satisfied with the type of experienced representatives now in Congress. One would naturally expect Democrats to prefer Democratic candidates, and Republicans to prefer Republican candidates, and that is the case when looking at the data by party. But partisans' preferences for incumbents versus challengers seem to be influenced by their knowledge that the Democrats currently have a majority in Congress, and thus, more Democrats will be defending House seats this fall. Democrats are more likely to prefer a Democrat who is in Congress to a Democrat who is not, and Republicans are more likely to prefer a Republican outside of Congress to one who is currently serving there. Independents also show a strong preference for Republican non-incumbents. Strong Anti-Democratic Sentiment Gallup reports Anti-Democratic Sentiment Aids GOP Lead in 2010 Vote The Republicans' lead in the congressional generic ballot over the past month may be due as much to voters' rejecting the Democrats as embracing the Republicans. Among voters backing Republican candidates, 44% say their preference is "more a vote against the Democratic candidate," while 48% say it is "more a vote for the Republican candidate." The 44% of Republican voters who say they are voting more against the Democratic candidate exceeds the level of negative voting against the incumbent party that Gallup measured in the 1994 and 2006 elections, when party control shifted (from the Democrats to the Republicans after the 1994 elections and from the Republicans to the Democrats after the 2006 elections). GOP Holds Huge Edge In Turnout Related Question In our third poll topic, Gallup shows Republicans Hold Wide Lead in Key Voter Turnout Measure Two months before this year's midterm congressional elections, Gallup finds 54% of Republicans, compared with 30% of Democrats, already saying they have given "quite a lot of" or "some" thought to the contests. Republicans' current level of thought about the elections, from Gallup Daily tracking conducted Aug. 23-29, matches or exceeds that found in October/November of the last three midterm years. By contrast, Democrats are giving far less thought to the elections today than they did in the final weeks before the prior four midterms. As a result, Democrats are on par with independents in current attention levels -- a sharp departure from recent years, when the Democrats exceeded independents on this measure. The large party gap in "thought" suggests the typical Republican turnout advantage could be larger than usual this year if that gap persists until Election Day. Attention normally spikes as elections approach, and this is likely to occur among Democrats. However, it is unclear whether the Republicans have reached the limit for how much attention they will pay to a midterm election, or whether their attention will rise to perhaps a historic level by November. How this plays out will determine Democrats' ability to catch up to Republicans on this measure before Election Day, and will in turn determine the size of the Republican turnout advantage. It's a virtual certainty that voters' attention to the election will increase in the coming months. If this increase is proportionate between Republicans and Democrats, then the Republicans will likely maintain a formidable turnout advantage. However, it's also possible that Republicans have merely tuned in early to the elections, leaving less room for their attention to expand -- and thus giving the Democrats an opportunity to narrow the gap by November. Temper Tantrum? In Our Quick-Fix Electorate on Real Clear Politics, Eugene Robinson proclaims ...This isn't an "electoral wave," it's a temper tantrum. In the punditry business, it's considered bad form to question the essential wisdom of the American people. But at this point, it's impossible to ignore the obvious: The American people are acting like a bunch of spoiled brats. ...there's no mistaking the public mood, and the truth is that it makes no sense. On the contrary, this makes perfect sense. The public is fed up with how beholden Obama is to unions. They are fed up with sacrifices they have to make that government workers don't. They are fed up with how well the political class has fared in this election vs. how well they have fared in this election. They are fed up with never-ending wars. It's not that people prefer Republicans by some huge margin. They don't. They specifically prefer non-incumbent Republicans hoping for a Change. Obama promised "Change you could believe in", but where is it? We are still bogged down in Afghanistan, Obama did not get us out of Guantanamo Bay as promised, but most importantly he did continue the same bailout strategies and surrounded himself with the same economic philosophy and same Wall Street advisors as Bush. The public is fed up and rightfully so. The anti-union vote is going to be huge, and deservedly so. I am increasingly confident that Republicans are going to take the House. So be prepared to Kiss Nancy Pelosi goodbye and be prepared to welcome John Boehner as the new House speaker. Perhaps we can get some real change. If not, gridlock is better than what we have seen under Obama. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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