Central Perk

duminică, 25 august 2013

Mish's Global Economic Trend Analysis

Income Inequality Explained: Why Wages Don't, Won't, and Can't Keep Up With Productivity
Hurry! Only 121 Shopping Days Left Before Christmas; What to Expect This Holiday Season; Perpetual Christmas
Brazil Plans $60 Billion Currency Intervention Scheme; Indonesia Abandons Intervention, Adopts Other Measures

Income Inequality Explained: Why Wages Don't, Won't, and Can't Keep Up With Productivity

Posted: 25 Aug 2013 10:36 PM PDT

By now, everyone is well aware that real wages have not kept up worker productivity. But why is that?

The Fed, government bureaucrats, and economists are puzzled by the phenomenon as well as what to do about it.

I can explain easily, but first let's zero in on what is happening.

Workers Don't Share in Companies' Productivity Gains

In stark contrast to the great American dream, CNN notes Workers don't share in companies' productivity gains.

Companies are on a tear in terms of productivity and profits, but they aren't sharing much of the gains with their workers.

The gap between hourly compensation and productivity is the highest it's been since just after World War II. This divergence is one of the major drivers of the nation's growing income inequality.

"A bigger share of what businesses in the U.S. are producing is going to the owners of the firms and the people who lent money to the firm, and a smaller share is going to workers," said Gary Burtless, senior fellow in economic studies at The Brookings Institution.

Productivity, which measures the goods and services generated per hour worked, rose by 80.4% between 1973 and 2011, compared to a 10.7% growth in median hourly compensation, according to the left-leaning Economic Policy Institute, which crunched the numbers last year.

Real Wages vs. Productivity

CNN states "Global competition and national deregulation have kept compensation down, while the decline of union power weakened workers' ability to bargain for higher pay."

Where Did the Productivity Go?

Is the demise of unions and deregulation really the story? The answer is "no", but first consider superficial analysis by Paul Krugman in Where The Productivity Went.

Where did the productivity go?

The answer is, it's two-thirds the inequality, stupid. One third of the difference is due to a technical issue involving price indexes. The rest, however, reflects a shift of income from labor to capital and, within that, a shift of labor income to the top and away from the middle.

Krugman offered no insight as to why this was happening, but he did accurately state "Income stagnation does not reflect overall economic stagnation; the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn't soared."

The Wedge Between Productivity and Wages

Mark Thoma commented on Krugman's post in his Economist's View take on The Wedge Between Productivity and Wages

Inequality has reverted to levels unseen since the Gilded Age, financial regulation has waned, monopoly power has increased, union power has been lost, and much of the disgust with the political process revolves around the feeling that politicians are out of touch with the interests of the working class.

We need a serious discussion of this issue, followed by changes that shift political power toward the working class. But who will start the conversation?

Who Will Start The Conversation?

Thoma asks "Who will start the conversation?"

I am more than happy to start the conversation (and indeed already have on numerous occasions). Nonetheless, let's try once again, starting with a link a close friend sent just today: "A Peek Inside Tesla's Robotic Factory"

I invite you to read the article, but please watch the video.

Technology Overtakes Demographics

Watching that video should explain many things. The key point that should be easy to spot is technology has surpassed demographics.

Krugman's Mea Culpa

Paul Krugman was let to the recognition party as evidenced by his article Is Growth Over?

"Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people. So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots."

Robots, Demographics, the Fed

Amusingly, Krugman admitted in December of 2012 that he did not understand what was happening (let alone what to do about it).

In Human Versus Physical Capital Krugman stated ...

So the story has totally shifted; if you want to understand what's happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn't grasp this until recently. But it's really crucial.

Robots, Demographics, the Fed

Not only was Krugman was late to the problem, he also missed the central cause of the problem, who is to blame, and what to do about it.

As noted above, technology has overtaken demographics. Before that happened, the Fed (central banks in general) could inflate at will, waiting for wages to rise with inflation.

However, the natural state of affairs as a result of productivity increases is falling prices (not rising nominal wages). One look at computer prices (where there is no government or union interference) should suffice to prove the point.

Yet the Fed is hell bent on preventing price deflation. The Fed succeeded but it has been a Pyrrhic victory.

Prices are going up, but wages have not kept up. It is as simple as that.

In the absence of Fed policies, wages would be stable to declining, but prices would fall more, and thus real wages would rise.

Instead, and as a direct result of Fed inflationary policies, profits have gone to those with first access to money, notably banks and the already wealthy.

The solution is to get rid of the Fed and fractional reserve lending, not tax robots or increase inflation as Krugman and others hypothesize.

Unfortunately, we see all sorts of preposterous proposals by various inflation proponents stating that more inflation is the key to success.

For example, Noah Smith, economist author of the "Not Quite Noahpinion" blog, recently proposed 5% inflation stating "Inflation makes you richer ... to the benefit of the young and the poor ... which is why conservatives don't like inflation"!

For details of Noah's Alice in Wonderland economic thesis, please see Ivory Tower Academics, Inflation, and Kindness.

Bottom Line

The Fed and its inflationary policies are directly responsible for the massive rise in income inequality, yet numerous economists promote more inflation and taxation of robots as the solution.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Hurry! Only 121 Shopping Days Left Before Christmas; What to Expect This Holiday Season; Perpetual Christmas

Posted: 25 Aug 2013 01:53 PM PDT

Better hurry. There's "only" 121 shopping days left before Christmas.

If you think that sounds ridiculous so do I. But all it takes is for one major retailer to start Christmas promotions a few days earlier than last year, and all the lemming fall in line.

Thus, retailers en masses started bombarding customers with Christmas promotions three days sooner this year than last.

What to Expect This Holiday Season

MarketWatch says Wal-Mart's free layaway launch foreshadows a competitive holiday to come.

Many top retailers have cut their full-year earnings outlooks, a clear indication they see a rough holiday season ahead.

Wal-Mart Stores Inc. WMT , cognizant of the climate, is wasting no time getting a jump on the competition.

Merchandising and marketing chief Duncan Mac Naughton, speaking Wednesday before 6,000 employees at Wal-Mart's annual holiday meeting, said the company for the first time will introduce free layaway with no opening fee and no gift-card reimbursements. Last year, Wal-Mart layaways carried a $5 fee. It's also adding infant toys, car stereos and other automotive electronics to the list of categories available for layaway. The program starts Sept. 13, three days earlier this year, and lasts through Dec. 13.

Citigroup analyst Deborah Weinswig said Wal-Mart's layaway-tied sales last holiday season rose about 10%. "We have a cautious view on the consumer," she said, adding Wal-Mart's no-fee program will resonate with shoppers given the challenging economic environment.

Christmas in August

As goes Wal-Mart, so goes the rest of retail. On Thursday CNBC stated Retailers start Xmas deals.

Even before the school bells are ringing for many families, retailers are sounding sleigh bells.

Yes, that's right. With 120-plus shopping days left, stores are already talking up their holiday offers.

Toys R Us announced Wednesday that it would expand its price-match guarantee to include online retailers including Amazon.com, Walmart.com, Target.com and BestBuy.com, among others. The aim, according to the release, "Removing any doubt before holiday shopping begins in earnest that customers are receiving the best available prices."

"Retailers are determined not to be left on the sidelines," said Dave Cheatham, managing principal of Velocity Retail Group. "They're reinventing the rules on how to do holiday shopping."

And there is some basis for the Christmas-in-August approach. "We do know that 40 percent of holiday shoppers say they begin shopping before Halloween," said Kathy Grannis, spokeswoman for the National Retail Federation. If it draws in even a few extra customers, early action can be a big advantage in a competitive season, she said.

"Perpetual Christmas"

So when does Christmas in July start? Heck, why not perpetual Christmas?

And I have just the slogan: "It's always Christmas at Wal-Mart". And if it's "Always Christmas", there's never any shopping days left - so you really better hurry with that shopping!

Wal-Mart better grab this slogan before Amazon does.

Retailers seem to be worried. But if consumers behave rationally for a change, it will be a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Brazil Plans $60 Billion Currency Intervention Scheme; Indonesia Abandons Intervention, Adopts Other Measures

Posted: 25 Aug 2013 10:59 AM PDT

The Financial Times reports Brazil, Indonesia launch measures to shore up their currencies.

Brazil and Indonesia have moved to stem the declines in their currencies and shore up confidence at the end of a torrid week for emerging markets where local borrowing costs hit a two-year high.

The central bank of Latin America's largest economy said late on Thursday that it would launch a currency intervention programme worth about $60bn to ensure liquidity and reduce volatility in the nation's foreign exchange market.

On Friday, Indonesia's chief economic minister Hatta Rajasa told reporters that the government would increase import taxes on luxury cars, introduce tax incentives for companies investing in agriculture and metals industries and aim to reduce oil imports.

Brazil's huge programme, which will be conducted through currency swap and repurchase agreements, follows a more than 15 per cent depreciation in the real against the dollar this year to its weakest levels in more than four years.

Brazil's central bank said in its statement that it would on Monday to Thursday offer $500m a day in currency swaps to support the real, while on Fridays it would sell $1bn on the spot market through repurchase agreements.

"If judged appropriate, the central bank will take additional measures," the bank said in the statement. The programme, which will last until December, follows intervention this year by the bank through derivative markets and other means worth about $45bn.

Brazil's Currency War

These moves by Brazil are rather amusing since Brazil launched a "currency war" while complaining bitterly over the past two years that its currency was too strong.

Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe; Japan Losing Balance of Trade Battle

Brazil has declared a fresh "currency war" on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country's struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not "sit by passively" as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

"When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil," he said on Thursday after announcing changes to the so-called IOF tax.

Be Careful of What You Ask

Countries need to be careful of what they ask as they just might get it. Brazil got what it asked and now does not want it.

OK Guido, what happened to the increased competitiveness you thought you were going to get?

Brazil's currency madness should provide a lesson for Japan, but it won't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Seth's Blog : "When I grow up..."

"When I grow up..."

No kid sets out to make Doritos commercials. No one grows up saying, "I want to go into marketing."

More than ever, though, folks grow up saying, "I want to change the world." More than ever, that means telling stories, changing minds and building a tribe.

You know, marketing.

At least if you want it to be.

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sâmbătă, 24 august 2013

Mish's Global Economic Trend Analysis

Diversion from Down Under

Posted: 24 Aug 2013 07:01 PM PDT

Here is an extremely well done video by reader Peter Sonners who lives in Australia. I offer this as a weekend diversion from economic news, war news, political news, etc.

Link if video does not play: King Tide on Tallebudgera Creek.

"Just once or twice a year, the mangrove forest next to Tallebudgera Creek floods deep enough to paddle all the way through to the other side"

Enjoy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Prepare for War: Pentagon Crafts "Limited Strike Plans" for Syria; U.S. Forces Ready to Act With "Wide Range of Options"; Lose-Lose Situation For US; A Sensible Option

Posted: 24 Aug 2013 01:52 PM PDT

Flashback May 17, 2013: Foreign Policy magazine reports Obama rules out unilateral action in Syria as Russia ships advanced missiles to Assad

Top News: U.S. President Barack Obama again ruled out unilateral U.S. military action in Syria at a press conference with Turkish Prime Minister Recep Tayyip Erdogan yesterday. "It's not going to be something that the United States does by itself. And I don't think anybody in the region would think that U.S. unilateral actions … would bring about a better outcome," the president said, promising to "keep increasing the pressure on the Assad regime and working with the Syrian opposition."

Pentagon Crafts Limited Strike Plans for Syria

Today's "Top News" looks remarkably different: Pentagon Crafts Limited Strike Plans for Syria

A U.S. official said the Pentagon has crafted military options for limited U.S. air strikes in Syria that would send a message to the regime of President Bashar al Assad not to continue using chemical weapons against its civilians. There has been no presidential decision to use the military options, and U.S. intelligence continues to investigate an apparent large-scale chemical weapons attack by the Assad regime this week that may have killed as many as 1,000 civilians.

The official said the military options developed for consideration by the White House are limited in scope and would be intended to "deter or prevent" the Assad regime from the further use of chemical weapons.The options are not intended to remove the Syrian president, who has tenaciously hung on to power as Syria's two-year civil war has raged on.

Traveling on a plane to Malaysia, Secretary of Defense Chuck Hagel confirmed to reporters that Obama had asked the Pentagon to provide military options in Syria in light of the reported use of chemical weapons against civilians by the civilian government.

Ready to Act

Bloomberg reports U.S. Forces Are Ready to Act on Syria as UN Envoy Arrives.

"The Defense Department has a responsibility to provide the president with options for all contingencies," Hagel told reporters yesterday while en route to Kuala Lumpur, where he starts a week-long visit to the region. "That requires positioning our forces, positioning our assets to be able to carry out different options, whatever option the president may choose."

Military options include the repositioning of personnel and assets including ships, so as to be ready if the president chooses a military intervention, a senior U.S. defense official told reporters, speaking on condition of anonymity to discuss internal planning.

Obama is under increased pressure to intervene in Syria amid allegations that President Bashar al-Assad's government used chemical arms in an Aug. 21 attack in a Damascus suburb that opposition groups say killed 1,300 people.

French Foreign Minister Laurent Fabius called on the world to respond "with force" to any use of chemical weapons.

Iran's foreign ministry warned against any international military action in Syria today, saying that intervention would heighten tensions in the Middle East.

"There are no international authorizations for a military intervention in Syria," foreign ministry spokesman Abbas Araghchi was quoted as saying by the state-run Iranian Students' News Agency. "We warn against any moves or announcements that would result in further tensions in the region."

"Wide Range of Options"

Liberty Radio reports Obama To Meet National Security Team To Discuss Syria

The White House says President Barack Obama is meeting with his national security advisers to discuss possible next steps in Syria.

The meeting comes amid reports that the Syrian government has carried out a toxic-gas attack near Damascus on August 21.

A White House official said in a statement Washington had "a wide range of options available."

Hagel said Obama had asked the Pentagon to prepare military options for Syria, and that some of these options "require positioning our forces."

Lose-Lose Proposition

Edward N. Luttwak, in a New York Times Op-Ed says In Syria, America Loses if Either Side Wins

The Obama administration should resist the temptation to intervene more forcefully in Syria's civil war. A victory by either side would be equally undesirable for the United States.

At this point, a prolonged stalemate is the only outcome that would not be damaging to American interests.

Indeed, it would be disastrous if President Bashar al-Assad's regime were to emerge victorious after fully suppressing the rebellion and restoring its control over the entire country. Iranian money, weapons and operatives and Hezbollah troops have become key factors in the fighting, and Mr. Assad's triumph would dramatically affirm the power and prestige of Shiite Iran and Hezbollah, its Lebanon-based proxy — posing a direct threat both to the Sunni Arab states and to Israel.

But a rebel victory would also be extremely dangerous for the United States and for many of its allies in Europe and the Middle East. That's because extremist groups, some identified with Al Qaeda, have become the most effective fighting force in Syria. If those rebel groups manage to win, they would almost certainly try to form a government hostile to the United States. Moreover, Israel could not expect tranquility on its northern border if the jihadis were to triumph in Syria.

The war is now being waged by petty warlords and dangerous extremists of every sort: Taliban-style Salafist fanatics who beat and kill even devout Sunnis because they fail to ape their alien ways; Sunni extremists who have been murdering innocent Alawites and Christians merely because of their religion; and jihadis from Iraq and all over the world who have advertised their intention to turn Syria into a base for global jihad aimed at Europe and the United States.

Given this depressing state of affairs, a decisive outcome for either side would be unacceptable for the United States.

There is only one outcome that the United States can possibly favor: an indefinite draw.

By tying down Mr. Assad's army and its Iranian and Hezbollah allies in a war against Al Qaeda-aligned extremist fighters, four of Washington's enemies will be engaged in war among themselves and prevented from attacking Americans or America's allies.

That this is now the best option is unfortunate, indeed tragic, but favoring it is not a cruel imposition on the people of Syria, because a great majority of them are facing exactly the same predicament.

Maintain Stalemate Says Luttwak

Luttwak continues with a hugely controversial set of statements "Maintaining a stalemate should be America's objective. And the only possible method for achieving this is to arm the rebels when it seems that Mr. Assad's forces are ascendant and to stop supplying the rebels if they actually seem to be winning."

Stalemate Option Foolhardy

Up until his "maintain stalemate" position, Luttwak was on track. The point being the US receives no particular benefit regardless of who wins.

Yet, by alternating support depending on who was winning, both sides would resent US tactics. And sooner or later one side is going to win by some US miscalculation somewhere, intervention by Russia, or intervention by other Mideast countries.

In the meantime, the hot-cold practice of on-again off-again backing of both sides would be 100% guaranteed to inflame tensions in Iran, Iraq, and Saudi Arabia (all of which would resent US policy).

Better if Assad Won?

One might even argue it would be better if Assad won than a group of belligerent Al Qaeda rebels guaranteed to stir up more problems in the region if they win.

Yet backing Assad is hardly an option.

Sensible Option

I suggest the sensible option is to condemn chemicals, condemn bloodshed, and otherwise stay out of the mess.

Unfortunately, I strongly suspect the US will not choose the sensible option. Preparing a wide range of military options and sending forces to the area is hardly encouraging. So mentally prepare for the US to engage in another senseless, unwinnable war, that we cannot afford in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

A Better Bargain for Responsible, Middle Class Homeowners

Featured

A Better Bargain for Responsible, Middle Class Homeowners

In his weekly address, President Obama notes that while college education has never been more important, it has also never been more expensive -- which is why he proposed major new reforms this week to make college more affordable for middle class families and those fighting to get into the middle class.

Click here to watch this week's Weekly Address.

Seth's Blog : Misunderstanding quality

Misunderstanding quality

Kodak, of course, ruled their world. They were as close to a monopoly as they could get for generations.

Along the way, though, the company made the mistake of misdefining quality. They thought that what would ensure their future was better fidelity film. And without a doubt, they delivered on the promise of ever better film stock, with all the things a professional photographer could hope for.

Polaroid, for a while a disruptive competitor of Kodak's, fell into precisely the same trap. As they gained market share, they doubled down on image quality, raising their prices to support cameras and film that would compete with Kodak's leadership in fidelity.

It turns out that what people actually wanted was the ability to take and share billions of photos at vanishingly small cost. The 'quality' that most of the customer base wanted was cheap and easy, not museum quality.

This confusion happens all the time. Quality is not an absolute measure. It doesn't mean 'deluxeness' or 'perfection'. It means keeping the promise the customer wants you to make.

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vineri, 23 august 2013

Mish's Global Economic Trend Analysis

Humorous Clarke and Dawe Video - Same Special Subject as Everyone Else - Ben Bernanke
Outlook for Jobs and Confidence in Economy Sink
New Home Sales Plunge 13.4% in July, June Revised Lower; Blame Rising Mortgage Rates; Starts 896,000 - Sales 394,000 - Hmmm
Ivory Tower Academics, Inflation, and Kindness

Humorous Clarke and Dawe Video - Same Special Subject as Everyone Else - Ben Bernanke

Posted: 23 Aug 2013 07:02 PM PDT

Here's a bit of weekend humor on Ben Bernanke.

Link if video does not play: Clarke and Dawe - Same Special Subject as Everyone Else

Here is a flashback to another Clarke and Dawe Video, one of the funniest ever.

Link if video does not play: Clarke and Dawe: Lending merry-go-round

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Outlook for Jobs and Confidence in Economy Sink

Posted: 23 Aug 2013 12:40 PM PDT

Gallup reports Americans Sour Slightly on Quality Jobs Market.

The market for quality jobs may be cooling. The 21% of Americans who say now is a good time to find a quality job is down from 25% in July -- and the most negative reading this year. Now, 76% say it is a bad time to find a quality job, up from 70% in July.

Prior to this month, Americans' views of the availability of quality jobs, though still generally pessimistic, had been improving. The percentage saying now is a good time to find quality work rose through most of 2012 and increased further in 2013. But that momentum appears to be fading, which could be due to a variety of economic factors. Americans' quality jobs outlook has worsened at the same time that their confidence in the economy has declined and the U.S. Payroll to Population employment rate has been stagnant.

Confidence in the Economy Sinks

It should not be surprising to discover confidence in the economy has slipped along with availability of jobs given a huge rise in polled unemployment.

For a complete detailed analysis of Gallup employment trends, please see Gallup Unemployment Rate Spikes from 7.9% on Aug 1 to 8.9% on August 20! Sampling Error or Seasonal Effect?

Expect a Jump in BLS Reported Unemployment

I expect to see a strong jump in the BLS unemployment rate unless the Gallup unemployment trend reverses significantly, and soon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

New Home Sales Plunge 13.4% in July, June Revised Lower; Blame Rising Mortgage Rates; Starts 896,000 - Sales 394,000 - Hmmm

Posted: 23 Aug 2013 10:39 AM PDT

On August 14 I penned Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?.

Pertinent Snips

30-Year Fixed Rate Mortgages

Explaining the Rebound in Housing

If you are looking for what fueled the rebound in home sales and the increase in home prices, look no further than the above chart.

In the two-year period from December 2010 until December 2012, the rate on popular 30-year mortgages fell from 4.97% to 3.42%, a decline of 155 basis points (1.55 percentage points). In April, rates were still near record lows at 3.56%.

Treasury Yields and Housing Affordability

On June 24, in 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability? I commented ...

Anyone who stretched to buy is no longer qualified unless they locked some time ago.

Refinancing will soon be dead in the water (anyone who has not already locked no longer has any incentive) and new home affordability has taken a big hit.

Mainstream media talking heads say this will not affect the housing recovery. Assuming this trend sticks (even if rates simply level off now), how can this bond revolt not affect housing?

Sales Plunge Starts Rise

Today, the Census Bureau reports New Home Sales Plunge 13.4%

June was revised lower to 455,000 from previously reported 497,000.

Why the Surprise?

None of this should be a surprise given what I said on August 14. Nonetheless, it was a surprise.

USA Today posted charts of new and existing sales along with this comment "Sales of new homes plunged in July. The seasonally adjusted annual sales pace of 394,000 missed analysts' expectations of 487,000."

New Home Sales

Existing Home Sales

Comments From Bloomberg

Here's a few comments from Bloomberg.

Sales of newly built homes declined 13.4 percent to a 394,000 annualized pace, the weakest since October, following a 455,000 rate in the prior period that was lower than previously estimated, Commerce Department figures showed in Washington. The median estimate of 74 economists surveyed by Bloomberg called for a decrease to 487,000. Last month's decline was the biggest since May 2010.

Purchases of previously owned homes jumped in July to the second-highest level in more than six years, data showed Aug. 21.

"New-home sales data was weak, but the existing-home sales was very good -- there's nothing that changes the FOMC general picture that the housing market continues to recover," Greg Anderson, head of global foreign exchange strategy at Bank of Montreal, said by phone from New York

That's a rather curious statement from the head of global foreign exchange strategy at Bank of Montreal.

New home sales are recorded at signing while existing home sales are recorded at closing. The surge in existing sales reflects contracts written months ago and possibly contracts rushed to closing to beat rate increases. Thus, we need to wait a month minimum to see what effect rising rates had on existing sales.

The plunge in July new home sales coupled with June revisions lower perfectly coincides with rising rates and "Mortgage Applications Decline 13th Time in 15 Weeks".

Builders Still Optimistic

Don't worry! Builders aren't. Housing starts are up 5.9% to a whopping 896,000 with sales coming in at an annual rate of a mere 394,000, a decline of 13.4%! Is that optimistic or what?

I sense a drop in prices and a further plunge in home buying if mortgage rates continue to rise. Home builders and analysts will be surprised when that happens.

Addendum:

Reader Michael responded Permits include condos. He also commented "A housing start is recorded when the permit is issued so it doesn't necessarily mean the house will be built in the immediate future if ever."

Actually a "start" is recorded when ground-breaking begins.

But, as Michael points out, total permits to new home sales are not directly comparable. Nonetheless, rising permits with declining sales does seem to reflect a bit of unwarranted optimism.

If homebuilders learned their lesson, those permits will gather dust.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ivory Tower Academics, Inflation, and Kindness

Posted: 22 Aug 2013 11:56 PM PDT

Bloomberg writer Caroline Baum pinged me with her latest article Ivory Tower Types Fall for Bigger Inflation Fix complete with a veritable "Who's Who" of inflation proponents.

Inflation Proponents

Kenneth Rogoff - Harvard University economist
Greg Mankiw - Harvard professor
Olivier Blanchard - IMF Chief Economist
Noah Smith - Economist author of the "Not Quite Noahpinion" blog

The biggest missing entry was Paul Krugman.

IMF economist Olivier Blanchard says "the benefits of a 4 percent inflation target might outweigh the costs"

Rogoff goes even further, recommending "a short burst of moderate inflation" -- two years of 6 percent inflation -- would speed the deleveraging process."

Mankiw emailed Baum "Think of it as the Fed announcing it will keep future short rates lower, for any given inflation rate, than it otherwise would have"

Baum offered a series of pertinent rebuttals:

"If a 6 percent inflation target would accelerate the deleveraging process, why stop there? Why not 8 percent? Or 10 percent? Wouldn't that speed the process? You get the point."

"In theory, Mankiw is right. Ceteris paribus -- Latin for with other things equal. But other things aren't equal; they never are."

"In the real world, bond investors are going to look at 6 percent inflation and project 8 percent or 10 percent. Nominal bond yields will rise to incorporate higher inflation expectations. Real yields might not rise, but it's unlikely they would fall. And long-term rates are what matter for capital investment, which is key to increasing the economy's growth potential and raising productivity."

What Baum Left Out

Baum's rebuttal was well stated. However, she forgot to mention that asset bubbles that do not even count as "inflation". What about the housing bubble? The dotcom bubble? They don't count either, at least to the Fed.

We are in this mess precisely because of inflation. The Fed does not even know how to measure it.

From 1997-2000 the Fed ignored a major bubble in the stock market.
From 2003-2006 the Fed ignored major bubbles in home prices, then commercial real estate

Here's the deal: The Fed can inflate money supply, but it cannot control where the money goes. And typically monetary inflation goes into asset bubbles (which the Fed ignores until they burst). Then in an effort to bail out the banks (typically overweight bubble assets) the Fed steps on the gas again.

The end result of inflation is a series of boom-bust cycles of ever-increasing amplitude.

The biggest losers in these inflationary boom-bust scenarios are those with last access to money and credit, typically the poor. The housing bust is a prime example. By the time those lowest on the totem pole had access to credit, it was far, far too late to buy houses to benefit from inflation.

Bernanke brags "inflation" has been lower under him than any other Fed chairman. He conveniently ignores the fact he was on the Fed in the Greenspan years, that he presided over the biggest property bubble in history, and he also ignores the stock market bubble we are in now.

Bernenke is now stepping aside, hoping to pass the buck to Janet Yellen or Larry Summers. How Convenient!

For a comparative analysis of the leading candidates to replace Bernanke, please see Tweedle Dum vs. Tweedle Dee; Does Janet Yellen Have What It Takes?

Totally Ignoring Reality

Baum referred to inflationist Noah Smith who on August 20, wrote Learn to stop worrying and love (moderate) inflation.

The Federal Reserve's unprecedented programs of Quantitative Easing have not, as many predicted, resulted in substantially increased inflation. But I view this as a failure of the policy, not a success.

[Mish note: unlike other Austrians and countless misguided hyperinflationists, I predicted economic distortions not price inflation]

Popular Inflation Myth 1: "Inflation means I can't buy as much stuff."

Wrong. Remember, inflation is an increase in the overall price level. But when the price of everything goes up, your wage should rise as well. Why? Because on average, we are all sellers of something. If you work in a tea shop and the price of tea goes up, your wage can be expected to go up as well, and so forth. Remember, every dollar that one person spends becomes the income of another person!

So when prices go up, wages should go up as well. Read this paper. The authors find that "higher prices lead to higher wage growth".

Of course, wages are affected by other things besides inflation - for example, labor's share of total income. So "price inflation" and "wage inflation" aren't exactly the same. But they tend to be similar:

Not Just Wet, Soaked

Noah's not just wet, he's soaked to the bone.

Let's take a look at Noah's wage theory vs. practice, starting with Top 1% Received 121% of Income Gains During the Recovery, Bottom 99% Lose .4%; How, Why, Solutions.

Also consider my followup post Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else).

Here is the key section.

Real US Household Incomes

In "real" (CPI-adjusted) terms, 50% of households are no better off than they were in 1988. Let's dig a litter deeper.

Growth in Real Household Income by Quintile

The above chart shows percentage income growth by quintile since 1967. Since 1988, the bottom, 4th and middle quintiles (a combined 60% of households) have negative real income growth. The next chart shows the same thing in a different way.

Real Household Income by Quintile

No matter what your timeframe, only the top quintile did well. And from 1980 until 2000 the top 5% got the lion's share of income gains.

Reality

While Noah can sit in his ivory tower and express an ill-formed opinion on what should happen, I posted the reality of what did happen - with price inflation every step of the way save a brief period at the bottom of the great recession.

Here is the reality: Those with first access to money, the banks and already wealthy are the only ones who benefit from inflation.

Noah concluded with "We don't want to let inflation get out of hand. But a higher Fed inflation target for the next decade - say, 4% or 5%, instead of our current 2% - would probably be a good thing for most Americans."

In essence, Noah proposes a mathematical absurdity: "If it doesn't work, do 200% more of the same." The absurdities don't stop there.

Amazing List of Noah's Ridiculous Statements

Inflation Benefit 1: Your debt goes away. Which means that inflation makes you richer. Remember, surprise inflation helps debtors and hurts creditors. Who are debtors? Mostly the young and the poor. Who are creditors? Mostly the old and the rich. Now you hopefully see why many conservatives don't like inflation!
Inflation Benefit 2: The federal government debt goes away. That high inflation in the postwar era is exactly how we got rid of our huge World War 2 debt.
Inflation Benefit 3 (?): "Balance sheet recession" might go away!

Inflation benefits conservatives!?

Inflation, as I have shown, benefits those with first access to money, typically the banks and already wealthy (most likely not the blazing liberals).

Inflation makes you richer!?

That statement by Noah is so ridiculously absurd that only a complete fool could believe it. The housing bubble proves otherwise, so does the dotcom bubble, so does common sense, and so does Hello Noah, Meet Stephanie.

Federal Debt Goes Away With Inflation!?

What about interest on the national debt? What about demographics? WWII debt did not go away because of inflation. In fact, it never went away at all. To the extent it was reduced, it was because of the tide of boomer demographics and the fact that unlike Europe and Japan, the US did not lose productive capacity in WWII.

"Balance sheet recession" might go away!?

We have a balance sheet recession precisely because of an inflationary asset bubble gone bust.

Reflections on Kindness

Caroline Baum was far too kind with her rebuttal, concluding with a simple message "Bad ideas never die. ... That won't stop academics, who are enthralled with an idea that looks good on paper."

I propose the suggestions of Noah, Mankiw, Blanchard, Rogoff go far beyond "bad ideas". These guys are economic illiterates living in some alternate universe, where lack of common sense is the norm and lessons of history nonexistent.

Here's a simple question for you: If "Federal government debt goes away in inflation" as Noah states, then why the hell do we have any? Indeed, with near-constant inflation, why is there any debt at all?

But hey, along comes Noah and a parade of academic wonks devoid of all common sense, promoting the idea that if 2% inflation doesn't work, then 5% must!

And in the process we must praise things like the dotcom bubble and the housing bubble (because those sure worked out well last time, didn't they?) Clearly the poor and not the conservatives benefited from both! And let's forget about the lessons of Japan, because it's clear Japan did not try hard enough either.

Assume Nirvana

Let's assume we reach Nirvana of 5% inflation. What would that do to food stamp costs, medical costs, and the price of gasoline? Not all things go up equally in price, or maybe in academic wonderland they do.

And what about interest on the national debt? Is it "inflating away" now at 2% inflation (with the long bond yielding 3.9% and the 10-year note yielding 2.9%)?

If inflation was 5% what would the rate be on the long bond? 7%?

In academic wonderland can we hold the rate to 0% while inflating away? If we can, then why is the long bond yielding 3.9% now?

What about jobs? If printing trillions did not create many jobs, then why would doubling it? Or are we supposed to have government provide more fiscal stimulus too (because deficit spending of $1 trillion a year isn't enough?)

Sorry, I forgot. In academic wonderland, the way to fix deficits is to increase them!

And all of this money sloshing around will supposedly make everyone wealthy (instead of creating more income inequality as it does now).

Why? Because 5% is the magic Nirvana number, that's why! Noah knows!

Pitiful

It is pitiful what complete ridiculous nonsense spews forth from ivory tower academic wonderland. Baum was kind in her rebuttal, and so was I.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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