CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Wednesday, April 28, 2010
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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48 Comments:
The E.U. is in worse shape than the U.S. (recent article excerpts):
Essentially, Greece has been living beyond its means for years. Think of Greece as a family that's maxed out its credit cards, taken out a second mortgage, and continues borrowing money to write itself a fat check even though it has no job.
It wouldn't be that huge of a deal if Greece could manage some fiscal austerity -- increase taxes, boost productivity, enact pension reform, and cut federal spending. But historically, Greece has a bad if not terrible track record of being able to crack down when it needs to.
And then there's the rest of the PIIGS: Portugal, Ireland, Italy, and Spain. These countries, in one form or another, all suffer from high debt, low growth, and looming financial obligations.
Desmond Lachman, an AEI fellow and a former IMF official, said that the euro zone could even "unravel in the next 18 months."
Greece is a potential domino that could knock over the economies of Ireland, Portugal, or Spain, he said.
He described Greece as the "Bear Stearns" of a general European fiscal crisis. The U.S. government and Federal Reserve engineered a takeover of Bear Stearns in March 2008 but by the time Lehman Brothers needed help seven months later, officials were sour on the idea of a rescue. The subsequent Lehman collapse triggered the global recession.
Lachman said that the euro zone's woes would be the big story over the next year.
We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:
First, there is a liquidity crisis in Greece (already underway).
Second, it turns into a full-fledged financial crisis for the GIIPS. The capital account drops precipitously with investor confidence in GIIPS markets, leaving the very vulnerable countries, like Portugal and Spain with current accounts very much in the red, seriously short of cash.
What Germany wants out of Greece is the equivalent of an economic anaconda. It will force Greece to meet the limits of the EMU Stability and Growth Pact (3% of GDP) by some period.
Of course that cannot happen without an epic surge in exports. Here’s the death spiral: sharp austerity measures translate into unemployment, economic contraction, deflation, and yes, higher deficits. There’s just no way out of it.
All of the GIIPS are in EXACTLY THE SAME UNCOMPETITIVE BOAT!
So we get to the final stage, GIIPS go depressionary, and the economic contagion spreads across the Eurozone, hitting yes, Germany.
Greece has a head start, since it was the first democracy.
Anonymous... Really? I don't think you have read this blog longer than a week.
Don't listen to him, Peak. I enjoy your posts.
I enjoy your posts too even though I may not always agree they are informative in detail. Keep it up peak trader.
"the subsequent Lehman collapse triggered the global recession"
Nope!!!!!!! Maynard Keynes got it right.Read his material! Read Milton Freedman he backs Keynes up. It was that "-CONFIDENCE-" COLLAPSED.The dudees became scared of the duddors.
PT? When Greece joined the EEC and then adopted the Euro along with the condition of no deficits greater than 3% of GDP did it realize that it could no longer devalue its Euro currency like the previous currency the drachma. Truth is they gave up part of their sovereignty to the king of the EEC Germany.
"-CONFIDENCE-" COLLAPSED.The dudees became scared of the duddors.
Yup. The vast majority of loans, even low doc loans are still being paid.
Michael:
Athenian democracy was developed in the Greek city-state of Athens, comprising the central city-state of Athens and the surrounding territory of Attica, around 500 BC.
It was a joke, Michael.
Sorry you missed it.
Remind me to add reading this blog to my resumé, I didn't know it was so important.
Grant, that trade-off may have been worthwhile to be part of something bigger, like a U.S. state.
The U.S. is in a weak position, because it can't afford another major crisis. The Fed's quantitative easing, TARP, fiscal policy (the stimulus plan, and subsequent spending, along with the health care law, energy policy, regulation, strengthening the yuan, cash-for-clunkers, etc.) resulted in slow growth, record budget deficits, and inevitable higher taxes, inflation, and interest rates.
The top priority should've been facilitating economic growth, which would've raised tax revenues. However, a bunch of lawyers decided instead to micromanage the economy, with more layers of laws, because prior laws had undesirable effects.
It's uncertain if a E.U. depression will help or harm the U.S. economy. When a firm's top competitor goes bankrupt, it helps the firm. Capital flows may shift from the E.U. to the U.S., and the Euro may collapse. After WWII, when Europe was in ruins, the U.S. economy benefited. Of course, there will also be a loss of optimism or confidence in Western Civilization.
Recent doom and gloom predictions:
Harry Dent, author of "The Greatest Depression Ahead." He combines demographics with consumer spending patterns to estimate growth or contraction of the economy. His conclusion: depression in 2010-11.
Marc Faber, he told Bloomberg that the Dubai debt default was just the tip of the iceberg -- entire governments will default before this financial crisis ends.
Charles Nenner, a securities and trading analyst for Goldman Sachs for 12 years before forming his own firm, Nenner is a "double-dipper," forecasting another recession in 2011 as interest rates soar and strangle the economy.
Robert Prechter, CEO of Elliott Wave International, he was bullish in February and predicted the current stock market rally. Now? "I think 2010 is going to be a big down year very much like 2008." Prechter's interpretation of wave theory suggests the U.S. is heading into the worst depression in 300 years.
Jim Rogers, made the rounds on the financial networks, excoriating the theory that the solution to America's debt problem is more debt. "That's like saying to Tiger Woods, 'You get another girlfriend and you'll solve your problems.'"
David Rosenberg, the chief economist and market strategist for Gluskin Sheff & Associates Inc. writes that the U.S. household sector has imploded. "Even with the equities rally and the tenuous recovery in housing in 2009, the reality remains that household net worth has contracted nearly 20 percent over the past year and a half. That's an epic $12 trillion of lost net worth, a degree of trauma never seen before."
Nouriel Roubini, known as Dr. Doom, the New York University economics professor warns that the recovery will be anemic and U-shaped.
Economist A. Gary Shilling, a consultant and investment manager, Shilling says the U.S. consumer is dead, meaning slow growth and deflation for years to come.
More views: Double dip could come through a large, even increasing number of pressures. These start with unmanageable public debts in several countries, a run against the US dollar, defensive interest rate hikes due to returning inflation if the recovery builds, stubbornly high OECD unemployment and high budget deficits, geopolitical rivalries in the Mid East and West Asia. Trade conflicts could flare, including possible carbon tariffs and protectionism. The list of other possible causes is long.
It's difficult to be optimistic, because government rather than helping households reduce their mountain of debt, created another mountain of (government) debt, which households will pay for.
PT?Confidence is the big thing so what the M.P'S have been posting here on new domestic oil production is good.Also taken with other international new areas opening up to exploration and development should contribute to a more stable raw oil price in years to come. Iraq Brazil Russia The Stans Australia Falkland Islands US Africa Sudan Libya have all reported big new developments coming on stream for oil or gas
PT?Health care can be better managed when the Republicans win future elections they can simply start to reign in costs by applying an access fee for doctor visits to reduce un-needed waste and abuse.They can also limit free services only to certain items or ailments. A tax levy can also be introduced on the users to cut the health deficit to the then current government. So all is not lost the health system is still evolving for probably at least the next 10 years.
PT? I don't agree that $12 trillion of invested funds was lost. But I do think that Michail Jenseen was foolish to think that markets [and prices] can rise forever.
How much of the $12 trillion was a fictitious figure because the asset prices reached could not be obtained in reality until actually sold. If the whole peak stock market was sold as the stock hit the selling lists the sale prices would begin to tumble and as buyers became harder to come up with.
I think the word bubble fits aptly here.
PT? The consumer does not count as much If you start to shift the economy away from consumer imports to higher quality U.S. manufactured goods with particular attention given to new high tech industries. Particularly if some way can be found to keep copy countries exports from hitting ---marts shelves for an elongated of time so as to increase profits earned on a hot new line
"Health care can be better managed when the Republicans win future elections they can simply start to reign in costs by applying an access fee for doctor visits to reduce un-needed waste and abuse"...
Why bother with more bureaucracy?
The Republicans if they're serious about it all can just DEFUND ObamaCare every year it comes up...
In fact that method could be applied to a very wide variety of nanny state programs and then just watch the deficit and debt shrink before your very eyes...
It's difficult to be optimistic, because government rather than helping households reduce their mountain of debt, created another mountain of (government) debt, which households will pay for.
Total Cost = Production Cost + External Cost + Government Cost.
You don't necessarily lower total costs by lowering one of the others. each fction thinks that lowering their costs lowers total cost, without considering the system effects.
In this case Production Cost is the true cost of housing and exteranal cost is debt (and whatever other stuff the builders don't pay for) and government cost is cost of regulating and policing the business.
As you point out, debt is shifted from one side to the other, except in the case of true, uncovered losses, which woulfd ordinarily be production costs to the banks. In turn, these would be covered by risk management built into the successful loans.
then just watch the deficit and debt shrink before your very eyes...
while the external costs pile up.
When a firm's top competitor goes bankrupt, it helps the firm.
But when a fiorms top customer goes bankrupt it doesn't.
"while the external costs pile up"...
What external costs?
Juandos? I think it is better to have everyone covered for basic health care. Nobody should be refused treatment in a life threatening situation if they cant pay.
What external costs?
I don't think we know yet, and we certainly don't agree.
I think one argument would be that if you defund Obamacare you would pay less government cost, but more uninsured people show up at the emergency room where they are guranteed treatment anyway.
Maybe that isn't a good example, but generally an external cost is one borne by a party outside the transaction boundary. Defunding would be a reverse transaction, so I'm not sure how that would work.
Let's see, You take away funding and you expect that certain services will stop. Thats how you figure what a fair deal is: you think it will cost you less to do without the services than to pay for them. later you discover that the suppliers to those services are hurt, so that becomes an external cost.
Hmm, obviously not a fully formed thought in this circumstance.
Try another way. The assumption going in to Obamacare is that it will reduce external costs more than it riased government costs. We have not tested that yet, but we believe we have plenty of reason to be skeptical, based on prior history.
Your assumption going out is just the opposite. You assume you reduce government costs, and you certainly reduce production costs since you stop paying for it. But you suggest that no other costs go up.
That seems unreasonable. What rteally happens is tha production (health care) goes on, but the payment for some of it is shifted away from government to those who use it.
If they use it. If they cannot afford to, they won't,and they are now outside the transaction. Then whatever the value of the damage to their health (through non -treatment) becomes an external cost. Then if thy cannot work or be productive, that becomes an additional cost.
I dunno, haven't thought it through, but it does seem that whenever the policeman isn't on the block, external costs go up. someone winds up paying for not having that cop on the beat, and someone else winds up saving by not having the cop on the beat.
The property of both those people should be equally protected, so when the cost of crime is greater than the cost of police, you nned to spend more on police. sut if the value of losse is lower than the cost of police, you are spending too much and protecting the taxayers money too little.
PT? There is plenty of scope for a lot of micro economic reform to take place in America. Tariffs and subsidies can be reduced or removed so that any particular industry can be opened up to worldwide competition which would force protected industries to become more efficient or disappear from the marketplace over time.This would reduce prices on these goods services or items for consumers over time.
PT? America is not in a weak position because the real economy is solid and can be easily turned to produce most of the goods and services that America needs.
If you remove money from the equation and instead just forget the human factor and needs production costs can be reduced by simply chaining workers to desks and machines day and night then the economy would pick up instantly because the cost of production would fall immensely providing there was not a rise in the price of raw material im-puts.
So money as a cost becomes arbitrary and suggests that earnings should be reduced by at least 10% or the working hours increased to bring instant relief to hard pressed employers.
A very desirable drop in consumer prices would result.Everyone wins.
PT? Capital flows are shifting all the time so a run is possible against the $US at any time in the same manner that a run is possible on any currency.
Now that the $US has devalued by about 40% over the last year it I think less likely now than a year ago.However the most likely current devaluation would be a government engineered quick drop in value that could be possible particularly as the$US has been creeping up in value in recent weeks.
EU depression would probably not grossly damage the US economy but a heavially devalued Euro would set aside some of the trade gains already picked up on the back of the depreciated $US dollar.E,g, recent large sales of Boeing aircraft.
just forget the human factor and needs production costs can be reduced by simply chaining workers to desks and machines day and night
And you don't think that is a production cost, chaining people to their desk? so much for compassionate conservatism.
Think of this as a system C/B analysis where the benefits of production count as negative costs in the PC term. It costs something to make soap, but you get to stay clean. In the external costs the soap winds up in the river, and the soap wrappers in the landfill.
The government costs are licensing monitoring policing and enforcing operating regulations so the wrappers cannot be made out of lead foil.
It all has to be monetized to make sense. Frequently this boils down to what value you choose for statistical value of human life. Strangely enough some departments use one value and some use another.
PT? I don,t think western civilization will collapse as it has many successful imitators who have dropped their primitive past culture to join it.these hanger onners are just not going to drop off and invent their own when they can sponge off gullible Americans by selling them easily worn out crap that needs replacing continuously. How can they loose.
America has some very good allies and some very questionable ones but there has always been a future for this country even in its bleakest times. Time heals everything.
Grant, I agree, the U.S. has tremendous fundamental strengths. In 2000, the U.S. economy was the envy of the world. Even until Sep 2008, when Lehman failed, and eight years into the structural bear market, the U.S. economy was near its peak.
However, in only 1 1/2 years, we managed to achieve a slow recovery from a deep recession, projected $1 1/2 trillion annual budget deficits, and a populist uprising, based on ignorance, against many of the factors that made the U.S. successful.
PT? I know what you are saying and I agree with you but things will get better. I have lived and seen through this stuff before.heres a couple of links. www.aol.com click- finance -select;-obama makes his mark on federal reserve. This will improve the current situation.While at www.aol.com click wallet pop-personal finance-then click on manure tea bags. This is innovation!how to raise your income by thinking.
anon @ 4/29/2010 3:04 PM says: "I think one argument would be that if you defund Obamacare you would pay less government cost, but more uninsured people show up at the emergency room where they are guranteed treatment anyway"...
Well that sort of nonsense has to stop...
Why don't those who think that this mandatory care be 'free' to all volunteer to pay for it ALL with their own money?
"I think it is better to have everyone covered for basic health care. Nobody should be refused treatment in a life threatening situation if they cant pay"...
O.K. grant then why don't YOU pay for it?
Where does it say in the Constitution that one group of people should be extorted from so as to cover the costs of another group of people?
The Irish economy is in crisis due to the greed of investors and bankers and the stupidity of Government policies in stoking up the property "boom".
Now the poor-both working and unemployed, the sick and disabled are set to pay for the greed of the few. NAMA will take om the multi-billion debt of the speculators while wages, benefits, health services are cut to the bone. The poor bail out the rich!
Juandos I already answered your question here under health care.But don't forget in a civilized society where the majority rule we all have to step up to the plate for lots of things we don't believe in because the majority have voted for it.
we all have to step up to the plate for lots of things we don't believe in because the majority have voted for it.
A Democracy also has the obligation to protect minorites.
Juandos apparently believes that anything and everything the government does that he does not agree with amounts to a direct extraction from his pocketbook through taxes.
Considering the number of things he complains about, he must have a whopping big bill, otherwise the theft amounts to about 5 cents per gripe.
I've suggested a glorified version of the presidential checkoff: on the back of you tax bill have a simplified vesion of the budget where you can allocate your dollars wherever you think they should be spent.
The results would be published, but non-binding on the legislature. However andy legislator who proposes spending in excess of that allocated by the people, would have some splainin to do.
Having allocated all of his $2000 in taxes to law enforcement and national defense, juandos could rest in peace, and quit complaining about how other people allocated their tax money.
Naturally he wouldn't actually do that, propbably, but would continue to expound on what money should not be spent. We would then see that his true agenda is ordering other people around.
Eventually, you could make the straw budget partially binding: any legilation that differs from the straw budget amount by more than 15% requires a supermajority vote, otherwise a simple majority.
Where does it say in the Constitution that one group of people should be extorted from so as to cover the costs of another group of people?
Extortion is a strong word, but the preamble does mention a need to provide for the general welfare.
You don't believe it, but when the government forcibly takes money from you it is obliged to use that money to provide protection for the remainder of your property.
One way it does that is to protectt you from constant badgering from charity causes which would otherwise have to provide indigent health care and old age support.
OK Juandos send me the bill then I'll go and repossess the government of the people and clean the whole bloody lot up.You can have the job of minister of finance. We will have beggars and stiffs everywhere but what to hell we will have a budget in surplus.
PT? A bit more on the $US dollar. Currently in Asia [including China] there is a lot of talk of re-valuing Asian currencies upward. The Republic of Singapore in a first move has lifted the value of the Singapore dollar by 1%. They intend to continue this upward trend into the future and no end target has been announced. The result of this is that in Singapore the $US will have been de-valued.
China has been fiddling with doing the same.The Canadian dollar is about parity with the $US and the Aussie is creeping towards it. So is the $US still in a de-facto devaluation.
Mike? the Irish economy is just another one of those Irish jokes.
This comment has been removed by the author.
"Juandos I already answered your question here under health care.But don't forget in a civilized society where the majority rule we all have to step up to the plate for lots of things we don't believe in because the majority have voted for it"...
No grant you did not...
All you have done is proven that people like Margaret Thatcher ('The problem with socialism is that you eventually
run out of other people’s money') and Benjamin Franklin ('When the people find that they can vote themselves money,
that will herald the end of the republic') were right...
You and anon @ 4/30/2010 2:14 PM need to remember we're NOT a communist nation yet...
Quite awhile back Professor Mark posted the following that you should consider reading: Not Yours To Give
Juandos?I haven't given anyone anything. I have merely stated my opinion. Margret Thatchers reign was back in the 1980's and things have changed substantially since then even though it was the mainly extended Harold Wilson extreme left labor government that created most of the British problems it is amazing that the right leaning American Bush administration republican government managed to achieve the same type of mess.Thatcher inherited the mess and to a degree so did Bush by inheriting growing problems that Clinton had ignored [eg. Bin Larden bombings].
Read again what I said about health care. I actually think it is pretty middle of the road.
I think that when governments go too far to the left or right they are voted out of office and there I think it is better for conservative governments to compromise somewhat to the left rather than have a far left government elected.
To be blunt dead bodies are dead people and I am afraid I like live ones much better.
You should consider yourself very lucky that you are not living in the UK at the moment as they are having an election and the candidates seem to be idiots.No one wants to clean up the current Labor party mess.
BTW. Obama finally made a move and put economist's back into the federal reserve.Things are looking up.
"it is amazing that the right leaning American Bush administration republican government managed to achieve the same type of mess"...
Right leaning?!?!
On what planet grant?!?!
I can see why you don't think you hold socialist views...
"BTW. Obama finally made a move and put economist's back into the federal reserve.Things are looking up"...
ROFLMAO!
The Federal Reserve has always had economists on staff...
From Reason TV: Why The Stimulus Isn't Working: Q & A with economist Richard McKenzie
Juandos?????????????????????????????
www.aol.com----click finance---then click economy---then read:-Obama makes his mark on federal reserve.
"Obamas nomination of two economists and a lawyer to seats on the federal reserve will bring the seven member board to full strength. For the first time in 4 years,allowing the democrat to exert his influence over the long- term policies of the central bank while allowing it to maintain its current direction."
Juandos these are fed governors!
log into the article if you want to read more.
I posted this article as an update information source.
Juandos!The bush administration ran out of other peoples money when their policies caused the economy to crash
"www.aol.com----click finance---then click economy---then read:-Obama makes his mark on federal reserve"...
What? No link grant?!?!
What economy link?
BTW using the AOL search engine there was no story (unless its gone already) titled: "Obama makes his mark on federal reserve"
Yes, it was about the board of the reserve, maybe you should reread your first statement about economists...
"Juandos!The bush administration ran out of other peoples money when their policies caused the economy to crash"...
ROFLMAO!
Meanwhile back in the real world:
President Obama’s Budget Is Killing Jobs
JUANDOS?? i JUST CHECKED THE LINK TO aol AND ITS STILL THERE.This is an important story..
You should read what posters write before you comment, then what you say would have some relevance.
There is no sense in putting any non related link on a posting just so you have one.
"JUANDOS?? i JUST CHECKED THE LINK TO aol AND ITS STILL THERE"...
BS!
If it was there why didn't you put the link?
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