Monday, August 08, 2011

Burton Malkiel: Don't Panic About the Stock Market

Corporate profits, the "mother's milk of stocks, business success and job creation," remain at record high levels.
Burton Malkiel writing in today's WSJ:

"Is it time to sell all your stocks, which are still well above their lows of 2009? I think not. No one can predict what the stock market will do in this and coming weeks. Stocks may continue their decline, but I believe it would be a serious mistake for investors to panic and sell out. There are several reasons for optimism that in the long run we will see higher, not lower, market valuations.

First, I believe that stocks today are cheap. Price/earnings multiples are just over 14 and forward P/E multiples, which use forecasted earnings, have shrunk to less than 12. These multiples are low relative to historical precedent and are especially low when considered in comparison to a 10-year Treasury yield of 2.5%. Dividend yields of 2.5% also compare favorably with 10-year Treasurys.

Moreover, the structure of U.S. corporate earnings increasingly reflects economic activity abroad—including the rapidly growing emerging markets—rather than activity in the U.S. This is why corporate earnings have been growing so rapidly even though U.S. economic growth has been so tepid (see chart above). For large U.S. multinational corporations, the continued growth in emerging markets will be the most important determinant of the future growth of corporate earnings. For many companies, what happens in China, India and Brazil is more important than the inability of Europe to get its house in order and the paralysis in the U.S. and Japan.

My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios. If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did."

76 Comments:

At 8/08/2011 9:10 AM, Blogger Hydra said...

Dividend yields of 2.5% also compare favorably with 10-year Treasurys.

Except for the risk.

 
At 8/08/2011 9:14 AM, Blogger juandos said...

"There are several reasons for optimism that in the long run we will see higher, not lower, market valuations"...

LMAO!

Yeah, its called inflated dollars...

Who's going to trust the value of the greenback after this?

From CNBC quoting Greenspan: "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press...

From the Business Insider: When interviewed on Friday, Warren Buffet echoed this sentiment, “…”Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will...

 
At 8/08/2011 9:24 AM, Blogger morganovich said...

he's missing a key factor here:

profits at non financial firms in the US have been dropping in the last couple q's.

the only reason we are showing gains is how cheaply the fed is giving money to banks and how much they can lever up on govvies.

 
At 8/08/2011 10:18 AM, Blogger Che is dead said...

E Trade Baby Loses Everything

 
At 8/08/2011 10:39 AM, Blogger Buddy R Pacifico said...

One equity that could fit Mr. Malkiel's profile, but with a higher div yield(3%+), is the EFT SDY. This is a Dvidend Aristocrat ETF, composed of the 50 highest yielding stocks of the S&P 1500 Composite -- that have increased dividends for at least 25 consecutive years. It has limited exposure to financials.

I am not a financial professional (duh) but IMHO this equity seems reasonable for myself and possibly others.

 
At 8/08/2011 10:53 AM, Blogger James said...

How can profits be up when high regulation and high taxes are stiffening the economy?

Every time I claim the free trade is a bigger problem I get flamed. Time and time again I am told on this site that high taxes and regulation are causing the lack of employment growth and yet I am presented with yet another set of data saying it ain’t so. Yet another reason that free trade is the problem not the solution. With free trade companies can produce profits without hiring Americans. Apply tariffs and watch employment soar.

No tariffs no recovery. Everything else has been tried and failed. Multiple stimulus packages, multiple applications of Quantitative Easing and multiple tax reductions have been tried. Each has done short term good while making the long term worse. QE2 is over and down we go.

I say there will never be a real recovery without effectively addressing jobs lost to free trade. I challenge you free traders to put a date on the recovery without tariffs. When is it? One year, two years, ten years? Step up to the plate make a call.

 
At 8/08/2011 11:10 AM, Blogger Benjamin Cole said...

Buddy-

I have always liked dividend stocks and like the diversity of the ETF you mention.

My guess is that interest rates int he USA basically go to zero, meaning dividend plays get huge.

We are doing a Japan.

 
At 8/08/2011 11:22 AM, Blogger Buddy R Pacifico said...

James, please re-consider your stand on Free Trade. The current U.S. Free Trade agreements are with seventeen countries. These are basically good for the U.S. The real problem is with the countries that the U.S. does not have Free Trade agreements with.

The overwhelming deficit country for the U.S. is China. If the U.S. adminstration had courage it would declare this trade relationship highly dysfunctional. Further it would limit trade to equal amount for both countries, as a result of economic emergency, until a Free Trade agreement went into effect.

There are some, for various reasons, that will argue it is competition that drives the trade deficit between China and the U.S. This is basically not true, but rather the manipulation of not only currency, but non-tariff trade barriers and official non-enforcement of intellectual property theft in China.

I think that demanding a Free Trade agreement with China is the best hope for the U.S. economy. I am not optimistic but will strongly argue for it.

 
At 8/08/2011 11:48 AM, Blogger morganovich said...

che-

that e-trade baby is exactly how i picture benji.

bunny-

regarding your new "guess", weren't you the one screaming "buy! buy! buy!" back a month ago and talking about down 15000 and how the economy was going to be fine?

your "guesses" seem a bit suspect and subject to change.

 
At 8/08/2011 11:53 AM, Blogger morganovich said...

buddy-

"The overwhelming deficit country for the U.S. is China. If the U.S. adminstration had courage it would declare this trade relationship highly dysfunctional. Further it would limit trade to equal amount for both countries, as a result of economic emergency, until a Free Trade agreement went into effect."

is this a joke?

so, in the midst of a recession, you want product shortages and price hikes in the US?

you have to be kidding.

and how could a government even do this?

governments do not trade, individuals do. what are you going to say, hey, walmart, i now you wanted to import those plates, but you can't?

hey, walmart shopper, get ready to pay more if you can find plates to buy at all?

hey, other business patronized by a walmart shopper, prepare for your customers to have less to spend with you?

unilateral free trade still leaves you better off that imposing retaliatory tariffs/bans.

what we ought to do is drop all out trade barriers and let the rest of the world keep making dumb mistakes if it wants to.

 
At 8/08/2011 11:53 AM, Blogger morganovich said...

buddy-

"The overwhelming deficit country for the U.S. is China. If the U.S. adminstration had courage it would declare this trade relationship highly dysfunctional. Further it would limit trade to equal amount for both countries, as a result of economic emergency, until a Free Trade agreement went into effect."

is this a joke?

so, in the midst of a recession, you want product shortages and price hikes in the US?

you have to be kidding.

and how could a government even do this?

governments do not trade, individuals do. what are you going to say, hey, walmart, i now you wanted to import those plates, but you can't?

hey, walmart shopper, get ready to pay more if you can find plates to buy at all?

hey, other business patronized by a walmart shopper, prepare for your customers to have less to spend with you?

unilateral free trade still leaves you better off that imposing retaliatory tariffs/bans.

what we ought to do is drop all out trade barriers and let the rest of the world keep making dumb mistakes if it wants to.

 
At 8/08/2011 12:02 PM, Blogger morganovich said...

james-

free trade cannot cause such problems.

it's actually impossible.

there is no mechanism by which it can do so.

all tariffs cause a deadweight loss.

removing them creates a gain.

the benefit to US producers of X from a tariff on X is always outweighed by the extra costs to US consumers who now pay more for X.

i note you had no response to by debunking of this argument on the last thread, so i'll repeat it here:

"all tariffs create a deadweight loss in real terms.

how can creating such a loss lead to prosperity?

i note you are silent (again) on those questions.

think about it.

if the US consumes 100 cars, 50 made here and 50 made overseas at a price of $20, we have a $2000 market for cars. $1000 is domestic.

let's say we put a $5 tariff in place.

foreign cars now cost $25. demand for US cars goes up, demand for foreign cars drops.

market share shifts and price rises.

price hikes reduce overall demand.

now the market is 80 cars at $25, still a $2000 market.

sure, US automakers, who now sell 60 of them may make more money, but overall, americans are paying the same money for 20% fewer cars.

that vastly trumps increases in US auto profits.

net jobs are lost as real buying power diminishes.

even if we make the unrealistic assumption that 100 cars are still sold, 70 by the us, 30 from offshore, the US is now paying $2500 (25% more) for the same number of cars and suffering from lesser selection.

the 25% increase in the price of cars comes from somewhere. that's money they cannot spend elsewhere.

and 30% of the price increase does not accrue to american companies.

thus, there is ALWAYS a deadweight loss.

us consumers lose more from higher prices than us producers gain from them.

this graph makes it clear how this must ALWAYS be so:

http://mjperry.blogspot.com/2011/03/econ-101-protectionism-for-dummies.html

you are arguing to benefit special interests at the expense of the society, but are too deluded or misinformed to see it.

you cannot benefit an economy in real terms by arbitrarily making goods more expensive."

until you can answer those question, you have no argument.

 
At 8/08/2011 12:04 PM, Blogger juandos said...

"Multiple stimulus packages, multiple applications of Quantitative Easing and multiple tax reductions have been tried. Each has done short term good while making the long term worse"...

Good?!?! What good?

Try this Business Insider article out by Mike Shedlock: After 16 Types Of Stimulus Failed, What Can The US Government Try Next?

 
At 8/08/2011 12:08 PM, Blogger Buddy R Pacifico said...

"unilateral free trade still leaves you better off that imposing retaliatory tariffs/bans."

The U.S. is a unilateral Free Trade country (ex. 4% tariffs on 4% of imports).

But, unilateral Free Trade is not trade but rather an economic pincer move within a cul-de-sac for the Chinese. Free Trade agreements and resulting Free Trade between the countries is Free Trade. So, we wind down the dysfunction of trade deficts within twenty-rour months or until the start of a Free Trade Agreement.

 
At 8/08/2011 12:11 PM, Anonymous Anonymous said...

benjamin: We are doing a Japan.

The Japanese government debt to GDP ratio is over 200%. We'd have to ramp up spending big time to do a Japan.

 
At 8/08/2011 12:45 PM, Blogger morganovich said...

buddy-

no.

that's just flat out not true.

if we eliminate tariffs altogether, it benefits us NO MATTER whether others do so.

we still get lower prices and more real buying power.

if they want to punish their own consumers and reduce their own growth, well, that's their failure and their lumps.

if your rival punches himself in the face, the last thing you want to do is emulate him.

for every us sugar job lost by cutting tariffs, more than one would be created by the additional buying power created by cheaper sugar.

 
At 8/08/2011 12:54 PM, Blogger Buddy R Pacifico said...

"if we eliminate tariffs altogether, it benefits us NO MATTER whether others do so."

No, this effectively result in an economic pincer move FOR other countries that do not have a Free Trade agreement with the U.S. (REF. 20% U.S. unemployment and real inflation numbers).

 
At 8/08/2011 1:02 PM, Blogger Benjamin Cole said...

Zhang-

I agree with that part of your sentiment, although the Japanese owe the money to themselves, so in a way they are less endangered by their debt. They also have enormous foreign reserves.

Even so, the Bank of Japan has made low inflation rates a fetish. With a monetary noose around the neck of Japan's economy, it has underperformed almost every Western economy, and has shrunk as a fraction of global output. The yen has soared in value.

Milton Friedman and John Taylor both advised Japan to go hard and heavy in QE. They never did (only fleetingly), and are in chronic decline. Property values are still falling in Japan, 20 years after the bust. Try investing in that environment.

Japan's flag is that of the setting sun. The future is in China and the Far East, perhaps Thailand.

 
At 8/08/2011 1:21 PM, Anonymous Anonymous said...

Milton Friedman and John Taylor both advised Japan to go hard and heavy in QE. They never did (only fleetingly), and are in chronic decline. Property values are still falling in Japan, 20 years after the bust. Try investing in that environment.

What are you talking about? Japan's interest rates have been lower than ours for decades. Should the Japanese banks start charging people for maintaining savings accounts? Quantitative easing has worked its magic - Japanese saving rates have plunged from 15% in the 80's to 2% as of 2009. The problem with Japan's economy has nothing to do with economic fiddling - it has to do with the fact that it caught up to the US technologically, but continues to generate very few path-breaking technologies of its own. The easy gains from following the leader are long gone.

 
At 8/08/2011 1:41 PM, Blogger Benjamin Cole said...

Zhang-

Google Milton Friedman, Hoover Institution and Japan, You will come across his paper on Japan.

Then go to John Taylor's wabpage, and read his 2006 paper on Japan, in which he absolutely gushed about the positive effects of QE (a program the Bank of Japan then ended).

Also consider George Gilder, who stated obsessing with minute rates of inflation, while not concentrating on growth, is a key mistake that many conservatives make.

Japan education and technology is excellent. Yet they are a beaten people, not even reproducing. That is what happens when deflation settles in.

 
At 8/08/2011 1:59 PM, Blogger Paul said...

Benji,

"Yet they are a beaten people, not even reproducing. That is what happens when deflation settles in."

Really? Do you have any evidence that low fertility rates are a side-effect of deflation? Prove it.

 
At 8/08/2011 2:10 PM, Blogger morganovich said...

buddy-

nope. not even a little.

please explain to me how higher prices and a deadweight loss benefit the US.

show me one tariff ever that has created net jobs.

just one.

you can't.

because it's impossible.

read the example i laid out for james using cars and you will see why.

you act like china having a tarrif helps them.

it doesn't. it harms their consumers in real temrs.

there is no pincer, just china punching itself in the face while we walk away laughing.

 
At 8/08/2011 2:12 PM, Blogger Benjamin Cole said...

Paulette:

Have you ever tried to reproduce while deflated?

Not only is it humiliating, it is unsuccessful.

 
At 8/08/2011 2:16 PM, Blogger morganovich said...

zhang-

japans deeper issue is demographic.

they are very old and aging.

the workforce is shrinking rapidly. birthrates are at 1.2 per 2. that's going to cut the population by over 40% in a generation if it persists.

no amount of economic policy can overcome that.

benji will never accept this as he believes that a) japan has had tight money b) that money supply growth stimulates real growth when i have proven to him that there has been no correlation between money supply and growth in japan for 25 years and that the periods of best growth have corresponded with a strong, not a weak yen and c) he thinks they have been under stimulated.

good luck getting him to see the facts.

 
At 8/08/2011 2:28 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 8/08/2011 2:35 PM, Blogger morganovich said...

bunny-

cut and paste for you:

friedman was wrong. he posited a theory. the facts prove him wrong. he was a very smart economist, but nobody bats 1.000. he saw everything as monetary. not everyhting is.

here, for the 17th time, is the study of WHAT ACTUALLY HAPPENED.

http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/macropaper04/miyao.pdf

there has been no correlation between monetary stimulus and real growth in japan.

not all problems are monetary or susceptible to monetary solutions.

if loose money has the effects you claim, there would be a correlation.

that fact that there isn't means that neither you nor freidman can possibly be correct.

given the magnitude of their policy, there is just no way there would be no visible R squared if it were working.

as ever, you'll slink off and return spouting this nonsense again on the next thread in blissful denial that once more you have been proven wrong, but that's why i instituted this cut and paste bunny response file.

now i need put no more thought into proving you wrong that you do in learning the facts of the matter.

 
At 8/08/2011 2:39 PM, Blogger Benjamin Cole said...

Morgan-

I trust you as an authority on UFOs.

On the economy--not so much.

 
At 8/08/2011 2:40 PM, Blogger Buddy R Pacifico said...

morganovich and James,

Real Free Trade, not the fake unilateral Free Trade meme, results in mostly trade surpluses for the U.S. in goods.

Ten of the seventeen countries that the U.S. has Free Trade agreements with result in a surplus of trade receipts of goods for the U.S.. Real Free Traders: do you think China really wants a Free Trade agreement with the U.S.?

 
At 8/08/2011 2:47 PM, Blogger Paul said...

Benji,

The chart I linked demonstrates Japan's fertility rate has been declining overall since the early 1970's. Your stupid reply demonstrates you have no evidence to support your oft-repeated and bizarre "deflation causes low birthrates" theory.

But I bet you'll repeat it over and over again anyway.

 
At 8/08/2011 2:54 PM, Blogger morganovich said...

bunny-

i would not even trust you on that.

you really need to go get your money back on you alleged degree.

ps.

i note that once more, you have ZERO substantive response, just ad hominem.

the fact that you cannot even participate meaningfully in the debate (much less win) pretty much says all the need be said bout the validity of your views.

 
At 8/08/2011 3:04 PM, Blogger Buddy R Pacifico said...

CORRECTION: twelve of the seventeen countries that the U.S. has a Free Trade agreement with results in surplus of reciepts for the U.S.

 
At 8/08/2011 3:16 PM, Blogger morganovich said...

buddy-

you are still not getting this.

there is still NO argument for a tariff. china does not benefit from the ones it has.

we might be better off if they dropped it (and they certainly would) but that's no argument for our having a tariff.

go back and look at the chart i linked (12.02). that's for a unilateral tariff. what the trading partner does is irrelevant.

i notice you are silent on naming even one tariff that created net jobs.

i presume that to mean you cannot do so.

in light of that, i have no idea how you can justify mainlining your beliefs.

further, there is no evidence that trade surpluses are a sign of wealth. the structure of GDP makes it look so, but that's highly misleading.

if i trade you $100 for something i value more, how can i possibly be worse off?

from an overall utility standpoint, trade deficits are a good thing. we have traded more money for goods we valued more highly that our partner.

personal utility comes from buying, not selling.

the fact that we wind up with more than we produce enhances wealth, it does not diminish it.

the whole concept of "trade deficit" is essentially meaningless.

you'll have a trade deficit with the supermarket your whole life.

does it make you worse off?

no.

you are better off.

it says nothing about your solvency.

 
At 8/08/2011 3:17 PM, Blogger Benjamin Cole said...

Morgan/Paulette-

I refer you to John Taylor and Milton Friedman re problems of the Japanese economy. They know more than you.

And yes, every modern economy also obtains lower birth rates--but in Japan they are rapidly depopulating. The othjer nation facing rapid depopulation is Germany, a nation also with a monetary fetish.

And please tell me, when will Japan's real estate picture improve?


Morgan: Let me guess--you have followed your advice, and have been a heavy investor in Japan for the last 20 years.

How has that worked out?

 
At 8/08/2011 3:27 PM, Blogger Eric H said...

"Have you ever tried to reproduce while deflated?"

Benji, one of your all time best posts.

"First, I believe that stocks today are cheap."

Uh, yeah. In fact, they are apparently getting cheaper by the day.

 
At 8/08/2011 3:33 PM, Blogger morganovich said...

bunny-

ah, appeal to authority, the other sign you cannot participate in the argument.

that's where you run and hide when ad hominem fails.

why don't you just admit that you do not understand this issue at all and save us both the headaches?

friedman and taylor are provably wrong.

i've given you the paper.

try reading it instead of repeating your same stupidity over and over.

it contains what are called facts. you are just talking about unsupported theories.

this is what actually happened. if there is no correlation between money supply growth and real growth, that shows you this issue was NOT monetary.

there is not other possible interpretation unless you want to argue that some magic force offset money growth each time in precise proportion, a totally implausible notions.

monatarists always claim everyhting is a monetary issue.

often, it isn't.

see how well the largest stimulus and the loosest money in us history has worked?

yeah, me either.

just as in japan, money growth does not cause real growth.

inflation is up, growth is down.

yup, that's a great policy you have there.

 
At 8/08/2011 3:38 PM, Blogger morganovich said...

"Morgan: Let me guess--you have followed your advice, and have been a heavy investor in Japan for the last 20 years."

bunny-

are you really that stupid? i've told you over and over that nothing can compensate for japan's demographic issues and that they are creating a decline that will persist no matter what. saying it's not a monetary problem is not the same as saying they do not have a huge problem.

how about your big buy the market call? did you put your money where your mouth was?

remember my telling you it was going to collapse?

we made money today.

how'd you do?

best i can tell your track record for predictions is about 0.00.

inflation will stay low.

nope. at multi year highs.

growth is coming back.

nope. fell off a cliff.

buy the market.

oopsie.

you are a fantastic contrarian indicator.

i wish there was an etf to bet against you.

 
At 8/08/2011 3:38 PM, Blogger Benjamin Cole said...

Morgan,

When you get that fresh shipment of dilithium crystals mounted into your warp drive, please read this:

http://thefaintofheart.wordpress.com/2011/08/07/the-myth-of-the-strong-dollar/#comments

 
At 8/08/2011 3:40 PM, Blogger Benjamin Cole said...

Eric H-

Thanks for noticing my "good post."

Better a good post than a soft pole!

 
At 8/08/2011 3:43 PM, Blogger Benjamin Cole said...

From Morgan:

"friedman and taylor are provably wrong."

First, cannot you spell and use at least some punctuation? You write like a maroon fresh in from the Guyana backforest.

Secondly, if Friedman and Taylor are wrong (note use of caps), and you are right, I want to get on your Flying Saucer and go to another planet.

 
At 8/08/2011 3:50 PM, Blogger Paul said...

Benji,

"And yes, every modern economy also obtains lower birth rates--but in Japan they are rapidly depopulating."

Funny, I see a steady decline since the 1970's. In fact, there's been a slight uptick beginning in 2005.

ZERO evidence for your bizarre theory, Benji boy.


"The othjer nation facing rapid depopulation is Germany, a nation also with a monetary fetish."

Uh, not according to the actual statistics. Click on the same graph and plug in Germany. Looks to be relatively stable since the early 1970's. Now click on inflation ravaged Venezuela. I see a slope you could ski down.

Once again, zero evidence for your stupid theory.

 
At 8/08/2011 3:58 PM, Blogger Buddy R Pacifico said...

"i notice you are silent on naming even one tariff that created net jobs.

i presume that to mean you cannot do so.

in light of that, i have no idea how you can justify mainlining your beliefs."


I argue for Free Trade. This is the elimination of trade barriers:
Tariffs, Non-Tariffs such as revolving certification standards, non enforcement of intellectual property rights and currency manipulation.

Please find one U.S. job that has been created as a result of these barriers imposed on U.S. goods and services -- other than foreign lobbyist.

"Mainlining" beliefs?

morganovich, please explain to the 20% U.S. unemployed how China's trade barriers benefit them.

 
At 8/08/2011 4:08 PM, Blogger morganovich said...

bunny-

read the paper.

it will show you that they are wrong.

neither one used actual data to test their propositions, they spoke theoretically.

miyao's paper lays out the actual facts and correlations.

i see you are back to ad hominem.

you really cannot speak to these issues at all, can you?

you focus on capitalization because you have no other issue to raise. you really are ridiculous bunny.

just give up and admit that you do not understand even the rudiments of economics. you'll feel better afterward.

 
At 8/08/2011 4:09 PM, Anonymous Anonymous said...

Juandos, the notion that the Fed would try to simply inflate away our debt is silly, Buffett is not dumb enough to really believe that. The Fed would essentially be imposing a tax on all net lenders and using that to pay down debt, but the destabilizing effects of such a move would be so vast, it would far outweigh the debt paid off. Apparently one of the main reasons the govt bailed out Fannie and Freddie is because of how much of their securities were held by the Chinese; the notion that the Fed would then hurt our lenders much more by quickly devaluing the currency is just ridiculous. If we ever reach the stage where Benjie's inflation recommendations are followed in earnest, things will be so far gone that we will be a banana republic with jokers in charge of the Fed- not someone sensible though perhaps a bit too risk-seeking like Bernanke- and the currency will be the least of our problems. ;)

James, I'll take you up on your challenge: we'll have a full-blown recovery in 2-5 years. I can't give you a more specific date as the economy is a complex amalgamation of billions of actions, but I've been predicting another tech boom for awhile now. You do realize that we will also lose US jobs at Caterpillar and other firms in a tariff war? It was precisely such stupidity during the Great Depression that precipitated World War II. I suggest you take a look at this 60 minutes segment from a couple years ago that showed both sides of this issue.

Benjie, haha, that "reproduce while deflated" line was great, I laughed out loud. :D You're completely wrong about deflation and Japan, as has been explained to you many times before, but that was a funny line.

 
At 8/08/2011 4:13 PM, Blogger morganovich said...

buddy-

i never said that china's trade barriers benefit the us. i said they likely hurt us but certainly hurt china.

you are the one arguing for absurd US limits on chinese imports.

i quote:

"If the U.S. adminstration had courage it would declare this trade relationship highly dysfunctional. Further it would limit trade to equal amount for both countries, as a result of economic emergency, until a Free Trade agreement went into effect."

this literally says "i will punch myself in the face until you give me what i want".

if forcibly limiting us imports from china is "favoring free trade" that i have some doubts about your definition.

i realize that you want to inflict pain on them to make them open their markets, but the pain we would inflict upon ourselves in so doing would be worse and could well set off the kind of horrible trade war we saw in the 30's.

pursuing free trade by restricting trade is like pursuing literacy by burning books.

 
At 8/08/2011 5:42 PM, Blogger Benjamin Cole said...

Sprewell-

I enjoy your posts, and as of two years ago would have agreed with you 100 percent. I still agree on balanced federal budgets, need for less regs etc.

Lately, I have been reading conservative monetaristsa of the Milton Friedman stripe, those being Scott Sumner, Marcos Nunes, David Beckworth, and a few others.

They argue for a Fed that targets nominal growth of GDP. They do not obsess about minute rates of inflation but rather obtaining robust growth. George Gilder also wrote about this in Wealth & Poverty.

Sadly, I think, the Fed will continue to be frightened on inflation rates above 1 percent, and cut off growth any time we see that.

That sets up a Japan scenario.

 
At 8/08/2011 6:14 PM, Anonymous Anonymous said...

Benjie, let us examine what you are really calling for. You propose that the Fed raise inflation by printing more money. All this does is take money away from lenders and give it to borrowers, as if I lent someone $5k and there's now more money available, he can now pay me back easier with the greater amount of dollar bills in circulation. This is a silent tax on lenders, all to promote what? The theory is that borrowers are dumber and that while lenders won't invest that money in productive investments in a down economy, choosing gold or some other commodity instead, the borrowers are irrational fools who will start spending it right away, raising demand for the iPads and Gucci bags and Honda Accords that they buy. According to the writers you cite, that spending is presumably worth it because it spurs productive investment in more factories and products, forgetting the great damage it does to lenders who are the primary investors in any economy.

Worse, it merely doubles down on our current factories and products, rather than forcing companies to retrench and come up with new products, so it likely slows down overall technical progress. Would Apple be where it is today if it hadn't almost gone bankrupt just 14 years ago? I think not. Further, if you are really targeting a set rate of nominal GDP, that also means raising interest rates during a boom, something Sumner and his ilk never talk about. All these monetary gimmicks are short-term "fixes" that make things worse in the medium-term. Our economy is recovering and there plenty of smart people at startups and other private companies trying to figure out the ways forward. Panicking and implementing dumb govt policies now only gets in their way and impedes our overall progress, rather than helping.

 
At 8/08/2011 7:00 PM, Blogger Benjamin Cole said...

Sprewell-

Well, a lot there on the plate.

1. If an increase in inflation is theft from lenders, then a decrease in inflation is theft from borrowers.

You can go a lot of ways from there. If the Fed raises rates, then that is theft from existing bondholders, who find their bonds decrease in value. On other words, we can never do anything, as anything we do will "steal" from someone.

2. There is no shortage of capital. We have gluts of capital. In days of yore, lenders had to be catered to. Now, everyone is looking for anywhere to put their capital.

3. We have to do what promotes growth, not the interests of rentiers, labor, the military, welfare recipients etc. We need pro-growth policies.

For example, we have to shave Social Security--that means cutting benefits or raising the retirement age, or both. To make the economy grow, some people are getting to get a haircut.

4. And frankly, I sympathize a lot more with business borrowers (who create jobs) then with lenders.

5. Lenders, when they lend, took a risk. They take a credit and interest rate risk. Their investment is not sacred, or ethically superior to my stock or real estate investments. In fact, I contend the guy investing in business is more ethical or valuable than a mere lender. Lenders we have everywhere--the guy who can creates jobs and wealth--now, that is a hero.

 
At 8/08/2011 7:47 PM, Blogger Buddy R Pacifico said...

"you are the one arguing for absurd US limits on chinese imports."

morganovich resorts to magical thinking to break down and eliminate trade barriers or:

Mr. morganovich, help tear down the wall of forced joint operating agreements with local Chinese firms.

Mr. morganovich, help tear down the wall of Chinese ban on foreign procurement for Chinese government entities.

Mr. morganovich, help tear down the Chinese wall of non enforcement of intellectual property rights.

Mr. morganovich, help tear down the wall of Chinese Indigenous Products Iniative.

Mr. morganovich, help tear down the wall of restricting Chinese currency purchase under market conditions.

Mr. morganovich, help tear down the wall of revolving certification standards on foreign products in China.

Mr. morganovich, help tear down the walls on trade barriers that China erects by endorsing nothing less than a Free Trade agreement with the U.S.

 
At 8/08/2011 7:50 PM, Blogger Benjamin Cole said...

From David H. Levey
Managing Director, Sovereign Ratings, Moody’s Investors Service (1985-2004)

On Saturday, I sent the following statement via email to several publications (NYT, WSJ, Bloomberg, FT). It is intended to describe why I would vote to maintain the US Aaa credit rating, were I still in my former position. At this time, I have no connection with Moody’s nor any non-public knowledge of what its analysts think about the rating or what they intend to do.
This statement is not a defense of the Administration in its war of words with S&P. I am not a supporter of the Obama team’s economic policies, which have added to the debt and the regulatory burden on the economy. As I see our current situation, the Federal Reserve, with its too-tight monetary stance since the summer of 2008, has allowed nominal GDP to fall far below trend, causing a collapse of output and employment — as described by the monetary bloggers Scott Sumner, David Beckworth, Bill Woolsey, and David Glasner. Had the Fed acted properly, (by, for example, setting a nominal GDP level target) the recession would have been much shallower and fiscal stimulus might not have been undertaken. As it was, the collapse of nominal GDP drove the “fiscal multiplier” to zero, leaving us with more debt and nothing to show for it. Monetary policy always “comes last”.
The solution to avoiding the predicted debt explosion will have to come primarily from major reforms of entitlement programs. Tax-rate increases within our present system are counter-productive and will retard growth. If there is to be some contribution from increased revenue, it should come from structural reforms which reduce the taxation of saving, support entrepreneurship, and eliminate loopholes and exemptions that distort consumption and investment decisions. Despite sharing their fiscal concerns, I see the S&P downgrade as premature for the reasons given below.

 
At 8/08/2011 7:57 PM, Anonymous Anonymous said...

Benjie, it's not any increase in inflation that's theft from lenders, as some market-caused variability is natural and to be expected. It's your preferred route of govt involvement through printing more dollars, effectively devaluing the dollars already in circulation, that is theft. Nobody denies that the Fed raises or lowers rates in a counter-cyclical manner now anyway, but that's done to maintain a stable and moderate level of inflation, which is what everyone expects to begin with. You want more, which is where the stealing begins. Just because we have a lot of "capital" doesn't mean we should waste it on trillions of dumb investments, like we just did in the housing bubble, which merely slows growth. I'm all for growth too, but the notion that the dimwits in govt know how to promote growth is a fatal conceit.

I don't just want to "shave" SS, I want to get rid of it, which will do far more to promote growth, as people will then invest in actual companies rather than have their money stolen by govt bureaucrats to squander on their latest bridge to nowhere. Who you sympathize with is irrelevant, and the notion that you have the right to interfere in the contracts of borrowers and lenders through inflation is ludicrous. There is not much of a difference between lenders and investors, they're the same class. They took a risk, but taxing them further means they become less willing to put themselves up for more such theft, so they pull back and gold rises to record levels, as it is today. That's what creates another depression. The entrepreneur, who you laud, often would not get anywhere without lenders who critically examine his ideas and choose to lend to him: you discount their critical role at our peril.

 
At 8/08/2011 9:06 PM, Blogger Larry G said...

re: "... I don't just want to "shave" SS, I want to get rid of it"

in terms of CURRENT issues... SS has been around for 60+ years and over that time has usually broke even or even generated a surplus and has had no role in the deficit and debt since it is funded from FICA taxes - not income taxes.

We have lots of problems... but none of them are due to SS/FICA.

That's what is nutty about the discussion sometimes.

for over 60 years.. SS was not considered a problem to the economy... because.. it wasn't ... it was..and remains a payroll tax - and is also a feature of every other industrialized country that we compete against.

In other words, even if you think it is a bad thing - most, if not all, of the countries we compete against also use payroll taxes for the same purpose.

so why all of a sudden if SS the problem?

I do not see where it has had any different impact now that in the past 60 years... it's always been essentially "off budget".

Now.. it's true that some people have ALWAYS been opposed to the CONCEPT of SS - for it's entire 60+ years of existence but in terms of it being a cause of our current problems.. it's just not.

It's TRUE that IN THE FUTURE - SS will BECOME a problem if we don't make changes to it - similar to changes that have been done many times over it's 60+ year history.

but that's not right now.

so why all of a sudden... SS has to be whacked?

what does it have to do with anything that is going on now?

 
At 8/08/2011 9:49 PM, Anonymous Anonymous said...

Buddy, a little economic history for you. In the decades after the Civil War, the US railroad boom and ensuing bust led to foreign investors in American railroad and govt bonds getting cleaned out, as the Americans refused to pay. Guess what's likely to happen when the Chinese have their inevitable bust? During the 18th century, American piracy of British books was widespread, as the developing nation of the United States didn't want to pay rich world prices for British books. There is nothing new under the sun: all developing nations, like the US, do this to catch up. For you to rail against the Chinese when Americans did the same just a century or two ago is either hypocritical or ignorant, depending on whether you were aware of this history or not. If China ever wants to catch the US, they will liberalize trade and start paying US authors at some point, cuz they sure won't catch us if they keep using their current silly policies over the longer-term.

Larry, I'm one of those who has always been against SS. Also, the sixty-year history is not that relevant as benefits have been raised many times during that period, so the original program bears little resemblance to what we have today. If you want to go back to the program that FDR first signed 75 years ago, where you only start paying out around the average age when people start dying and the benefits were much, much lower, I'd be all for going back to that, deal? ;) And looking at a "pension" program like SS, really a ponzi scheme, and saying "everything's fine, everything's fine" just because we can make current payments is just dumb. Pensions and ponzi schemes die because they can't make future payments, just like SS can't.

 
At 8/08/2011 10:16 PM, Blogger Buddy R Pacifico said...

" During the 18th century, American piracy of British books was widespread, as the developing nation of the United States didn't want to pay rich world prices for British books."

Sprewell (Chief proponent of Theft), this questionable assertion of yours bears little resemblence to today's circumstances. When China ascended to the WTO it agreed to abide by intellectual property rights. Almost all business software, movies and music in use in China have been pirated because of official malfeasance. This extends beyond copyrights to trademarks and massive counterfeitting of goods (even Apple Stores).

 
At 8/08/2011 10:42 PM, Blogger Benjamin Cole said...

Sprewell-

Sometimes, we gotta do what we gotta do. Right now we need to print money, stimulate the economy, and deleverage, for the very same reasons the Fed often raises or lowers interest rates.

There are winners and there are losers, but the winners will vastly outpace the losers, in numbers and amount.

 
At 8/09/2011 12:34 AM, Blogger Ron H. said...

E Trade Baby Loses Everything

That link has been taken down. Try mirror site here.

 
At 8/09/2011 12:41 AM, Blogger Ron H. said...

"Really? Do you have any evidence that low fertility rates are a side-effect of deflation? Prove it."

Not tonight, dear, I'm feeling kind of sad that the prices we pay for almost everything are dropping. I just can't seem to get an inflation.

 
At 8/09/2011 12:50 AM, Blogger Ron H. said...

Buddy

"Ten of the seventeen countries that the U.S. has Free Trade agreements with result in a surplus of trade receipts of goods for the U.S.. Real Free Traders: do you think China really wants a Free Trade agreement with the U.S.?"

If you believe a trade deficit is a bad thing for the US, why do suggest it's a good thing if the US inflicts a trade deficit on 10 of our 17 trade agreement partners?

Am I misunderstanding you?

 
At 8/09/2011 12:55 AM, Blogger Ron H. said...

CORRECTION:If you believe a trade deficit is a bad thing for the US, why do suggest it's a good thing if the US inflicts a trade deficit on 12 of our 17 trade agreement partners?

 
At 8/09/2011 8:15 AM, Blogger morganovich said...

mr buddy-

magical thinking? you are being absurd.

you are the one proposing that we limit imports in favor of free trade.

you are proposing starting a trade war.

this will harm us, and, if history is any guide, has a very low chance of working.

remember smoot hawley?

you seem to think that if china does somehting dumb, we should emulate them and punish ourselves to punish them.

there is nothing magical in my thnking. it's very simple, strightforward trade 101 stuff.

you are the one living in fantasy land where mythical "trade deficits" impoverish us (they don't, they cannot) and where retaliatory trade restrictions benefit us.

there is not a single shred of evidence for your positions.

 
At 8/09/2011 8:19 AM, Blogger morganovich said...

buddy-

you have to be kidding with that china WTO claim.

very little has changed and i suspect you know it.

promises are just air. we wanted them as badly as they wanted us and we fudged it to let them in.

try writing/releasing software code in china and see how you do.

walk around shanghai and see how much pirated music is for sale.

for you to accuse others of living in a fantasy and then make such a ridiculous statement is pretty unbelievable.

 
At 8/09/2011 8:28 AM, Blogger morganovich said...

buddy-

i've been thinking more on your "tear down" missive.

it should really read as follows:

mr buddy, tear down this medieval thinking on trade.

tear down the desire to harm ourselves and precipitate trade war to the detriment of all.

stop punishing american consumers with higher prices for meaningless foreign policy goals around a meaningless metric. (trade deficit)

tear down the counter-factual edifice of lies, distortions, and misunderstanding that underpin the mercantilist belief that trade wars can be won, that anyone benefits, or that punishing our own consumers can make them better off.

seriously buddy, name a trade war anyone has actually won without resort to actual war?

the tide of history is violently against you here.

do you have any idea what a "balanced trade" limit with china would do to the us?

do you even begin to see how unconstitutional it is and what a horrendous abuse of federal power it would be?

you really want that kind of fascism?

sure, we might be better off if china opened it's trade fully, but the price you ask for a shot at it is outlandish.

we'd be better off if we ate more broccoli too. want to invite the feds into your house to force feed you daily?

 
At 8/09/2011 8:38 AM, Blogger morganovich said...

"Sometimes, we gotta do what we gotta do. Right now we need to print money, stimulate the economy, and deleverage, for the very same reasons the Fed often raises or lowers interest rates. "

we've been doing it.

it's failed.

it has not created any of the benefits you purport it will.

instead we get stagflation and capital flight.

you are just espousing bigger hammer theory like some 18th century quack claiming that if he had just bled the patient more, he would have survived.

the policies you propose are what got us into this mess.

we've had loose money since 2000.

we tried to print our way out of the dot bust, and got a new bubble. we tried to print and buy our way out of the housing bust and got a government dent bubble and wild, unsustainable deficits.

the moral here is clear - this pure monetary solution is just flat out bankrupt as a real solution.

it just kicks the can down the road and creates massive moral hazard. if you benefit borrowers at the expense of lenders and savers, more people take on more debt.

look what happened to both federal and consumer debt i the last 10 years.

now, like the quack you are, you claim we just need more of what is killing us.

you seem impervious to the evidence that your policies have never worked and repeatedly made things worse.

given that you seem to have the memory of a goldfish, perhaps this is not surprising, but using monetary policy to control the business cycle does not work, especially if you never tighten while the bubble is inflating.

it's just another failed dogma attempting to control the economy. taylor's ideas are supported no better than those of keynes.

he's just another central planner pushing dogma to gain power.

 
At 8/09/2011 10:11 AM, Blogger morganovich said...

bunny-

that you would post that levey quote shows just how little you understand.

he's a bond analyst.

all he cares about are nominal figures, because that what governs debt repayment.

he'd rather see 50% inflation and 45% nominal gdp growth than 2% inflation and 5% nominal gdp increase.

in terms of rating us debt, he cares not one iota about real growth. note that he mentions it nowhere.

we live and feel prosperous due to real growth, not nominal.

as ever, you show that you cannot tell the difference.

 
At 8/09/2011 10:33 AM, Blogger Buddy R Pacifico said...

"If you believe a trade deficit is a bad thing for the US, why do suggest it's a good thing if the US inflicts a trade deficit on 10 of our 17 trade agreement partners?

Am I misunderstanding you?"


Yes, the U.S. will win most compeitition in Free Trade. I posted this so that James might be swayed to a Free Trade position. Note, this is not the fake Free Trade of unilateral Free Trade that is inflicted as a false meme in dreamy writings.

 
At 8/09/2011 10:44 AM, Blogger juandos said...

"Juandos, the notion that the Fed would try to simply inflate away our debt is silly, Buffett is not dumb enough to really believe that. The Fed would essentially be imposing a tax on all net lenders and using that to pay down debt, but the destabilizing effects of such a move would be so vast, it would far outweigh the debt paid off"...

Well personally sprewell I've never been a fan of the so called Oracle of Omaha thinking that there wouldn't be one but for Charlie Munger... Mind you that's just my guess...

Never the less that fact that Buffet seems to have been a public supporter of Obama (maybe not in everything this administration does) has made me now question a possible course of action that I would've never considered would've been on any major player's plate...

Will this administration do such a thing?

Well as much as I dislike the make up and actions of this administration I don't think even they would be that dumb to try a stunt like printing our way out of the problem since it would make a seriously questionable situation worse...

Still there has been talks of QE3: Markets Spike on Bernanke Talk of 'QE3 which basically means, "Let's print more"...

Well maybe the Onion has a track on the inside thinking of Bernanke...:-)

 
At 8/09/2011 10:52 AM, Blogger morganovich said...

buddy-

"Note, this is not the fake Free Trade of unilateral Free Trade that is inflicted as a false meme in dreamy writings."

this is an absurd statement.

you are making the perfect the enemy of the good.

bilateral trade restrictions < unilateral trade restrictions < full free trade.

recommending a step back from the middle to the bottom in hopes that, against all historical precedent, you can get to the top is the kind of wishful thinking that creates depressions.

this is especially true because those who impose import restrictions harm themselves more than they harm their trading partners.

costing yourself $20 to inflict $5 in damage into your partner is hardly the road to prosperity.

 
At 8/09/2011 10:54 AM, Blogger Buddy R Pacifico said...

morganovich states:

"sure, we might be better off if china opened it's trade fully, but the price you ask for a shot at it is outlandish."

M., you are an opportunist but what the debate should be about is lasting opportunity, not momentary pick-offs in a discredited trade system.

We agree that Free Trade offers the best of the world, and we diverge on goodwill winning or a deal means something.

 
At 8/09/2011 12:39 PM, Blogger Ron H. said...

Buddy

"Yes, the U.S. will win most compeitition in Free Trade."

Well, I think I see the problem: Your notion that countries compete with each other is absurd. You might as well claim, in reference to interstate trade, that California will win most competitions in free trade with other states.

What does 'winning' even mean in this context?

Individual actors, not countries engage in trade. Countries, or more accurately governments, can only interfere with voluntary, mutually beneficial trade between individual actors.

The best possible action a government can take is to be neutral, by staying completely out of trade.

Just because the Chinese government interferes with trade by Chinese firms and individuals, and harms Chinese consumers, is no reason for the US government to do the same to US firms and consumers.

As morganovich says, don't punch yourself in the face in retaliation for your trading partner punching themselves. It really is that simple.

"I posted this so that James might be swayed to a Free Trade position."

You should know by now that James' position will never change. His initial comments on the subject of trade are the same, pretty much word for word, every time. No amount of evidence that his view is wrong has changed that. Sort of like yours, come to think of it.

 
At 8/09/2011 2:23 PM, Blogger Ron H. said...

"First, cannot you spell and use at least some punctuation? You write like a maroon fresh in from the Guyana backforest."

You must really be out of gas to pick on such a non-issue. Does morg's writing style really interfere with the content of his messages for you?

If this is a real problem for you, you may want to focus on a really serious offender like Hydra, who, it appears, is held hostage by a hand-held device that dictates to HIM what his comments will look like, rather than the other way around.

 
At 8/09/2011 4:26 PM, Anonymous Anonymous said...

Ron, you say "Your notion that countries compete with each other is absurd. You might as well claim, in reference to interstate trade, that California will win most competitions in free trade with other states.

What does 'winning' even mean in this context?"

I think I can answer this question. Buddy's really arguing from an old mercantilist position that if Germany's economy gets stronger than ours, we should watch out, because they might then use that greater industrial strength to attack us. That may have made some sense a century ago, but we haven't had a world war in 65 years now. Worse, perhaps a trade deficit was a good measure of relative strength back then, but it is basically meaningless now, because our economies and technology are so much more advanced and complex today. So Buddy's really arguing using antiquated 19th century principles, that are completely useless in our modern era.

 
At 8/09/2011 6:10 PM, Blogger Ron H. said...

Sprewell: "So Buddy's really arguing using antiquated 19th century principles, that are completely useless in our modern era."

True, and I sense a dislike of foreigners in his writing also.

When most currencies in the world were based on a gold standard, a trade deficit could mean an outflow of a country's gold reserves. That possibility frightened many, although if left alone, such an imbalance would correct itself, as currency values adjusted to the new supply.

 
At 8/09/2011 7:19 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 8/09/2011 7:29 PM, Blogger Buddy R Pacifico said...

"True, and I sense a dislike of foreigners in his writing also."

This false and rediculous sense by Ron H emanates from my distinguishing between members of the Chinese Communist Party or Red Chinese, and all other Chinese. This is the term used in China since at least 1948. Ron H needs sensitivity training to temper his hyper sensing proclivities.

 
At 8/10/2011 12:33 AM, Blogger Ron H. said...

Buddy

"This false and rediculous sense by Ron H emanates from my distinguishing between members of the Chinese Communist Party or Red Chinese, and all other Chinese. This is the term used in China since at least 1948. Ron H needs sensitivity training to temper his hyper sensing proclivities."

OK, I'll concede that you don't dislike all foreigners, just the CCP. But, how would you respond to my earlier comment about your view that countries are in competition, and that they must have agreements among them to ensure that trade is fair? Such trade isn't really free trade.

 
At 8/10/2011 9:29 AM, Blogger Buddy R Pacifico said...

Ron H states:

"OK, I'll concede that you don't dislike all foreigners, just the CCP."

No, wrong again, O'sensitive One.

I am wary of any member of the CCP but that doen't preclude liking an individual.

" But, how would you respond to my earlier comment about your view that countries are in competition, and that they must have agreements among them to ensure that trade is fair? Such trade isn't really free trade."

I am a proponent of Free Trade agreements and YES, countries, as economies, do compete. The benefits to individuals in the countries having a Fair Trade agreement are bountiful. Come on Ron, help spread the bounty around the world, by supporting Free Trade agreements.

 
At 8/10/2011 12:50 PM, Blogger Ron H. said...

Buddy: "I am a proponent of Free Trade agreements and YES, countries, as economies, do compete. The benefits to individuals in the countries having a Fair Trade agreement are bountiful. Come on Ron, help spread the bounty around the world, by supporting Free Trade agreements."

To suggest that countries compete - for what, exactly are they competing? - means, as you have stated that some will win and some will lose. What "bounty" is spread to those who lose, in this view of the world?

You remember, those 12 "losers" out of the 17 countries the US has free trade agreements with?

Maybe you need to define "country. Is it a geographical area? A group of people? A government? Just what IS a "country"?

True free trade is win-win. No one loses. Trade is between individuals, and "countries" aren't involved. Why do you suppose there are no "free trade" agreements between US states? Should California demand an agreement with Michigan that Michigan must buy a certain amount of artichokes for every auto California imports? Why isn't California's trade deficit with Michigan a problem?

I generally support so called Free Trade Agreements over restrictive trade policies, as they are most often an improvement, even if most of the benefit acrues to favored special interests. But, any restrictions or requirements limiting trade - and why else would an agreement be needed? - are less desirable than true free trade between individual actors.

As for a "Free Trade' agreement between the US and China, what possible advantage do you see for US consumers? For China to "open their markets" to US Exports might benefit some US manufacturers a small amount, but to require a balance of trade could only harm US consumers by drastically reducing imports.

China is a very poor country compared to the US, and even if their markets were wide open to US exports, they couldn't possibly buy as much as US consumers buy from them. The only possible result would be a reduction in US imports.

How is that winning?

 

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