QE3

By now you know that the FED has begun inflating the US Dollar again.  Whether this will do what they say they want it to or not, well, we just don't know yet.  This author is doubtful, especially given what he feels are already some fairly negative signs. 

The Insulation of DC

Once again, the DC area has several of the nation's wealthiest counties.  This year greater DC has 7 of the 10 counties with the highest annual income.  This is up from previous years.

To me, this is a very obvious symbol of just how very out-of-touch the DC area is from the rest of the country.  Government jobs and government-funded jobs (gov/defense contractor) are simply insulated from the harsh economic realities facing most of the nation right now.  

You can find the information here, in the 2011 American Community Survey conducted by the Census Bureau. 

Is Great Britain's Downgrade Next?

In this paper the authors make the case for an impending downgrade of the British Pound.  Essentially it boils down to the Pound being in no better shape than the Euro, but currently looking decent only because everyone's attention is on the Euro and Dollar. 

Consequences?  Massive loss of confidence in currency markets.  Maybe a little buoying of Dollar/Euro, but not much.  Movement away from cash instrument. 

The GM bailout from a fan, and why he wants it to end

Ed Whitacre, the author of this article, is a former CEO of GM and a fan of the auto bailout.  Though I disagree with him on the significance/importance/propriety of the bailout, I agree with him that it is time for GM to be General Motors, not Government Motors. 

The result: GM spends an awful lot of time checking in with the people who administer TARP over everything from hiring to executive compensation and management. For a global company, that adds up to a lot of distraction. 

....

GM is now trying to convince Treasury to sell, for some of the reasons I have mentioned. These same reports say that the government may be willing, but not at the current stock price. GM stock hasn't performed as well as everybody would like, but I remain hopeful that it will rebound as the global economy improves.
Meantime, life in the hypercompetitive world of GM goes on. The company already answers to a lot of constituencies: stockholders, unions, Wall Street and global competitors. Adding TARP to the mix for another few years, or even another few quarters, is not fair to GM or to the one million people it employs, directly and indirectly.

Corporate Cronyism

I've written about crony capitalism before.  Essentially it is businesses attempting to use the coercive power of government for their own ends, either to regulate their competition or to seize money from taxpayers for the business. 

Charles Koch has written a nice column in the WSJ address this topic.  

Selected quote:

Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.
We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.
We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn't ordinarily buy.

Spend Like a Rich Man

This article has a very interesting discussion of how the very-rich (net worth in excess of $25Million) spend their money each year.  Essentially they spend money on their cars, houses, and trips.  Oh, and something not mentioned by the article, they GIVE.  LOTS.  See the very interesting chart below.  I find the giving very interesting b/c Americans are constantly told that the rich don't care about anybody else, that they got rich by basically being terrible.  You know, maybe not.

There is this theory called "crowding out" and it is the idea that as government takes more responsibility than private citizens take less - due to two reasons.  First, they simply have less money as government takes taxes to pay for the "charity".  Second, private citizens see reduced need.  Right or wrong, something about human nature likes to be needed.  To me, the great amount of giving by the wealthy is a very positive sign.

 

Fiscal Cliff

This article presents a view saying that we might actually be better off as a country if we go over the fiscal cliff facing us in January. 

I do not know.  As an economist I think the tax increases in January will be devastating to a already-slow recovery (the article does not address taxes).  I think the spending reductions are crucial, that the article gets right, but I think the structure of the spending cuts is going to be quite wrong.

As to mindset, yes, I think that Congress and the American need a reminder that there are consequences for stupid spending policies and electing politicians that support such policies.  It may be good for Americans to see that spending cuts do not lead to a collapse of all they hold dear.

On the other hand, politicians will be able to magnify any harms, real and imagined, for leverage to avoid future spending cuts. 

Politics > Contract

In a further revelation about how entirely terrible the auto bailouts were, the Daily Caller has been doing some good investigative journalism and uncovered evidence that administration officials intentionally subverted contract law, pension agreements, and bankruptcy law in an effort to help union members and do harm to non-union employees. 

This is directly related to economics because as the government expends efforts to determine winners and losers in the marketplace the co-ordinative ability of the market is severely compromised.  People begin to make business and personal choices based not market support, but on the likelihood that government will support them.  This leads to misallocation of resources - harmful because of the money spent, but much more harmful because those resources (money, people, etc...) are not being used to produce something people actually want to buy. 

The several dozen failed fedgov investments in green energy projects come to mind here. 

Pocket Change

The Treasury is estimating that the fedgov will lose $25B of the $85B invested in the auto company bailout. 

Essentially, the administration's rosy expectation of recouping our expenditure rests on being able to sell GM stock at, what now looks like, an unreasonable high price.

Not that this alone is enough to declare the auto bailout terrible.  But it does mean that not only do you have to think about the interest expense of borrowing the $85B to lend to GM/Chrysler, but you also have to think about the $25B expenditure.  Those jobs the bailout "saved" are pretty expensive after all.

And I'm completely avoiding the issue of whether the bailouts were a good idea or not (hint, they weren't).

$16,000,000,000,000.00

Tuesday the national debt crossed the $16T mark.

To whom do we owe that money?  Read HERE for the scoop. 

Chinese Manufacturing Troubles

In line with what economists have been saying is inevitable, Chinese manufacturing is registering a significant decline.  See HERE,for example. 

Inventories are piling up, factories are running at around 65% capacity, steel and iron production is flat, some industries report 30% declines, and profitability is vanishing. 

For years some have speculated that Chinese growth shows how a market can be contained, harnessed, and controlled to serve political masters. Even the Chinese government cannot hide from the laws of economics.

Economists already knew that. 

Why?  Because by containing the free-market activity and growth in SEZs China has not allowed the infrastructure to develop in a natural and efficient manner.  Too many people are in the SEZs, and virtually no economic activity takes place outside.  Now they have reached a point where the SEZs can only grow at the pace of Western growth (technology/technique), and b/c the government has so contained peoples' energies, there is nowhere else ready to grow.  Additionally, there is no where else, geographically, conducive to rapid growth. 

Unseen: Faucet Edition

I recently had to replace the aerator in our kitchen faucet.  The new unit is a "water saver" that has a 25% reduced flow compared to the original unit.  I looked for an original 2ga/minute aerator and couldn't find one to fit our faucet.  The new unit works ok.  Sure it takes longer to fill a pitcher.  Sure it makes a little more noise.  Sure, I find myself turning the handle on full more frequently than I used to.  But I suppose it might be saving some water somewhere. 

My wife though was just telling me how the "water saver" actually takes longer to rinse dishes.  The new unit takes longer to rinse soap and creates more bubbles on the dishes while rinsing.  So you have reduced flow, but longer faucet run-time. 

Does it save any water?  I kind of doubt it.  Reminds me of those "water saving" toilets that frequently must be flushed repeatedly. 

Food Prices Increasing

The BBC, as well as other sources, is reporting that food prices have increased by about 10% around the world in the month of July alone.  This is huge! A breakdown of some price increases:  "From June to July this year, corn and wheat prices each rose by 25% while soybean prices increased by 17%, the World Bank said. Only rice prices decreased - by 4%."

A variety of causes are to blame, but pretty much all of them are largely due to environmental factors.  While droughts and other weather conditions are mostly to blame, the huge increase in the price of corn is due in no small way to the  40% of US corn that is destroyed manufacturing corn ethanol. 40%!!  That's outrageous!!