Inflation since 1800

Presented without comment, I came across a chart showing inflation in America since 1800 (thanks, Tim Iacono), and I thought it was worth sharing, given all the talk I do about the Fed. The red line shows the cumulative effect of annual inflation, while the blue bars behind it show the actual annual rates. Do with it what you will.

[Tim Iacono]

Top posts of 2012

Since it's that time of the year where everybody takes stock of things and mocks the Mayans and makes predictions for the next year and does whatever else it is that people like to do while nursing their egg nog hangovers, I thought I'd take a look back at The Year That Was here at the Crimson Cavalier, starting with a rundown of my most popular posts of the past 12 months.

So here are my Top 10 most-read pieces from 2012, which are, naturally, all over the map. None of these posts was anywhere close to becoming my most-read post of all time (that honor belongs to this post on globalization, followed closely by this George Carlin-inspired post and this post on discrimination), but a few of them definitely registered a bit of a rumble on the ol' Crimson Cavalier pageview seismometer.

Enjoy re-reading some of your favorites, and I'll do my best in the future to reproduce more of the good stuff you all like... whatever that is.

#1: Remembering the Dream Team (June 14)

It probably shouldn't be surprising that my most-read post of the year had to do with the (tape-delayed) Olympics, which dominated the news cycle for a few weeks back in the summer. On the 20th anniversary of the Dream Team, I shared some of my own memories while excerpting a GQ oral history of the squad.

#2: The changing business of education (May 9)

The runner-up post (with about half the pageviews of the champion, which means it's a distant second, but so be it) involved one of my favorite topics, education. Inspired by a very cool new program at Virginia Tech called the "Math Emporium", I shared some of my thoughts on the future of higher education in America.

#3: Eat More Chikin (at Wendy's?) (July 30)

I'm sure you all remember the flap surrounding Chik-Fil-A this summer, way back when Mitt Romney's Presidential campaign was just shifting from "suck" to "blow". I thought the controversy was incredibly overdone, and I thought that many people were far too self-congratulatory with respect to their boycotts of the fast food also-ran. I said so, in a pretty standard Crimson Cavalier rant.

#4: I'm too busy to write a blog post (July 16)

I'm too busy to write a blurb about this blog post. Just read it, alright? Or don't, if you're too busy. Either way, kudos to the Harvard Business Review for a well-written article, one that I briefly reviewed in this post.

#5: The carbon footprint of flowers (WTF??) (May 4)

With Mother's Day approaching, I decided to take a minute to make everybody think twice about sending flowers to their mothers. Why? Because I'm a jerk, obviously. Also, because it turns out that almost all of the flowers we buy in this country are shipped here from Latin America, and that therefore the flower industry has an incredibly large carbon footprint. How's THAT for irony? "Green" economics, indeed.

#6: Is it the weekend yet? (June 6)

I wrote this post on a Wednesday, so no, it most definitely was not the weekend. I might have had a drink that night anyway. Possibly.

#7: Bernanke's Terror Alert Scale (September 14)

I wrote this post in the immediate aftermath of the Fed's announcement of infinite "quantitative easing", a program that has had incredibly underwhelming results so far. That's about what I predicted on that day, and so I'm going to take a second here to pat myself on the back. While we're at it, keep your eye on this dynamic in 2013—I have a feeling it's going to have some serious economic relevance in the not-too-distant future.

#8: When hypocrisy is good business: "The Lorax" (March 2)

"The Lorax" could have been a cute little Dr. Seuss movie with a nice message about conservation, but instead it became a symbol of all that I hate about corporate hypocrisy. I borrowed from a delightfully vicious review of the movie by NY Times critic A.O. Scott, and I shared my own thoughts about the odd intersection (or clash) between morals and business.

#9: Clip of the Week (April 6)

I'd like to thank John O'Hurley (J. Peterman) for providing me with my most popular Clip of the Week ever—a promotional video for "Rangé" golf balls. Good stuff.

#10: The tail is still wagging the dog at UF (April 24)

Yes, another post on education, which makes two in my top 10. This one also involved collegiate athletics, another common topic here on the blog. The University of Florida made the incredibly bizarre decision to drop its ENTIRE computer science department, an area of education that should be expanding if anything. At the same time, they increased their athletics budget by more than $2 million, an increase that was greater than the entire C.S. department budget. Well played, UF. Well played. But next time, beat Georgia.

Concentrated benefits and dispersed costs

I know, that's the most exciting headline you've ever seen on this blog. But it's also one of the most important dynamics in American politics and economics, and it's one that dominates just about everything that comes out of Washington these days. Thanks to Alex Tabarrok of the Marginal Revolution blog, we've got a nice video that explains what it's all about, focusing on why there's corn syrup instead of sugar in our Coke bottles.



Simply put, the people (farmers) who want there to be corn syrup instead of sugar in our Coke have more to gain (or lose) than the rest of us, so they make the most noise, donate the most money, and generally spend the most time and effort making sure that the laws of the land are written in a way that benefits them, even if it's at the expense of the greater good. The rest of us tend not to have enough of a dog in the fight, so we generally won't take the time to fight back, even if we're aware of the issue at hand (which we often are not). The problem is, sooner or later these little things start to add up in a way that matters significantly to us, but only in aggregate.

This video also provides a valuable lesson on the typical behavior of large companies in response to changes in input cost structure. When one input in the product they create increases dramatically in price, these companies are typically very resourceful at finding ways to replace that input at a lower cost (but similar enough quality). That's how we end up with corn syrup in absolutely every food in the grocery store, that's how all of our manufacturing jobs get outsourced to China and Vietnam (no, it's not about "currency manipulation"), and it's also one of the primary factors holding our official "inflation rate" in check.

Inflation rates are only useful statistics if we assume that the goods we're measuring are 100% the same over time, which they rarely are. Coke is different now than it was 30 years ago (and frankly, even five years ago), and so too are cars, houses, clothing, electronics, and more. That's usually a good thing, but not always. "Low inflation" is not a win for us as consumers if it means that the quality of our products is degrading over time—unfortunately, that's exactly what's been happening right under our noses, with a huge assist from government policies.

Concentrated benefits and dispersed costs—it's great when you're the focus of the concentration, not so great when you're the one bearing the costs... and when those small dispersed costs start piling up, it starts to become a pretty big cost, doesn't it?

[Marginal Revolution]

Quote of the Week

I'm going to keep things quick and simple with this week's Quote of the Week, because I think it largely speaks for itself. Let's get right to it, with blogger Karl Denninger's response to the recent revelation that over 47 million Americans (about 15% of the total population) are now receiving food stamps. That's an increase of nearly 50% just since 2009, which is costing our government an additional $25 billion annually. Yuck.

This week's QUOTE OF THE WEEK

"The last month for which data is available, September, shows over 600,000 people [began collecting food stamps] in that month alone, comprised of 290,000 households. In one month! The average handout is $278.89 per household, or $134.29 per person monthly. Note that there are only 143,549,000 people in the workforce -- that is, people earning a wage... To put this in perspective for every three people working one is collecting food stamps."
                                     - Karl Denninger, The Market Ticker

That is awful. Setting political issues of the "fiscal cliff" or the "welfare state" or whatever else aside, the simple fact is that this is a completely untenable economic situation. Far too many people are currently receiving food stamps, and this alone is a huge indication that our policy responses to the financial crisis of 2008-09 (deficit spending, Fed money-printing) have been an utter failure.

The debt-based financial games that we've played for the last several decades have gutted our nation's middle class (death by several trillion paper cuts), and yet many would suggest that more of the same is what we need to solve our problems. Believe me, they're wrong.

It is imperative that we stop lying to ourselves and pretending that these policies work. They don't. We need to clean up our fiscal house (starting with defense and Medicare), take the power away from the banks who continue to steal from the rest of society, and most importantly stop printing money. It won't be fun, and it won't be easy, but it really is the only option—things will only be worse in the future if we fail to act today. America is a country that has always strived for greatness, and 15% of the population on food stamps falls far short of "great".

[Market Ticker]

On housing and the low cost of money

I'm often writing about the perils of the Fed's monetary policy, but there are obviously some bright spots to be found out there. I'm sure by now that you've read at least one glowing article this year about the "housing recovery", and for the most part it's legitimate (even if there are some strange dynamics under the surface).

The question, of course, is whether this recovery is sustainable, and what will happen to housing prices if interest rates begin to rise from their freakishly low levels. That's a topic that Tim Iacono took on in a recent blog post, and I thought his findings were absolutely worth sharing (emphasis mine).

I’ve about had it with how giddy a large portion of the U.S. population has become about rising home prices. 

Don’t get me wrong, when first thinking about this, I was about as happy as anyone else to learn that property values are now rising sharply again since, after renting for six years, my wife and I finally bought a house about two years ago. So, we stand to benefit as much as anyone else. 

But, when you look at what’s driving home prices higher and how unnatural and unsustainable those factors are, suddenly the headlines sound more ominous than optimistic...  

Yes, low inventory is a big factor behind the home price surge as the flood of foreclosures has slowed to a trickle while strong investor demand and growing confidence amongst American consumers have surely tipped the scales in favor of higher prices. But, it is today’s freakishly low interest rates – engineered by the Federal Reserve – that have clearly played the biggest role in pushing home prices higher, simply because most people buy a house based on the monthly mortgage payment, not the purchase price. 

And when you see the impact record low rates have on purchase prices, you might be as concerned as I am... 

Based on a constant mortgage payment of $1,100 per month (what seemed to be a good national average based on this story and others like it), today’s 3.31 percent 30-year mortgage rate will finance a house at almost double the price that the 40-year average mortgage rate would!

While there are clearly other factors involved, it is the Federal Reserve’s asset purchase program that is largely responsible for these freakishly low rates (it is one of their stated policy objectives) and, while the central bank has promised to keep rates low for a long time and to continue buying mortgage-backed securities indefinitely, those actions are by no means guaranteed. 

This is a dynamic that I've been well aware of for a long time now, but it's still striking to see it laid out graphically like in Tim's piece. In just the last 12 months, 30-year mortgage rates have come down from 4.2% to 3.4%. Using Tim's $1,100 monthly payment, that means that a buyer who waited a year can now afford to buy a $276,000 home, as opposed to a $250,000 home last year.

That's an increase of 10.4% year-over-year because of the low cost of money, and yet home prices are only reported to have increased by 5 or 6% over the last year, even according to the rosiest estimates. Therefore, in any realistic terms, the price of housing has continued to decline this year, rather than rebound sharply as the headlines would have you believe.

If interest rates are really going to stay this low forever, then you shouldn't have much to worry about, and you can go ahead and buy real estate to your heart's content (just don't read these three posts before you do so). But as Wells Fargo is always reminding me in their constant mailings, "Interest rates rarely stay put for long!"

And if Wells Fargo is indeed correct, well then... Tim's chart tells us that housing's got another pretty significant leg down (like, 30 or 40%) to get back to those historical average rates. And that likely won't be pretty for anybody hoping to sell property at any point in the next few decades. Good luck!

[Iacono Research]

Pay for Congressional performance?

Sheila Bair baffles me. Every time she starts making a ton of sense, the former FDIC head says or writes something else that comes across like low-grade satire, except I don't think it is. Her most recent piece for Fortune falls into the latter camp.

Will the elections bring about improvements in our increasingly dysfunctional government? I fear not. Successfully running for office these days is more about political fundraising and negative campaigning than about the art of governing. Only one in 10 Americans thinks Congress is doing a good job, and no wonder. Our economy is stuck in low gear, and our fiscal situation is precarious. How do we motivate our national leaders to deal with these problems? As with most organizations, it comes down to economic incentives. If our elected officials can keep their paychecks by being adept at fundraising and negative campaigning, then that is what they'll do. But if at least part of their pay is based on performance, maybe we could get them to focus on doing their jobs. Pay for performance has improved management in the private sector. Why not try it with the folks in D.C.? 

For instance, one-half of compensation for corporate directors is frequently paid in stock, which they must hold for several years. The idea is to align their economic incentives with the long-term profitability of the corporation. There is no stock ownership in the federal government, obviously, but we do issue a lot of debt (boy, do we ever). So here is an idea: Let's start paying members of Congress and the President half of their compensation in 10-year Treasury debt, which they must hold until maturity. Members of Congress make roughly $180,000, so under this proposal, they would get $90,000 in cash and $90,000 in 10-year Treasuries. (We would add a housing allowance, too, given the high cost of living in Washington.) For the President, it would be $200,000 cash and $200,000 in T-bonds. If the economy does well and if they get our fiscal house in order and institute pro-growth tax and spending policies, those 10-year bonds should hold their value. But if we continue our profligate ways, inflation spikes, and interest rates skyrocket, those bonds may end up being worth as much as the stuff Czar Nicholas issued shortly before the Bolshevik revolution (some of which I bought at a flea market and now use as wallpaper in the bathroom).

She keeps going with her proposal, but I refuse to further indulge her ramblings here. Realistically, the very premise of Bair's argument is fundamentally flawed.

"Pay for performance has improved management in the private sector," she writes. No, Sheila, it hasn't. Reams and reams of research have been produced which prove your argument wrong. What pay for performance tends to do, instead, is encourage leaders and executives to make company-betting moves which promise huge potential payoffs but equally large risks. If those risks pan out, the executive in question makes millions and retires happy, but if they don't, the whole company blows up and the manager walks away scot-free, moving on to the next gullible company to rinse and repeat (see: John Thain).

These schemes have led to an epidemic of short-termism on Wall Street in particular, where traders and executives have little interest in the firm's profitability beyond the next quarter or year. Making those stocks or options or bonds vest at a later date does little to change the underlying risk/reward dynamic from the standpoint of the executive. While things may be slightly different for Congressmen than for Fortune 500 CEOs, those differences aren't nearly as great as we would like them to be. The folks in Washington have already shown themselves to be experts at trading long-term security for short-term gain, and the last thing they need is another scheme from us that encourages them to do more of the same.

You see, even if our Congressmen (and women) were to blow up the whole country under Bair's proposal, they'd still be pulling in $90k a year (oh, and a housing allowance, of course), well above the national average. That's not exactly giving them the "skin in the game" that they might need in order to ensure that they don't screw things up terribly for the rest of us.

Worse still, the plan suffers from a serious flaw in design by tying compensation to a bond price rather than some other more tangible measure of actual long-term American prosperity. If our Congressmen suddenly own millions of dollars worth of U.S. government debt, then all that does is give them a huge incentive to encourage the clowns over at the Fed to keep on keeping on with their ridiculous quantitative easing, which sends bond prices skyrocketing (and yields plummeting) even while the fiscal state of the union deteriorates by the day.

The real flaw in Bair's argument, ultimately, lies in its presumption that Congressmen and Senators control bond prices and economic outcomes with their policies—they don't. The Fed controls these things, they have for decades, and that won't be changing any time soon, regardless of any "pay for performance" scheme that you want to put into place. Not until the voters force it to be so, that is.

The truth is, the only kind of "pay for performance" scheme that will ever work in a democracy is to vote the bums out when they screw over their constituents. That requires real, actual responsibility on the part of the voters, more than some lazy "autopilot" compensation scheme that won't work and represents a further abdication of the voters' responsibility to hold their elected officials accountable.

Now as ever, we as voters get the government that we deserve. If we refuse to hold our Congressmen accountable with our votes on Election Day, then we can't expect the mess to sort itself out just because they own a few more government bonds then they used to. Bair should know better than this, and yet somehow she doesn't. Unless, of course, this is satire, in which case the joke is, once again, on me.

D.C. politicians have in large part ascended to their lofty positions by being experts at gaming whatever system has been placed before them. Unless a pay-for-performance scheme is meticulously designed to avoid any unintended consequences, you can bet that they'll find the loopholes and design ways to maximize their compensation, regardless of the externalities that may result from their actions. What a joke of an idea. Our politicians need fewer systems and schemes to try to game, not more. Go back to the drawing board, Sheila.

[Fortune]

Catastrophe bonds, QE, and you

Following up on my favorite topic (the Fed), and making a connection with this week's biggest news (Hurricane Sandy), we have this piece from last week from Businessweek.

Bonds designed to protect insurers from payouts on natural disasters are headed for the best returns since 2009 as a superstorm expected to develop from Hurricane Sandy threatens to strike the U.S. Northeast. 

Catastrophe bonds, which lose money if they’re triggered, have returned 10.3 percent this year through last week, more than triple the 2.79 percent gains in the corresponding period of 2011, according to the Swiss Re Cat Bond Total Return Index. The measure, which tracks dollar-denominated debt sold by insurers and reinsurers, includes bonds linked to potential storm damage in the U.S. 

Investor demand for the securities has grown with yields on speculative-grade corporate bonds hovering at record lows as the Federal Reserve holds down interest rates to boost the economy. About $1 billion of catastrophe bonds may be exposed to the storm, according to a “loose” estimate by Patti Guatteri of Swiss Re Capital Markets. 

“Some investors are looking for bids on specific bonds that are the most exposed to the Northeast,” Guatteri, director of insurance-linked security trading in New York, said today in a telephone interview.

Yeah, toss this one in the old "unintended consequences of QE" pile. People can't get investment yield from traditional securities, but they feel the need to do something to keep up with inflation, so they start scrambling around looking for yield wherever they can find it.

So it is that we end up with individual investors starting to play around in the catastrophe insurance business, taking on risk that even the large insurance companies don't want. As a result, the price of these things skyrockets (and the yield goes down), even as the exact opposite should be happening with Sandy bearing down on the East Coast.

This is (was) nothing but outright gambling by a bunch of desperate investors who can't see any other way of keeping up with Fed-sponsored inflation. All of this is absolutely fantastic, what could possibly go wrong? Seriously, taking all of your money to Vegas and betting on black would be a better bet than this. The investors who thought this was a good idea deserve whatever they get as a result (i.e., no bailouts), no matter how much they may have thought the Fed "forced them" to do it. Dumb investing is dumb investing.

[Businessweek]

Money for Nothing: Inside the Federal Reserve

I talk a lot about the Fed on here, and with good reason. To be an informed citizen in today's America, I think that it's absolutely vital that you know all about the Fed and what they're doing, or else you're bound to make some very bad decisions in your financial and political lives. Regardless of the outcome of Tuesday's election, the real locus of power in our country won't be changing at all—the unelected and unaccountable Emperor Ben Bernanke will still have more power than either Obama or Romney.

My viewpoints on this are echoed by the makers of "Money for Nothing: Inside the Federal Reserve", a documentary project that's currently looking for funding on Kickstarter (the doc has been filmed and cut, they're simply soliciting funds for the final finishing and production of the ultimate film). If you want to learn more about the Fed (and you should), this seems like the absolutely ideal starting place.



I think the whole project sounds awesome, and the list of people they interviewed for this is impressive—a who's who of Fed officials, financial commentators, academics, and other well-respected industry pros. They also got Liev Schreiber on board as the narrator, so these guys clearly aren't messing around. If you're so inclined (as I was), throw them a donation on Kickstarter, or at least visit their website or blog to learn more about them. I'll give them the parting shot here, with their own description of the film.

Whether you're buying a gallon of gas in Omaha, a loaf of bread in New York, or a condo in Miami, the Federal Reserve is taking historically unprecedented actions that affect your life.  But even though Ben Bernanke is in the headlines daily, the average person knows very little about America's central bank. 

Narrated by Liev Schreiber, and made by a team of AFI and Sundance award winners, Money For Nothing: Inside The Federal Reserve is the first documentary to take viewers behind the curtain of the world's most powerful financial institution. 

The film traces 100 years of Fed history, details the Fed's central role in the 2008 financial meltdown, and asks whether today's Fed policies are sowing the seeds of an even bigger crisis.   

Whether you're a Fed novice or expert, Money For Nothing presents an incisive look at this controversial institution, and a much-needed forum for intelligent debate about its role in determining the economic future of our nation. 

Join top Fed officials (many of whom are highly critical of recent Fed policies), world famous economists, investors, and traders as they debate the decisions that led the global economy to the brink of collapse - and why we might be headed there again.

So donate, watch, or at least take a minute to educate yourselves. Thanks.

Reminder: there is no retirement

Even while our friends over in France continue to whistle past the graveyard and pretend that their official retirement age should in fact be lowered, rather than raised massively, Americans seem to be waking up to the obvious and inevitable. That is to say, for most Americans, retirement is now a pipe dream.

As they struggle to save for retirement, a growing number of middle-class Americans plan to postpone their golden years until they are in their 80's. 

Nearly one-third, or 30%, now plan to work until they are 80 or older -- up from 25% a year ago, according to a Wells Fargo survey of 1,000 adults with income less than $100,000. 

"It is so tough for Americans to save for retirement that the answer seems to be to work longer," said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. 

Overall, 70% of respondents plan to work during retirement, many of whom plan to do so because they simply won't be able to afford to retire full time. 

But working well into your 70's, 80's or even 90's, isn't always realistic, said Ready. Nearly three-quarters of those who plan to work into their 80's say their employer won't want them working when they're that old, for example. Other roadblocks, like health issues, could arise as well.

Never mind the fact that many Americans won't even live until their 80s, this is an ugly statistic and trend. It's also terrible news for the next generation of college grads, who will emerge from school with mountains of debt and realize that there are no jobs for them because their parents (and grandparents?) are still holding them.

The simple fact is, we've convinced ourselves for decades now that low-interest rate policy and deficit spending gives us an economic free lunch, and that we'll therefore never have to endure another recession again. In reality, all low-interest rate policy has done is to pull forward years (if not decades) of economic growth into the current period, as workers spend now and cost themselves the ability to spend later (in retirement). Sooner or later we have to pay the price for those policies, and we're now seeing the side costs of all of that "prosperity" coming home to roost.

A devastatingly low number of 50-55 year olds in our country can currently afford to retire at anything approaching a reasonable age, and this problem will only get worse as our distressing gaps in pension and Social Security funding become more apparent (let's not even discuss their investment return assumptions right now). This is bad news for the older generation and the younger generation alike, and it all comes back to unrealistic monetary and interest rate policies. Thanks, Ben.

[CNN Money]
(h/t Tim Iacono)

Gas stations vs. department stores

I thought this chart here from the Illusion of Prosperity blog was pretty telling, and I think it says just about everything you need to know about what Fed policy has done for and to our economy over the last decade-plus (obviously the internet has a role to play here as well, but that dynamic alone cannot and does not account for a tripling of the ratio in a dozen years). Regardless of the reasons behind the spike in this chart, it's clear that inflationary monetary policy is powerless to restore lost retail jobs, but certainly ensures that we all spend more and more of our paychecks at the pump and the grocery store.

Pretty awesome, right? Hooray, Bernanke!

And hey, while we're at it, let's share another semi-terrifying chart from the same blogger.

Good times. Sooner or later, nobody will have any home equity at all, and then we'll all be living on Easy Street. Which will be good, because gas will be so expensive that we won't be able to afford to drive to any other streets. I can't wait.

Bernanke's Terror Alert Scale

Since I'm such a frequent critic of Federal Reserve policy, I'm pretty sure there's no way I can let yesterday's "aggressive", "unprecedented", "open-ended" announcement of what amounts to permanent quantitative easing ("QE") go by without comment. Indeed, I won't.

There's about a million different angles from which I could attack this latest policy announcement (it's desperate, it's ill-timed, it's dangerous, it fans the flames of inflation at a time when the economy can ill afford it, it jacks up the Fed's balance sheet leverage to astonishing and terrifying levels, it makes me wonder just how freaking bad things are out there if the Fed feels like this is a "reasonable" step, and it therefore isn't exactly confidence-inspiring), but I'm not even going to bother with any of those approaches. Instead, I'm actually going to celebrate (yes, you heard me), because this means that the end of the era of Fed-manipulated markets is now imminent. The Fed fired its last meaningful bullet yesterday, and now the endgame is at hand. Let me explain what I mean.

In the immediate aftermath of 9/11, the newly-created Department of Homeland Security unveiled its "Homeland Security Advisory System" (better known to most as the "terror alert level" or "terror alert scale"), a color-coded, semi-ambiguous chart indicating just how scared we all should be of a terrorist attack at any given moment. The intent of the program was in large part to impact the psychology of citizens, making them more vigilant and aware of their surroundings when times warranted.
 
Unfortunately, the terror alert scale was an utter failure. Since the level was essentially always set to either "yellow" or "orange", nobody ever really paid any attention to it. It simply became a part of the background noise, consistently ignored because of its ubiquity. People are able to remain vigilant and aware only for short periods of time—when they're asked to do so for years at a time, they simply become complacent. Not surprisingly, the terror alert scale was eventually retired, presumably still set to "orange".

The Fed's latest QE program similarly attempts to impact the psychology of the American citizens—if consumers and investors know that the Fed is committed to always printing money, they'll be more likely to step out on the risk scale and start spending and investing money (while it's still worth something) rather than waiting around until tomorrow. It theoretically creates a certain sense of urgency that the Fed has been laughably unable to instill up until now.

Unfortunately, perma-QE is likely to fail in the same manner that the DHS terror alert scale ultimately failed. Sure, QE-∞ will cause a Pavlovian short-term rally in the markets, just like the terror alert scale caused us all to be super-vigilant at airports for about 3 months. But sooner or later, this perma-QE will just fade into the background like the "orange alert" that we all ritualistically ignored after a while.

The simple fact is, "QE always" is "QE never", just like anything else that was once rare but then became ubiquitous (like, say, a college education). Once a new baseline expectation has been set and adjusted to, this "easing" simply becomes part of the landscape, and it will become increasingly difficult—if not impossible—for the Fed to effect incremental change. In all areas of life, ubiquity brings along with it an ironically increased invisibility—call it the paradox of ubiquity. Ubiquity breeds irrelevance, for Fed policy just like anything else.

To date, previous QE programs have been effective because they have been sudden, strong, and powerful—like a quick shot of cold air on a hot summer day. But once we've turned the AC on full blast and left it there for months at a time, does anybody even notice it anymore? Or do they only notice when it's taken away? I'd argue the latter, which means that the days of the Fed influencing the market with incremental policy proposals are largely in the past.

So as I said to lead off this rant, the Fed has now fired its last meaningful bullet (some intrepid journalists in fact called it a bazooka), and it sure as hell better work and work quickly. Because if it doesn't, they're going to have to do something far beyond drastic to ever have any impact on the economy (or markets) again, now that they've made permanent QE the baseline.

At some point in the not-too-distant future, the market will experience another correction, and the economy will tilt into another recession. The question is, what will the Fed do then, and will it have any impact whatsoever? The Bernanke Terror Alert Scale is now definitively set to "red"—to have any future effect, Bernanke will have to invent a new color, and I for one don't think that's possible.

So congratulations, Chairman. You've seemingly pulled off the impossible and printed yourself into irrelevance. Enjoy these next few weeks or months of Fed-fueled market rallies while you can—I'm betting this may be the last time you'll ever see them.

This about sums it up

So, this morning's jobs report was, once again, pretty terrible. No worries! Markets are higher because now everybody's convinced that the Fed is, once again, riding to the "rescue". We've been here before.

(Inspired by this)

Fed buying baseball cards

While the market gives its Pavlovian cheer to the latest kinda-sorta-we're-not-really-printing-money-you-guys-I-swear proposal out of Europe, I thought this would be an appropriate time to pass along my favorite cartoon from the last few months. Courtesy of Barry Ritholtz's Big Picture blog...

Seriously, when can the Fed start buying some stuff that I actually own (no, I don't own Treasury bonds or mortgage-backed securities, and I hope you don't either)? In addition to baseball cards, I've also got a pretty awesome collection of obsolete electronic devices and salvaged golf balls. Sure, you might think of these things as worthless, but I just consider them to be "distressed assets".

Mr. Bernanke, if you want to stimulate the economy, I suggest you start rummaging around in my basement. I'm quite sure you'll find something to your liking down there.

On middle class woes (and personal responsibility)

Hey, why not make it two posts about personal responsibility in one afternoon, right? Let's go for it.

Since it's election season, you're about to be bombarded with misleading statistics from both sides talking about how good and terrible the economic recovery of the last four years has been. The Democrats will tell you (I've seen it ad nauseam already) that Obama has presided over 29 consecutive months of job growth. True, but missing the point.

As for the Republicans, they're likely to counter with something like this:

Although the economy shed thousands of middle-wage jobs during the Great Recession, the bulk of the employment gains since then have been in low-wage arenas such as retail, food-service, and home-care industries, according to a new report released by the National Employment Law Project, a liberal research group.

Low-wage jobs, defined as those that pay no more than $13.83 an hour, accounted for 21 percent of recession job losses but have accounted for 58 percent of the recovery growth.

At the same time, middle-wage occupations (jobs with an average hourly rate between $13.84 and $21.13) accounted for 60 percent of the jobs losses, yet accounted for only 22 percent of the job growth, according to the NELP study which analyzed federal census and labor data.

Indeed, one study showed that among those workers who lost jobs between 2009 and 2011 and subsequently found new jobs (many did not), a full one-third were accepting new jobs with a 20% or greater pay cut. That's a problem, and it shows a significant weakness beneath the declining headline unemployment rate that President Obama hopes to tout this fall. Clearly, not all jobs are created equal, and the recent trade-off has been a terrible one for most Americans, despite what the headline stories would love for you to believe.

This low-quality job growth only continues a steady trend of devastation of our country's middle class, a trend that I largely blame on misguided Fed policies of dollar debasement, all of which benefit the rich at the expense of the poor. But as Mish Shedlock wisely asks, who is really to blame here?

Citing a study from the Pew Research Center, Mish posted the following graphic:

He then wrote,

Note that 62% blame politicians and 54% blame financial institutions, but only 8% blame themselves. 

Five Questions 

1. Did banks force people to take out loans they could not pay back, or did people do so voluntarily? 

2. Who elects Congress? 

3. Do people make enough effort to understand interest rates, debt, the economic policies of politicians, exponential math and its implications, the untenable nature of public union pension plans and promises? 

4. Do a significant number of people (if not the majority) get their economic views (assuming they have any economic views) from The View, Oprah, The Talk, or CNBC? 

5. Why did PEW leave off the Fed and Fractional Reserve Lending from the list of answers? 

Two Bonus Questions 

1. Would the majority of respondents know anything at all about the Fed and Fractional Reserve lending had the PEW listed those options? 

2. Who is really to blame for what is happening?

Preach on, Mish.

If you want to blame the banks or the politicians for all of your problems, fine. Go ahead. It's as good a cop-out as any. But at the end of the day, it is OUR unwillingness to pull our money out of the banks (or to stop borrowing money from them), it is OUR unwillingness to hold politicians accountable for their incompetence, it is OUR continued refusal to stand up for ourselves and take even the slightest modicum of responsibility for our own nation's destiny that is to blame for all of the negative outcomes of the last 10 to 15 years (or more).

The housing bubble and its ugly aftermath could not have existed without the greed and financial illiteracy (call it "innumeracy" if you must) of the majority of the nation's citizenry. Ditto the burgeoning debt crisis that threatens to rob a generation or more of its retirement. As I've mentioned here before, if you make yourself a target, then you're practically guaranteed to be taken advantage of sooner or later. This was all our own doing, but we've seemingly lost our ability as a nation to take responsibility for our own decisions (or refusal to make decisions, whatever).

I'm all about personal responsibility, and I always have been. Therefore, I don't blame Congress, because I haven't done anything significant in my life to change the composition or approach of our Congressmen. Congress does what it does because we haven't required them to do anything differently.

So I do blame myself, because I obviously haven't done enough to change the world in which I live. And in a sense, taking ownership of that is incredibly liberating. Are you willing to do the same?

[National Journal]

How Facebook could (help) bankrupt California

I wrote briefly last week about the troubles over in Facebookland (I shed no tears for Mr. Zuckerberg) and the company's incredibly shrinking stock price. Unfortunately for some of us—especially the California schoolteachers among us—there's some collateral damage here (isn't there always?). Per Bloomberg:

Facebook Inc. (FB)’s declining price may cost California “hundreds of millions of dollars” in revenue expected from taxes on capital gains, the state’s fiscal analyst said.

The owner of the world’s largest online social network, touched $19.82 today, the lowest price since the Menlo Park, California-based company first offered shares to the public at $38 on May 17.

The most populous U.S. state’s $91.3 billion budget, signed by Governor Jerry Brown in June, counted on $1.9 billion in income-tax revenue from company insiders such as Chief Executive Officer Mark Zuckerberg exercising options or sell shares, assuming an average price of $35. Facebook, which touched $45 May 18, has averaged $29.49 on the Nasdaq stock market.

“Facebook share prices have fallen far below levels assumed in the state’s revenue projections,” the nonpartisan Legislative Analyst’s Office said yesterday in a report. If “the lower share prices persist through November and December, hundreds of millions of dollars of income-tax revenue assumed in the state budget plan are at risk.”

Perfect. Let me put this as simply as possible—if your budget is only "balanced" based upon assumptions of one-time revenue streams from viciously overvalued assets (whether those assets are internet stocks or McMansions or marijuana farms or whatever else), then your budget isn't actually balanced and you need to go back to the drawing board. That's true whether you're an individual, a corporation, a credit union, a babysitting co-op, or the world's largest local government. Math doesn't care who you are, and it can't be fooled (or manipulated) for very long.

The simple and uncomfortable truth is that this is why our nation has developed the unprecedented culture of bailouts and financial market manipulation that we now have, a culture that's robbing us all of our prosperity by warping and manipulating the underlying infrastructure of our economy. We've all been led to believe by any number of politicians and economists that deflation is our enemy, and that we need inflation (and $5/gallon gas) in order to prosper. This is, of course, obvious bullshit, but the party line actually makes a lot of sense when you dig a little deeper.

Simply put, almost every government in our country—whether local, state, or federal—depends upon high asset valuations in order to maintain anything in the ballpark of a balanced budget. Property taxes, capital gains taxes, sales taxes, even excise taxes, all of these are significantly higher when asset prices are inflated. When the housing bubble burst in 2007-08, it blew a gargantuan hole in state and local budgets nationwide, a hole that still hasn't been adequately plugged. Politicians will be damned if they're going to let this happen again, even if their actions guarantee that the next bubble will be bigger and uglier than the one that preceded it.

For more than a decade, governments made overly rosy assumptions about current and future tax revenues—and therefore made overly aggressive financial commitments—entirely because they believed that house prices could never decline. Then they did, significantly, and tax revenues dried up, but the financial commitments remained. Oops. And despite all of our government's best efforts, we haven't been able to reflate that housing bubble, so here we remain, in a position of constant stagnation.

When a state like California has its budget riding on Facebook's stock price, is it at all far-fetched to assume that California politicians will do whatever is necessary to prop up that stock, unintended consequences be damned? Of course not, and that's why we've got the system we've got. It sucks, but thousand of California pensioners now "need" Facebook's stock to rally. So won't you be a good neighbor and buy a few thousand shares?

[Bloomberg]

P.S.- For another cute example of how individual taxpayers end up on the hook to effectively (or directly) subsidize the corporations in their communities, check out these two recent posts from Deadspin, showing how the Kansas City Chiefs and Royals have been oh-so-cleverly using taxpayer dollars to pay ordinary operating expenses. This is yet another reason why we should never have conceded to the concept of taxpayer-funded stadiums and arenas. We pay for the company's expenses (as taxpayers), and then we pay for the company's product (as fans). Sweet business, huh? Beats stealing cardboard.

On droughts and inflation

Hey, have you noticed? It's been really hot this summer. Like, absurdly hot. And dry. And this could be a really, really big problem for our economy.

The nation is experiencing its worst drought in over half a century. Grain crops, particularly corn, are being devastated as only 31% of the domestic corn crop in is good shape versus 40% just one week ago. The same is true for soybeans as only 34% is in good shape versus 40% last week.

As a result both commodities have hit record highs on the world futures market. For the first time in history corn exceeded $8.00 per bushel to $8.05 (one year ago--$5.50) and soybeans are at a high of $17.12 per bushel ($10.90 a year ago). It is projected by some commodities experts that these price may go up yet another 20-30%. The inflationary impact of these vital grains will be felt very soon in the nation's grocery stores as virtually all meat and many processed foods are dependent on these commodities. This on top of an economy that is already languishing in recession levels.

Right. Food inflation is bad, especially for those of us on already-strained budgets when unemployment remains stubbornly high. Things have gotten so bad that ranchers can no longer afford to keep/feed their cattle herds, so they're selling them off at auction at bargain-basement prices. So the corn and grain shortage in turn causes a meat shortage, meaning that the spillover effects on food prices are likely to be far-reaching. (Check below for a graphical representation of this year's drought versus previous years).

Chart from NY Times via Barry Ritholtz; CLICK to enlarge

But in my opinion, the more concerning issue here is what this might mean in terms of future Fed policy, which we haven't taken much time to discuss here in recent months. Now seems like a good time to change that.

Over the last few years, our economy has become increasingly dependent upon loose Fed policy to keep itself going (and to allow the federal government to finance its ever-growing debt). Recently, the economy has begun to show significant signs of slowing growth, and as a result people everywhere are calling for a third round of "quantitative easing"—a policy that I absolutely hate—to help out the economy.

That's great and all, but can the Fed really afford to engage in inflationary monetary policy at a time when American consumers are already getting squeezed at the supermarket? Yes, the Fed claims to largely ignore food and energy prices when considering their policies (because those prices are "noisy"), but there's no way they can ignore the impact that the ongoing drought is likely to have on national price levels. This drought will likely give the Fed even less room in which to operate, making a declaration of QE3 that much more difficult to sell to an increasingly-skeptical American public.

If nothing else, this drought should serve as a very loud reminder to everyone in the world that the Fed and other central banks are not the only determinant of price levels in the global economy. Maybe Ben Bernanke's consistent attempts to play God angered Mother Nature, and she decided to show him who's boss after all—like Icarus before him, the Chairman flew a little too close to the sun, and all of us got burned.

For all of us, if we're looking to the Fed (or the federal government) to be our savior, we should know that there are limits to the bank's power—this drought threatens to make those limits pathetically obvious to all of us, and in the long run that may be a very good thing. But it may be a very bad thing over the next several months, for those of us who like to eat.

[American Thinker]

Quote of the Week (Malinvestment Edition)

One of the greatest criticisms of the extraordinarily expansionary monetary policies that we have seen over the past couple of decades (and past several years in particular) is that they create a widespread culture of malinvestment—companies and governments launch projects that look attractive solely on the basis of ultra-cheap financing, projects which then go sour when economic reality (or a higher interest-rate environment) returns. This exacerbates the booms and busts of our economic cycles, making recessions more severe than they should be (and much more difficult to cure).

This dynamic helps to explain the severity of the housing bubble (built as it was on ARMs and subprime mortgages), and also... Spain. Spain is in some pretty tough shape lately, asking for bailouts from people who probably can't afford them and possibly won't even provide them anyway. A big part of Spain's problem lies beneath the surface in the regional governments, which can no longer afford to finance their debts. It's essentially a bigger and more dangerous version of the budding problems with local pensions here in the United States, and it's a situation that seems like it pretty clearly could have been avoided.

This week's QUOTE OF THE WEEK

Ciudad de la Luz [an extravagant, publicly financed, near-bankrupt movie studio] has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.

Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.

                                             - Doreen Carvajal and Raphael Minder, New York Times

When governments of any kind begin to make "investments" in the economy to attract big events or simply more tourists—especially when such investment is geared toward attracting big international events like the America's Cup and Formula One (and the Olympics... more on that later)—it rarely ends well. At best, the local economy receives a short-term jolt, and then is left trying to figure out what to do with the infrastructure (and how to pay for its maintenance) after is it no longer in active use. At worst, we end up with a Valencia situation, with taxpayers on the hook for failed ventures, looking for bailouts from anywhere they can find them.

Yes, the taxpayers themselves are always to blame for allowing their governments to spend like this, but the central banks' "expansionary" monetary policies are aggressive enablers in the process. Appropriate, then, that they should find themselves under increasing scrutiny in the aftermath of these sorts of bubbles. But be aware, "doing more" is not the solution—on the contrary, it's at the very heart of the problem.

[NY Times]
(h/t Tyler Cowen)

David Einhorn on the Fed and The Simpsons

I don't always agree with hedge fund manager David Einhorn, but the piece that he wrote for The Huffington Post regarding Fed policy is one of the better pieces I've read this year.

It's not easy to take a complex subject and make it easy to understand (not to mention entertaining), but I think Einhorn's pulled it off here. And the fact that he brings The Simpsons into it just makes it all that more appealing to me. I'm easy.

I'll excerpt a couple of sections of it here (basically the beginning and the end), but I seriously suggest that you take a few minutes and read the whole thing. At the very least, it'll help you understand just why the economy can't seem to get out of its own way.

A Jelly Donut is a yummy mid-afternoon energy boost. 

Two Jelly Donuts are an indulgent breakfast. 

Three Jelly Donuts may induce a tummy ache. 

Six Jelly Donuts -- that's an eating disorder. 

Twelve Jelly Donuts is fraternity pledge hazing. 

My point is that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn't giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. Last year, when asked why his measures weren't working, he suggested it was "bad luck." 

I don't think luck has anything to do with it. The blame lies in his misunderstanding of human nature. The textbooks presume that easier money will always result in a stronger economy, but that's a bad assumption... 

I think we've reached the point where even Homer can see that the last thing he needs is another Jelly Donut, but the Fed Chairman is oblivious. 

We can all say "D'oh!"

Since I left out the entire guts of the argument, you'll have to go to the full article to see what he's saying. I like the analogy, and I definitely agree with Einhorn's conclusions. The Fed needs to get out of the way, allow the market's price mechanism to work properly (even if that means significant short-term pain), and let the economy begin to heal itself. Doing otherwise will only prolong the pain, and could even create the next crisis--I might in fact argue that it already has.

[Huffington Post]

The explosion in obesity

This chart comes courtesy of Tim Iacono, and it absolutely blew me away. I knew that obesity rates had been soaring, but I didn't appreciate how much and how quickly.

Every state in the country has seen an increase in obesity over the last 20 years, and many of these increases have been dramatic--consider that in 1994, not a single state had an obesity rate greater than 20%, but by 2008, only one state (Colorado) has a rate below that same 20% threshold. Tennessee and Oklahoma somehow pulled off the incredible feat of going from sub-15% to over-30% during this time period. Yikes.

Ultimately, this map raises as many questions for me (Why did it soar so quickly? Is it a result of a broad-based change in our food supply? Or is it due to a change in behavior in response to economic factors, like consistently "accommodative" monetary policy?) as it does concerns (How the hell are we going to afford to pay for all the health problems that this obesity creates? Am I totally certain that I'm doing everything in my power to avoid becoming part of that statistical trend?). I think this dynamic therefore has incredibly wide-ranging implications for our nation, encompassing issues both political and societal, and both in terms of public health and economic sustainability.

Along with the fate of Social Security and other public and private pension plans, I think that this dynamic will turn out to be one of the most important ones to keep track of over the next 20 to 25 years. How we as a society decide to deal with our ever-growing group of elderly citizens, as well as our overweight (or otherwise unhealthy) citizens will in large part determine the fate of our nation as a whole. Stay tuned.

A few of my favorite charts

I realize I went radio silent last week, and I apologize. Work and family concerns took a front seat for a bit, but I'm intending to get back to blogging business soon. For now, enjoy a few of my favorite charts that I've come across lately. There's a bit of a common thread here... see if you can spot it.

STUDENT LOAN DEBT OUTSTANDING

GLOBAL CENTRAL BANK ASSETS (i.e. MONEY PRINTING)

MARKET IMPACTS OF "QUANTITATIVE EASING"

APPLE STOCK (AAPL)

Remember, buy Apple. It's "cheap". And now it even pays a dividend!