Inflation charts for Friday, January 11 podcast

CPI-U All Items (Headline Inflation) v. CPI-U less Food and Energy (Core Inflation)

If you look closely, core simply lags headline inflation, as fuel is incorporated into costs. Notice the great moderation of both and rise of both as it corresponds to oil price declines in the 1990s and rises again after 1999. Oil may not be as big a percentage of GDP as it used to be, but neither is any other single item, even an hour of labor.

CPI-U Core v. PPI Core
Producer prices are nearing the consumer price line, and have crossed a couple of times. One might imagine consternation at the Fed, particularly if you look at 1999 when something similar occurred and the beginning of 2005. Both instances were followed by Fed interest rate increases. Greenspan's right into the teeth of a big rise in oil prices, contributing to the so-called dot.com bust.

PPI Headline v. PPI Core
Take a look at the spike in PPI in the latest readings. Its highest level in 25 years.

Personal Consumption Expenditures (PCE) Headline v. Core
Just again to note that one leads the other. Yes, one is more volatile, but taking out food and energy does not leave a neutral track, it leaves the lagging trend. One wishes officials would not panic.

Market Failure VI: Global Poverty -- podcast transcript

The failure of dozens of countries and their inhabitants in Africa, Asia and Latin America is hardly news.

Much of the Third World was better off forty years ago than it is today. Growth collapses, as the World Bank now refers to them occurred in many areas. Per capita income plunged. Today, nearly fifty percent of the world’s population lives on less than two dollars per day. The UN’s millennium development goals are not so much development targets as targets for survival.

And this understates the problem as hundreds of millions of people are forced off the farm and into cities where more of life is monetized and less well-being is available in the non-monetized economy.

Why is Global Poverty a market failure? The free market apologists are already calling. It is the ABSENCE of free markets, they say, not their presence which is the root of global poverty. Often they mention corruption in the governments of those countries in the next breath. Government functionaries are interfering with the free market actors.

This situation has occurred in the presence of globalization. Globalization was supposed to move capital from the richer countries to the poorer. It has done the opposite. Open markets were supposed to bring a rising tide that would lift all boats. Income disparity in all countries, rich and poor has increased. Free flow of capital was supposed to bring stability, it has brought crisis.

The benefit in well-being of a tiny investment in poor nations puts to shame many of the mega-million capitalist shrines. Who can argue for a market that has missed the mark by such a margin?

Half the world — nearly three billion people — live on less than two dollars a day.

The GDP (Gross Domestic Product) of the poorest 48 nations (i.e. a quarter of the world’s countries) is less than the wealth of the world’s three richest people combined.

Nearly a billion people entered the 21st century unable to read a book or sign their names.

Less than one per cent of what the world spent every year on weapons was needed to put every child into school.

But it is the imprimatur of free market fundamentalism as espoused and enforced by the International Monetary Fund on behalf of the developed nations that is the mark of the free market here , and the cause of so much failure and poverty.

Over the past three decades the international institutions such as the IMF and World Bank have aggressively promoted the Washington Consensus, an informal designation for a program of opening markets to the free movement of capital, promoting privatization and facilitating export-based industry.

The results were a calamity in Russia, as we noted in Market Failure V. They were no less ineffective in Africa, where schools and water supplies have been privatized and draconian budget balancing has deprived whole populations of the education and infrastructure they need to be effective.

From Joseph Stiglitz: The Promise of Global Institutions, Chapter 1 of Globalization and its Discontents

The IMF and the World Bank both originated in World War II as a result of the UN Monetary and Financial Conference at Bretton Woods, New Hampshire, in July 1944, part of a concerted effort to finance the rebuilding of Europe after the devastation of World War II and to save the world from future economic depressions. The proper name of the World Bank -- the International Bank for Reconstruction and Development - reflects its original mission; the last part, "Development," was added almost as an afterthought. At the time, most of the countries in the developing world were still colonies , and what meager economic development efforts could or would be undertaken were considered the responsibility of their European masters.

The more difficult task of ensuring global economic stability was assigned to the IMF. Those who convened at Bretton Woods had the global depression of the 1930s very much on their minds. Almost three quarters of a century ago, capitalism faced its most severe crisis to date. The Great Depression enveloped the whole world and led to unprecedented increases in unemployment. At the worst point, a quarter of America's workforce was unemployed. The British economist John Maynard Keynes, who would later be a key participant at Bretton Woods, put forward a simple explanation, and a correspondingly simple set of prescriptions: lack of sufficient aggregate demand explained economic downturns,; government policies could help stimulate aggregate demand. In cases where monetary policy is ineffective, governments could rely on fiscal policies, either by increasing expenditures or cutting taxes. While the models underlying Keynes's analysis have subsequently been criticized and refined, bringing a deeper understanding of why market forces do not work quickly to adjust the economy to full employment, the basic lessons remain valid.

The IMF was charged with preventing another global depression. It would do this by putting international pressure on countries that were not doing their fair share to maintain global aggregate demand, by allowing their own economies to fall into a slump. When necessary it would also provide liquidity in the form of loans to those countries facing an economic downturn and unable to stimulate aggregate demand with their own resources.

The passage goes on to describe how the IMF’s original mission has been turned on its head. It now espouses a program of free market fundamentalism – open capital markets, privatization and budget austerity. It intimidates and cajoles nations in crisis to adopt wholly inappropriate policies in order to obtain the loans they need to overcome the crisis.

Larger, advanced nations such as the United States have no qualms about ignoring IMF advice. Smaller, more vulnerable economies are caught by their need for crisis funding.

A single example from Ethiopia, one of the poorest countries in Africa. The banking sector of that nation was about the size of a single regional bank in suburban America. IMF conditions pried open the banking sector for multinationals and liberalized banking laws. Within three years fourteen new banks had grown up and failed. Meanwhile, the multinational banks had moved in, attracted the capital, but focused their lending not on the small to medium-sized domestic companies, but to the larger operations. The result was not pretty. This illustrates that while the IMF preaches a free market fundamentalism, the application is hardly market-friendly.

To be brief, there are several elements hidden here:

1. The free market policies have not been applied on the basis of evidence they work, but from political bias. That realization is sinking in. Those countries which resist the IMF are those which prosper.


2. Successful development in the West proceeded from demand side policies, not the radical opening of capital markets and enforcement of monetary and budget austerities.


3. The free market experienced by these nations has come in the form of large corporations building large-scale projects or siting big factories. This is as appropriate as playing baseball with a shot put. It has also produced enormous debt. This top-down development contradicts the bottom-up development of all successful market economies.


4. Third world nations are not necessarily blessed if they have abundant resources. Without the basic democratic institutions, too often an oppressive elite rules in combination with the resource extraction corporations.


5. Corruption in government is not a function of government, but often a function of military or corporate power. The United States has often provided aid in the form of military hardware. Many countries are saddled with debt that ought to be considered illegitimate from this practice, as military dictatorships signed up for big arms deals to subjugate their populations. When they were thrown out by popular uprising, the debt remains, and those formerly oppressed are now on the hook for the cost of the weapons once used against them. Some debt relief has occurred, but not enough, and not without conditionality that may be even more burdensome than the debt itself.


6. In the context of trade treaties, Western developed nations have pursued a colonial-style agenda, using their huge economies to pry open the smaller, more delicate economies for exploitation by multinationals.

A final note, one region of Zambia, I believe the Northwest region, was cut off from assistance by the IMF and world bank for a complex of reasons. Over the period between 1960 and today, it has produced schools, miles of roadway, a thriving trucking industry, and successful and stable small-scale industries. Much of the rest of Africa has produced debt.

Forecast Redux -- podcast transcript

Repeating the forecast

As tedious as it may be, today we are reiterating our forecasts, primarily because there has been a full-tilt shuffling of folding chairs over the past few days. The assembled consensus seems to have moved in unison, like a flock of birds into the recession winds. We wanted to remind you we’ve been holding to our call. It seems that the great preponderance of economists were blindsided by last week’s unemployment rate increase and now admit the possibility of recession. It is a bit like admitting it might rain after the water starts pouring in over your boots.

We asserted that the recession was already in progress two months ago. That makes us aggressive. Over the intervening period we’ve moved from being an extreme outlier into being within a couple of standard deviations of the mean.

As far as the unemployment numbers, you may remember we’ve been complaining that the official numbers out of Washington have not been plausible for some time.

I told you this was going to be tedious.

In the last week of September, we made a call of economic weakness, but at the same time strength in stocks, commodity and bond markets. I have yet to see that replicated anywhere. To be clear, by strength in stock markets, I mean the absence of a thirty percent retreat in stocks typical of a recession. By strength in bonds, I mean the strength in bond prices typical in a recession, and a new powering up of commodity markets. The sell-off in stocks after the turn of the year may spook the herd, but we are holding onto the conviction that it will not be for long. We’re sticking with a flat to slightly upward movement in all broad market indexes.

And it was October when we said, it’s not inflation OR recession, it’s inflation AND recession.

The differences between us and the preponderance of economists lies primarily in whether you are Ptolmaic or Copernican, geocentric or heliocentric. That is, supply side or demand side.

Those who believe the supply side drives the economy are reduced to poring over arcane statistics in hopes of detecting a new trend or weakness. Attempting to produce models that are effective statistical trampolines so they can jump high enough to see over the horizon.

Parenthetically, another difference is that the preponderance of economists seem to use equivocation instead of bald assertion. We prefer the latter. If we are wrong, we want to have to explain why. Most prefer to appear not to be wrong, and so they couch their statements in terms of increasing chances, percentage probabilities or slowing economy rather than recession.

The statistical models are less a prediction and more early signs of activity, the smoke of a fire already in progress. This is why you have the ignominious spectacle of forecasters being hit in the back of the head with evidence that doesn’t appear on their charts.

Instead we can simply look at the shape of the economy from the demand side.

The past six years have seen an economy benefitting from interest rates at the bottom of the historic range, a government producing enormous deficits, and a job market that was still pathetic.

The unemployment rate peeked above six percent in 2003 before falling back to near 4.3 in 2006-07. But during that period employment growth stayed below two percent in all quarters except one. In contrast, Bill Clinton inherited an unemployment rate of nearly eight percent from Bush’s father. Growth in employment was above the two percent mark in seven of the next eight years. Net jobs went negative under Bush II in the middle of 2001 and stayed there until the end of 2003. Ten quarters. Longer than any other period of negative growth in jobs in post-war history.

It was this economy that was the scene of the Greenspan housing bubble and the Bush tax cuts for the wealthy. These two forces were the motive force of the last go-round of the so-called business cycle. Wealth, income and employment were all housing- or finance-related. No business investment. No meaningful job growth. The bubble was extended by extremely questionable lending to benefit a voracious appetite for mortgage-backed securities.

So we don’t need to know anything about the future except that it is connected to this past, but without the low interest rates, with a dysfunctional financial sector and in the presence of deflation in housing, the primary component of consumer wealth.

Contrast this with the predominant view among today’s economist that the problem BEGAN in August 2007, and that the previous years were healthy expansion. We were just beset by the, yes, perfect storm.

Our view is that questionable economics from the Fed and White House papered over underlying weakness and now we have the worst of many worlds: inflation, falling dollar, financial sector dysfunction, consumer overextension.

The most talked up prospects for recovery include, improbably, the idea that the Fed will come through with interest rate cuts good enough for housing to recover. This is not going to happen. The Fed cannot go down the Greenspan path because the dollar is on the block and inflation is certain. Even if interest rates could get that low, the housing bubble is over, and housing would not recover in any event because investor appetite is no longer there.

The drop in manufacturing has at least temporarily quieted the notion that export strength from the falling dollar is going to ride to the rescue.

High oil and commodity prices will strangle developed and developing countries alike. If the Fed – as we’ve predicted they will – attempts to keep a tight lid on inflation, then real incomes will be lost to the higher food and fuel prices.

Climate Change from the Demand Side - podcast transcript

We have argued elsewhere the primacy of demand, there about keeping total output and employment at optimal levels. But nowhere is the effectiveness and utility of the demand side more evident than in an economic approach to reducing the causes of climate change.

I struggle with the best way to differentiate supply side solutions from demand side. Today we will try with examples: The deforestation of Indonesia, the development of new transportation technology, and the elimination of wasteful prison mattresses.

Indonesia

Illegal logging and deforestation around the globe is creating about twenty percent of the greenhouse gas problem. In Indonesia Chinese and Chinese-sponsored illegal logging accounts for a tragic loss of this valuable resource. The logs are taken illegally, shipped to China, manufactured into flooring and other wood products, and then sold on into the markets of Europe and America.

International pressure has come to bear on China for this practice, since its companies are obtaining and processing the illegal logs for profit. China counterclaims that the host country should be responsible for the crime on its own shores. Indonesia, however, is a weak state, and even if it were not, the incentives are all in the wrong direction. The logs would no doubt be brought out by bribery or bullying or other tactics even if government were much stronger in Indonesia.

The Demand Side answer is to ban the sale in the American and European market, coupling the ban with a tax on all imported finished wood products – a tariff, if you will. As soon as the possibility of final sale dries up, the entire market dries up. The wealthy countries have the wherewithal to monitor such things. A tariff or tax provides revenue for the monitoring, plus a convenient and easily proven crime with which to prosecute smugglers. That is, tax evasion is far easier to prove than the derivation of any particular product, or the complicity of the retailer in obtaining that product.

Reducing carbon emissions

The current favored mechanism for reducing carbon emissions is the Kyoto binding caps on emissions by country. The US is being dragged into the process kicking and screaming. China and India are opting out. So-called cap and trade schemes are the market-based solution preferred in the developed countries. These provide a value which can be bought and sold, and so pollution is allocated to the most inefficient. Carbon taxes are another idea along this line, attempting to bring the costs of so-called externalities into the price. This is a useful and noble exercise, but it is not enough to produce the needed technological revolution.

Be clear. The only way to internalize externalities is to bring the cost of a product’s use and disposal into the market, the purchase-sale event. But this is not sufficient.

This is not to say bring as many of the costs of a products use and disposal into the market, the purchase-sale event, is the only way to internalize the externalities of the market. But it has many problems.

For one thing, the ultimate costs can never be known until after the fact. If the cost of nonaction is the destruction of the planet, then there is no price too high. Another obstacle is the political bickering about what costs ought or ought not to be assigned to the purchase-sale event. This could produce arguments and litigation which would extend far beyond the deadline for action.

Finally, nudging the costs up, particularly if done in a half-hearted or inconsistent way, will never provide the impetus for the widespread innovation needed to reduce carbon production to one-fifth its current levels. Such an approach will tend to produce graduated adjustments to current technology, not new technology. Remember, we need to get to one-fifth our current carbon output by 2050, little more than forty years.

A better model for action was produced by the state of California. The Californian skies in the 1970s were a soup of pollutants: carbon monoxide, particulates, nitrous oxide. California chose not to provide incentives to suppliers to do the right thing or to generate public information campaigns to coax consumers. It simply issued the mandate that automobiles bought or used as of a certain date needed to have a highly reduced emission level. A simple regulation.

But a huge market for those who could innovate the solution and the loss of a huge market for those who could not. First, the state listened to a cacophony of complaints and dire predictions. Cutting emissions to the target could not be done, and even if it could be done, the cost would be prohibitive.

Thirty years later, as a result of that law and subsequent amendments, emissions have been reduced to one one-thousandth of their former level. Yes. Zero point zero zero one. We have the catalytic converter and a separate reduction reaction in the converter box (as I understand it) and a result that any chemist or engineer in 1980 would have ruled out of the question.

This is the magic of demand side. In terms of reducing carbon, we describe the resultant products in terms of their carbon footprints and let the market innovate to that result.

Jonathan Frost, director of Britain’s Johnson-Matthey fuel cells has argued persuasively that if there is a guaranteed market for a product with clear specifications, that is, a guaranteed sale if the product is produced, the private sector will generate the investment and energy to get there. In the case of California, there were millions of cars to sell. The investment by the state in the technology was zip.

Government procurement

This leads into a process that is familiar to defense contractors who are given specifications and asked to produce. The most outlandish weapons or surveillance or battlefield technology has been developed by this method. See at night, get a three ton missile to home in on a four foot square target. Spy from a thousand miles up.

If government guaranteed it would purchase ex number of no carbon buses, they would be produced within five years.

Frost gives the example of zero waste prison mattresses. British prisons dispose of hundreds of thousands of mattresses that cannot be burned or used as weapons, etc. The specs for these were twenty six years old when, as part of a demonstration project, Frost and his colleagues altered them to include the stipulation of zero waste. No waste prison mattresses. They put it out to bid.

The first thing they got was what California got. “Can’t be done,” “If it could be done, it would be exorbitantly expensive.” Next they received thirty-three proposals. Multi-nationals down to inventors in garages came up with innovations on how it could be done. Ultimately the zero waste prison mattress was produced at a net savings over previous costs when disposal is considered.

Oh that’s right. In California. The catalytic converter and subsequent technology reduced emissions by one hundred thousand percent on an adjusted cost here, too, of — zero.

So it can be done. The first step may be the hardest, to think about and describe exactly what the result is that you want. Resist the temptation to describe the processes to get to the result. The current ethanol situation substituting fuel for food comes to mind. Previously it was liquified natural gas. Just concentrate on the low-carbon, high-performance product and let the private sector do its own innovation. That’s what they do best.

It is simple and effective. It engages corporations in what they do best – innovation, production, technological advancement – and urges them away from what they do worst – manipulate demand and manipulate the political and regulatory processes.

Inflation and Recession, seconded by Joseph Stiglitz

Joseph Stiglitz is the preeminent economist of our day. It was an evil delight this observer (to use a Nouriel Roubini construction) took reading Stiglitz piece today at Project Syndicate. Evil because the prediction entails the misery the misery of billions in a downturn whose dimensions cannot be known. You may, or may not remember one of the first posts here after transferring in from Northwest Progressive Institute was just such a call.

Stagflation cometh, by Joseph Stiglitz, Project Syndicate: The world economy has had several good years. Global growth has been strong, and the divide between the developing and developed world has narrowed... Even Africa has been doing well, with growth in excess of 5% in 2006 and 2007.

But the good times may be ending. There have been worries for years about the global imbalances caused by America's huge overseas borrowing. America, in turn, said that the world should be thankful: by living beyond its means, it helped keep the global economy going, especially given high savings rates in Asia... But it was always recognised that America's growth under President Bush was not sustainable. Now the day of reckoning looms.

Comment: Bill Clinton left office with one earnest plea: Maintain fiscal responsibility. Bush II used the excuse of 9-11 to throw all responsibility out the window.

America's ill-conceived war in Iraq helped fuel a quadrupling of oil prices since 2003. ... Until now, three critical factors helped the world weather soaring oil prices.

Comment: It is often stated that oil prices don't matter as much as they used to, since oil is a much smaller percentage of GDP than it used to be. The same could be said of all inputs, including labor, where a 70% rise in manufacturing output over the past 40 years has been performed by five million fewer workers. In addition, we import the energy component of products with those products, but we don't import directly the oil itself. Oil prices lead all energy prices, including natural gas and electricity. The price of oil matters, and it matters more than a little.

First, China, with its enormous productivity increases ... exported its deflation. Second, the US took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble... Finally, workers all over the world took it on the chin, accepting lower real wages and a smaller share of GDP.

That game is up. China is now facing inflationary pressures. What's more, if the US convinces China to let its currency appreciate, the cost of living in the US and elsewhere will rise. And, with the rise of biofuels, the food and energy markets have become integrated. Combined with increasing demand from those with higher incomes and lower supplies due to weather-related problems associated with climate change, this means high food prices - a lethal threat to developing countries.

Comment: The Chinese have hocked their environment for the economic growth they have seen over the past two decades. Now fully two hundred million of its citizens depend on agriculture that is not sustainable due to ground water mining.

Prospects for America's consumption binge continuing are also bleak. Even if the US Federal Reserve continues to lower interest rates, lenders will not rush to make more bad mortgages. With house prices declining, fewer Americans will be willing and able to continue their profligacy.

The Bush administration is hoping, somehow, to forestall a wave of foreclosures - thereby passing the economy's problems on to the next president, just as it is doing with the Iraq quagmire. Its chances of succeeding are slim. For America today, the real question is only whether there will be a short, sharp downturn, or a more prolonged, but shallower, slowdown.

Moreover, America has been exporting its problems abroad, not just by selling toxic mortgages and bad financial practices, but through the ever-weakening dollar... Europe, for instance, will find it increasingly difficult to export. ...

At the same time, there has been a massive global redistribution of income from oil importers to oil exporters - a disproportionate number of which are undemocratic states - and from workers everywhere to the very rich. It is not clear whether workers will continue to accept declines in their living standards... In America, one can feel the backlash mounting.

For those who think that a well-managed globalisation has the potential to benefit both developed and developing countries, and who believe in global social justice and the importance of democracy (and the vibrant middle class that supports it), all of this is bad news. ...

Indeed, the ... world [is] facing depressed aggregate demand. For the past seven years, America's unbridled spending filled the gap. Now both US household and government spending is likely to be curbed, as both parties' presidential candidates promise a return to fiscal responsibility. After seven years in which America has seen its national debt rise from $5.6tn to $9tn, this should be welcome news - but the timing couldn't be worse.

There is one positive note in this dismal picture: the sources of global growth today are more diverse than they were a decade ago. The real engines of global growth in recent years have been developing countries.

Nevertheless, slower growth - or possibly a recession - in the world's largest economy inevitably has global consequences. There will be a global slowdown. If monetary authorities respond appropriately to growing inflationary pressure - recognising that much of it is imported, and not a result of excess domestic demand - we may be able to manage our way through it. But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst: another episode of stagflation.

If central banks go down this path, they will no doubt eventually succeed in wringing inflation out of the system. But the cost - in lost jobs, lost wages, and lost homes - will be enormous.

- Joseph Stiglitz

Minimum Wage and other non-stories of 2007: Podcast transcript

Today we look back at some of the non-stories that were widely reported in 2007.

That is, things that did not happen that were widely reported as having happened or were certain to happen.

Among the non-stories covered in this podcast:

• The minimum wage hike causes unemployment to rise
  


• A weaker economy sends the stock markets tumbling
  


• Banks and the shadow banking sector face up to their problems with write-downs


• Housing slump nears its bottom
  


• Federal Reserve Bank liquidity puts confidence back in lending, or rescues credit markets
  


• Falling dollar does not mean higher inflation.



• Market stability will follow from newly sobered investors

All right, so the last hasn’t been reported yet.

First: Unemployment

If you’ve listened to us very long, you will remember our distrust of the official employment figures coming out of Washington in the past year, in particular the strength of the so-called birth-death assumption which has propped up payroll numbers.

BUT one thing about a strong employment record is its reflection on the great non-event of the rise in the minimum wage. The compassionate free marketeers were telling us that a hike in the minimum wage was going to adversely affect those it was intended to help. The lowest paid would lose their jobs as a result of the extra, what, five dollars a day in wage costs. Didn’t happen.

Where I live here in Washington state, we have the highest minimum wage in the nation at $7.22, and the only reason there’s any slack in the labor market is people keep moving here. Ours is, by the way, indexed to inflation. This is the right thing to do to start with, since it doesn’t require grandstanding to keep up.

That was my favorite non-story, but there were bigger ones.

The stock market collapse.

In full view of the biggest housing recession in postwar history and the current and continuing crisis in credit markets, the stock market has not tanked. In spite of many reports to the contrary. The Dow and the S&P 500 are actually up for the year. So is the NASDAQ, and by ten percent, its biggest calendar year rise since 2003.

Volatile? Yes. Down substantially? No. This non-event was actually announced several times by over-eager journalists who pronounced the inevitable as already having happened. Now it is just ignored, pushed under the table with the minimum wage.

Also under the table are the early reports that banks were facing up to their losses and taking write-downs that would clear their balance sheets, return transparency to their operations, and allow us to get on with business. No. They are holding onto as much of the toxic paper as they can as long as they can and being as opaque as possible. Occasionally they sell five or ten billion dollar chunks of themselves to foreign countries and announce writedowns of five or ten billion dollars the next day. Sometimes the same day.

We are going to see the so-called “fiscal option” in 2008. We only hope Americans get the same equity as the other sovereign wealth funds for their bailouts. Likely we’ll just get more debt, as in the bailout of the Savings and Loan banks in the Reagan-Bush I era.

HOUSING SLUMP NEARS ITS BOTTOM.

Perhaps only realtors are clinging to this. But the variant that the mortgage meltdown would not affect the broader economy is still getting substantial play after the data is in. Again, the so-called mortgage meltdown should really be called the financial sector collapse. We can’t call it the banking sector collapse unless we acknowledge that these shadow banking institutions and the hedge funds are also included. We’ve yet to see the sickening results of so-called innovation in commercial real estate and corporate debt markets.

CENTRAL BANK PRODUCES LIQUIDITY AND RESTORES CONFIDENCE.

The liquidity happened. Money is getting easier and cheaper for these guys to get. It bought about three weeks of very timid confidence.

MANUFACTURING EXPORTS WILL OFFSET CONSTRUCTION SECTOR JOB LOSSES

No. Exports need to offset imports before they start offsetting any other sectors.

FALLING DOLLAR DOES NOT MEAN HIGHER INFLATION

Usually this claim is followed by, “After all, imports are a relatively small part of consumption.” Yes. But the flip side of higher exports is higher priced domestic goods with export markets. Like food. Food inflation may not show up on the Fed’s preferred list of prices – core inflation. Higher food prices may not even be a completely bad thing. But it is inflation.

SPECULATORS ARE OUT OF THE MARKETS

The subprime meltdown was an isolated phenomenon. No. This story was a complete non-story. It wasn’t reported wrongly. It was just not reported. Speculation moved from the stock market to real estate after the dot.com bust of the late 1990s. Now we have the housing bust. Speculation has moved to commodities and currencies. While the individual market experts identify speculation as a likely culprit for ninety-six dollar oil instead of sixty dollar oil, the mainstream media reports the higher price as a function of supply worries or demand pressure. Maybe the day-to-day variations have something to do with storms or wars, but the baseline is determined by the money in the market.

This is bad news for inflation. Speculation in wheat, corn, soybeans, food of all kinds, metals, natural gas, and so on, is bad news at the front end for inflation and at the back end for farmers and others who invest in expectation of high prices and will have to go sit in line with the subprime mortgagees when the bubble bursts.

New Hope on Climate Change, Jeffrey Sachs

Noted economist Jeffrey Sachs sees more from the Bali roadmap than I do. It appeared to me that there was a signing statement shortly afterward as well. But Sachs is up on Project Syndicate with a brave defense of Bali beginning:

The world has taken an important step toward controlling climate change by agreeing to the Bali Action Plan at the global negotiations in Indonesia earlier this month. The plan may not look like much, since it basically committed the world to more talking rather than specific actions, but I am optimistic for three reasons.

First, the world was sufficiently united that it forced the United States to end its intransigence. Second, the road map marks a sensible balance of considerations. And, third, realistic solutions are possible, which will allow the world to combine economic development and control of greenhouse gases.

The first step at Bali was to break the deadlock that has crippled the global response to climate change since the signing of the Kyoto Protocol a decade ago. This time the world united, even booing the US lead negotiator until she reversed position and agreed to sign the Bali Action Plan. Likewise, the unwillingness of major developing countries such as China and India to sign on to a plan also seems to be ending, though considerable work remains to craft a global agreement to which both rich and poor countries can agree.

....