Category Archives: Economy

It’s not like Tim Morge didn’t say so…[Inflation]

Well, see, now some people are getting worried about the CPI.

And Dana’s not alone. A March CNN poll indicates that 91% of the population is concerned about inflation. I’d ask a member of the remaining 9% what they’re thinking - and what levels of relative fiscal comfort allow one not to be concerned about inflation - but I’m entirely surrounded by 91-percenters. So how do we account for the discrepancy between the Federal Reserve’s recent assurances that inflation is under control and the 91% of the population that’s worried it isn’t?

There are several possibilities: The first is that we’re all paranoid. We simply need reassurance from the authorities: Inflation rates are fine, nothing to see here, move along quietly. The second is that the Fed’s insistence on focusing on “core” inflation - a measure that strips energy and food from the consumer price index (CPI) because they’re theoretically subject to short-term volatility - makes inflation seem smaller than it is, or than we feel it to be when our gallon of milk that was 12% cheaper last year gets swiped across the grocery store scanner, beeping ominously like a tiny alarm bell. (While core inflation was just 2.3% in February, the CPI was 4%.) The third and most disconcerting possibility is that the CPI systemically understates inflation, in which case we’re paying for it taxwise, and the government is underpaying Social Security recipients. In the words of many a UFO spotter, it isn’t paranoia if they’re really out to get you.

Tim said a while back, when I interviewed him, that when he worked at the Federal Bureau of Labor & Statistics, that they knowingly and willingly fudged the numbers.

Apparently a common practice.

“Greenspan relaxed all of the lending regulations [after 9/11] and printed money like there was no tomorrow,” Morge said. “I think he thought he was the economic savior of America, showing the rest of the world that we were still strong … he was wrong, but he was being patriotic.”

Morge said a combination of politicians ebbing away at anti-trust policies during former President Bill Clinton’s administration, as well as bravado on the part of Greenspan, led to the sub-prime mortgage crisis, which many economists say has spurred the decline of the U.S. economy, if not a full-blown recession.

But the buck doesn’t stop there.

For the past three years, banks were giving interest-only mortgage loans at up to 125 percent of the appraised value of the house. When the value of the houses began to fall, millions of Americans were left with loans they could neither afford nor pay.

A bank like Citi Bank is probably holding $50 to $60 billion of these types of loans, Morge said. He estimates that 3 of the 5 major US banks will go “belly up” in 2008.

Banks, such as Citi, would bundle the loans, and in turn sell them to investment banks and hedge funds for a premium, who Morge labeled as “the greater fools.”

The problem, however, was much larger than the sub-prime mortgage, Morge said.

Oh what’s that, did you see the part about 3-5 banks going belly up?

There’s been One & Counting

The Future of the US …. from Britain, to US, to China

Interesting article here:

March 07, 2008 Free Trade and Fair Trade: SIEPR 2008 Economic Summit Conference

J. Bradford DeLong

The question of “free” versus “fair” trade, has three baskets: an environmental regulation basket, a labor-standards and freedom basket, and a “wages basket.”

The first two can, I think, be disposed of quickly. We don’t want those able to bribe governments in other countries to poison people or the globe by turning other countries into pollution havens. We don’t want environmental standards to be used to freeze the world distribution of wealth and keep people in other countries hungry, illiterate, and barefoot. The difficulties that remain are those of implementation.

Similarly, we want expanding trade to be a force for opportunity rather than for oppression: we like it when expanded trade gives ordinary people a path to a better life; we don’t like it when expanded trade gives rich and powerful people in the cloud city of Stratos an incentive to round others up and put them to work in the xenite mines. As then-Principal Deputy IMF Managing Director Stanley Fischer warned the great and good at the 2000 Federal Reserve Bank of Kansas City’s Jackson Hole Conference, there is nothing in the ILO’s principles that we cannot and very little that we should not be eager to endorse, all of us. The difficulties that remain are, once again, those of implementation.

The question of trade and wages remains: To what extent are rich countries obligated to open their markets to poor countries when the consequence is falling wages for the poor in the rich–bearing in mind that the poor in the rich are often wealthier and have more opporunity than the rich in the poor? To what extent do rich countries do themselves well–serve their national interest–by opening their markets to poor countries even when the consequence is falling wages for the poor in the rich?

Let me make four remarks on this “trade and wages” basket:

First, between 1950 and 1997 trade and wages weren’t an issue: our foreign trading partners raised their own relative wage levels at least as fast as globalization enhanced their influence, and there was no net effect of trade on wages–no link from greater openness to the global economy to greater inequality here at home.

Second, at times between 1950 and 1997 trade and wages became a political issue as a way of distracting attention from true problems. The voters of Michigan in 1985 did not want to hear that the problems of Michigan’s manufacturing industries were home-grown–in the fecklessness of management and in the Reagan administration’s budget deficits that pushed up interest rates which pushed up the value of the dollar and made the goods they made uncompetitive on world markets. They wanted, instead, to hear that the Japanese were doing something clever and illegitimate.

Third: since 1997 or so the link between expanded imports and wage inequality has become real, as our imports now embody a much larger amount of factors competing with our own lesser-skilled than they used to. How large? I don’t think we know. Paul Krugman is now writing a paper for the Brookings Institution in which he essentially throws up his hands at the question. But there are two points worth noting: (a) the effects of trade on pre-tax wage inequality are much smaller than the effects over the past generation of changes in the tax system on after-tax income inequality; (b) the effects of trade on inequality of opportunity are much less than the effects of educational inequities on inequality of opportunity.

Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century–extraordinary damage to our long-run national security.

Think of it this way: Consider a world that contains one country that is a true superpower. It is preeminent–economically, technologically, politically, culturally, and militarily. But it lies at the east edge of a vast ocean. And across the ocean is another country–a country with more resources in the long-run, a country that looks likely to in the end supplant the current superpower. What should the superpower’s long-run national security strategy be?

I think the answer is clear: if possible, the current superpower should embrace its possible successor. It should bind it as closely as possible with ties of blood, commerce, and culture–so that should the emerging superpower come to its full strength, it will to as great an extent possible share the world view of and regard itself as part of the same civilization as its predecessor: Romans to their Greeks.

In 1877, the rising superpower to the west across the ocean was the United States. The preeminent superpower was Britain. Today the preeminent superpower is the United States. The rising superpower to the west across the ocean is China. that was the rising superpower across the ocean to the west of the world’s industrial and military leader. Today it is China.

Throughout the twentieth century it has been greatly to Britain’s economic benefit that America has regarded it as a trading partner–a source of opportunities–rather than a politico-military-industrial competitor to be isolated and squashed. And in 1917 and again in 1941 it was to Britain’s immeasurable benefit–its veruy soul was on the line–that America regarded it as a friend and an ally rather than as a competitor and an enemy. A world run by those whom de Gaulle called les Anglo-Saxons is a much more comfortable world for Britain than the other possibility–the world in which Europe were run by Adolf Hitler’s Saxon-Saxons.

There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America’s future national security, nothing more destructive to America’s future prosperity, than for Chinese schoolchildren to be taught in 2047 and 2071 and in the years after 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

And let me stop there.

A foreign currency exchange trader who can see into the future

Nearly six months ago, and again in January, Tim Morge had a lot to say about the decline of the US dollar and the fall of the US economy.

January:

“We are well past the line of recession … there’s no doubt in my mind that we’ve been in recession for some time,” said Chicago-based trader Tim Morge. “This is the first time in 40 years that we’ve had a decline in housing prices — and that’s as long as we’ve been keeping records.”

Morge, who has 35 years of trading experience in billions of dollars, said current U.S. economic problems lay mostly at the feet of a patriotic man who was formerly at the helm of the Federal Reserve Bank, the U.S.’s central banking system: Alan Greenspan

From October:

Chicago-based professional trader, Tim Morge, estimates the Euro could be trading as high as two-to-one against the dollar if the current trend continues.

“We all used to make fun of the Canadians,” he said.

“Now, nobody’s making fun of the Canadians, Australians or New Zealanders.”

Economists attribute the decline of the U.S. dollar to a variety of factors, including the slow growth rate of the U.S. economy, the decline of interest rates and the increased investment in the Euro.

Morge said many of his professional trader colleagues, who routinely deal in billions of dollars, don’t keep their savings and investments in the dollar anymore.

Chicago-based professional trader, Tim Morge, estimates the Euro could be trading as high as two-to-one against the dollar if the current trend continues.

“We all used to make fun of the Canadians,” he said.

“Now, nobody’s making fun of the Canadians, Australians or New Zealanders.”

Economists attribute the decline of the U.S. dollar to a variety of factors, including the slow growth rate of the U.S. economy, the decline of interest rates and the increased investment in the Euro.

Morge said many of his professional trader colleagues, who routinely deal in billions of dollars, don’t keep their savings and investments in the dollar anymore.

Finally, the mainstream media is getting the picture.

Is the recession because of Greenspan and 9/11?

This is a rough write-up of an interview I did with an economist/trader for a Collegian article. Most of this is not showing up in the article, but I thought it was pretty valuable. Economics is a very tough game, and economists usually disagree, so I don’t expect you to necessarily agree with or understand anything below.

Hugo Chavez

Hugo Chavez, a vocal opponent of the Bush administration, urged his Latin American allies last Saturday to begin pulling out billions of dollars from U.S. banks in light of the recent economic crises, according to The Associated Press.

Chavez, presenting at the summit of the Bolivarian Alternative for the Nations of Our America, put a voice to thoughts running through the minds of many political leaders around the world — the U.S. economy is not only tumbling; we’re possibly in a recession.

The U.S. economy is facing stiff shocks to the economy; most recently with the sub-prime mortgage crisis, the rising costs of oil and natural gas, the continued decline of of the U.S. dollar’s value, and agricultural goods that grew as much as 50 percent over a one-year period.

Throw a war on top of all that, and economists are debating if the economy is in a recession, and if so, when we will recover.

One professional currency trader said the recession is not just a possibility, but that it has already arrived, and it may be the after-shock of the greatest tragedy in modern American history: the terrorist attacks of Sept. 11, 2001.

9/11

“We are well past the line of recession … there’s no doubt in my mind that we’ve been in recession for some time,” said Chicago-based trader Tim Morge. “This is the first time in 40 years that we’ve had a decline in housing prices — and that’s as long as we’ve been keeping records.”

Morge, who has 35 years of trading experience in billions of dollars, said current U.S. economic problems lay mostly at the feet of a patriotic man who was formerly at the helm of the Federal Reserve Bank, the U.S.’s central banking system: Alan Greenspan

Alan Greenspan.

“Greenspan relaxed all of the lending regulations [after 9/11] and printed money like there was no tomorrow,” Morge said. “I think he thought he was the economic savior of America, showing the rest of the world that we were still strong … he was wrong, but he was being patriotic.”

Morge said a combination of politicians ebbing away at anti-trust policies during former President Bill Clinton’s administration, as well as bravado on the part of Greenspan, led to the sub-prime mortgage crisis, which many economists say has spurred the decline of the U.S. economy, if not a full-blown recession.

But the buck doesn’t stop there.

For the past three years, banks were giving interest-only mortgage loans at up to 125 percent of the appraised value of the house. When the value of the houses began to fall, millions of Americans were left with loans they could neither afford nor pay.

A bank like Citi Bank is probably holding $50 to $60 billion of these types of loans, Morge said. He estimates that 3 of the 5 major US banks will go “belly up” in 2008.

Banks, such as Citi, would bundle the loans, and in turn sell them to investment banks and hedge funds for a premium, who Morge labeled as “the greater fools.”

The problem, however, was much larger than the sub-prime mortgage, Morge said.

For the past two years, the Chinese have been selling billions of dollars of U.S. debt in the form of treasury bonds and treasury bills. In effect, a foreign central bank such as China can “own” the U.S. debt when the U.S. government releases treasure bonds and treasury bills, which are basically ‘I.O.U.’s’ in which the government makes promises, or debt, in return for money up front.

“The Chinese were the first ones to step up to the plate and say ‘having all of our money in America is not a good thing,’ ” he said. “We had $5 or $6 trillion in debt, all issued in bonds and bills.”

As the Chinese central bank disinvested — or took their money out — of the U.S. economy, many nations were soon to follow, Morge said.

This disinvestment is helping to drive down the value of the U.S. dollar, as the Euro, British Pound, Canadian Loony and a host of other currencies’ values climb versus the dollar.

“Our interest rates are going down, all of Europe’s central banks said ‘we’re not going to lower rates with you,’ and their interest rates are going up,” Morge said. “China, in the next 3 to 6 months, will float currency and start raising their interest rates — and the demand for U.S. money will only decline.”

The interest rates to which Morge is referring are the federal funds rate, or the rate at which banks lend federal funds at the Federal Reserve to other banks, usually overnight. The Chairman of the Federal Reserve, who, since October 2005, has been Ben Bernanke, uses the rate to try to regulate the money supply in the U.S. — something most students learn in ECON 004 (Introductory Macroeconomic Analysis and Policy).

This past Tuesday, Jan. 22, Bernanke lowered the rate .75, the largest cut in US history, and he is expected to cut the rate again Wednesday.

Morge said that the interest rate cuts, as well as the economic stimulus package totaled at $150 billion announced by the President a few days ago, are not only too little — they are much too late.

“The economic stimulus means nothing — CitiBank and Bank of America are writing off more than the stimulus package is going to be. And in reality, Bernanke knows that he’s sitting on 17 percent to 18 percent inflation … maybe as high as 20 percent,” he said. (The official number released by the Bureau of Labor and Statistics is 4.1%, but Morge, who worked for the Bureau in the past, said they “blatantly lie,” to try to assuage the fears of the American people.)

Benjamin Bernanke

Morge said that Bernanke, along with the treasury department, Congress, and the Bush administration, want the American public to feel good, but that the “tax credits” won’t have any affect.

Combine rising prices of oil, agricultural goods, copper and steel — due to the rocketing demand in China and India — and Morge said we’re sitting on a time bomb, and we’re “due for a reckoning.”

“Eighty-five percent of all industrial cranes are in China now for their various construction needs and from the middle of 2006 to 2007, auto sales in China grew six-hundred percent, in comparison with the U.S. growing at 4 percent,” he said.

“How can you compete with that?” Morge rhetorically asked.

Not all is lost he said, but the battle for the presidency of the United States will be certainly affected — no matter who wins, Morge said, their affect on the U.S. economy will be moot, because the majority of the power will rest with Bernanke.

As stock markets crumble — and Morge said will continue to do so for the foreseeable future — there is only one solution: get rid of inflation.

Morge’s proposal includes raising interest rates, and he adds that people will lose jobs and homes, and he expects to see unemployment in the “teens.”

Although Morge’s news is bleak, he says he doesn’t want to be the “dooms-day prophet,” and had some practical advice for students concerned with the plight of the economy.

“If you have the opportunity to get more education and stay out of the current job market, take it,” he said, encouraging students to try to find jobs where the employer guarantees educational benefits.

“Your career is for your lifetime … find what you like to do, and do it. The money will take care of itself.”