Why the Wall Street Bailout will Harm average Americans -- even if it works!

Even if the $700 Billion Wall Street Bailout, together with the $Trillion or more pumped by the Federal Reserve into Wall Street banks and their counterparties, succeed spectacularly in rescuing the economy from financial meltdown, even if they succeed in generating +GDP and economic recovery for years to come -- in short, even if they succeed beyond just about anyone's wildest expectations -- they will almost certainly still work harm on the average American household.

The political bailout of Wall Street will do harm because it is the biggest single example of "trickle down" economics in our nation's history, a particularly toxic "trickle" because the inflation it creates will affect prices long before the cash wends its way from fatcat corporate cronies to average consumers. This is the problem of "first/early receivers" vs. "late/non-receivers" of new money or credit. How it applies to the Wall Street Bailouts I will explain below.

(Update) March poor Retail Sales explained: not adjusted for Easter!

Earlier this week the Census Bureau reported a nasty decline in March retail sales. The report was jarring precisely because private sources of data -- same store sales, mall traffic, car sales -- all had indicated firmness.

And look at what this abrupt decline has wrought: Prof. James Hamilton at econbrowser calls March's poor retail sales "a particularly discouraging development". Prof. Krugman says that "things are still getting worse."

Now let's consider this little nugget: here is the March monthly and early April weekly update from Shoppertrak:

Deflation deepens (slightly) but Death Spiral likely averted

This morning the BLS reported that consumer inflation fell 0.1% (seasonally adjusted) in March, (rising 0.2% NSA) meaning that year-over-year prices have fallen -0.4% into deflation. YoY consumer deflation is only surpassed by 1949 (and ever so slightly in 1954-55) in the post-Depression era. This graph, comparing CPI with PPI for finished goods and comodities (update: showing today's CPI) shows that after a brief pause, deflationary pressures deepened - ever so slightly - in March:

March retail sales: Processing ...

This morning both March PPI and retail sales were released. The PPI was more negative than anticipated, suggesting a negative CPI tomorrow (Deflation is Here!).

Retail sales are more interesting. I've written several pieces about consumers coming back from the grave. At first blush, the March numbers seem to contradict what we saw from Shoppertrak re mall sales; and also same store sales, and to a very limited extent, auto sales -- all of which showed some improvement.

Retail sales were off -9.4% YoY. Ex-auto they were off ~6.0% YoY. A closer look suggests (1) Easter falling one week later in April may have much to do with the decline; and (2) almost all of the decline is in auto and gasoline sales.

Total retail sales from a year ago fell from 380.2 to 344.4. Almost all of that decline was autos, down from 67.0 to 49.7; and gasoline, down from 42.3 to 27.9.

Unemployment and Recovery: a Grim Forecast

Regardless of whether the economy as a whole begins to improve, the malaise of working and middle class America will not be relieved until wages increase, and employment rates return to a robust level.
The news on that score is grim. Unemployment is a lagging indicator. Historically, it continued to rise right through to the end of recessions. The "jobless recoveries" from the 1990 and 2001 recessions were even worse: unemployment continued to rise for over a year after both recessions ended!
If that pattern is again true for any recovery from this recession, the forecast is grim indeed.

Springtime during the Ice Age

On this Easter/Passover weekend while we are enjoying the blossoming of spring, Robert Reich has a blog post that nicely encapsulates a debate percolating through the econoblogosphere:

[W]e're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy.... The real question is whether this means an economic turnaround. The answer is it doesn't.

The only economic fundamental that's changed ... is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished.
....

I spent the better part of an hour yesterday evening debating Larry Kudlow on his CNBC program, along with Arthur Laffer and two other financial analysts, all of whom were sure that the stock market had hit bottom and was now poised for a major recovery. I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it.

In other words, the "green shoots" side and "dead of winter" side are polar opposites, and never the twain shall meet.

Not so. As it happens, there's good reason to believe that both sides are right.

Oil and Recovery

This may be the most important economic graph of the year:

Why? The above graph shows gasoline consumption in the US. The dotted blue line is April 2007-March 2008, the yellow line the remainder of 2008, and the chained red line this year's consumption.

Let us make a not unreasonable assumption that this recession is going to be somewhat "L" shaped or at least a Verizon-logo like elongated "V" with a very slow recovery after hitting bottom. Let's also assume optimistically that we are somewhere near the bottom of the cliff -- the inflection point of the "L" or "V".

How much of a recovery we get -- or worse, if we get a double-dip "W" recession -- is likely to be substantially determined by the price of Oil later this year.

New Deal Democrat vs. New York Fed on Economic Recovery and the Yield Curve

The New York Fed has just published a study on the predictive power of the yield curve in 3 months vs. 10 year Treasury bonds. (warning: pdf. For an html friendly summary with graphs, see Prof. Mark J. Perrys' claims that the NY Fed research means the recovery has already begun!).

The study updates previous research dating from the 1980's onward to the effect that a negative spread between the 3 month and 10 year Treasury yields (negative means 3 month Treasuries pay more interest than 10 year Treasuries) is means economic contraction - a recession - 1 year later. Conversely, a positive spread means economic expansion 1 year later.

Based on that, the New York Fed says that the recession is over! I disagree.

Dead Money Talks, Sick Children Walk

As you probably already know, 2010 is the year to die is you are really wealthy. The Estate Tax disappears for one year only. Under the Bush plan, it would have reverted to its pre-2001 rates of 55% of estates over a $2 million exemption. President Obama proposed a 45% percent rate over a $7 million exemption.

Even this was too much for every single Republican and 9 Democrats in the Senate, who voted by 51-48 to enact a 35% rate over a $10 million exemptioin.

Here are the nine Democrats who voted against Obama's proposal

2009: Recession vs. Recovery (Update 5)

Towards the end of last year, I wrote a number of posts about 2 possible scenarios for 2009: recession vs. recovery (although I noted that there could be a recession first, then a recovery). I used at least 4 different indicators to discuss what might happen.

Now that we are through with the first quarter of 2009, let's see what those indicators are showing.

New Deal democrat's blog