New Deal democrat's blog

I see your Milton Friedman, and I raise you James Madison

This video of Milton Friedman espousing greed and self-interest as expressed by free enterprise and free trade is making the rounds again:

Friedman reduces all of human behavior to greed. "You think Russia doesn't run on greed? You think China doesn't run on greed?" "You think the communist commissar rewards virtue?.... Do you think American Presidents reward virtue? Is it really true that political self interest is more noble than economic self-interest? Tell me where in the world you are going to find these angels who are going to organize society for us?"

Professor Friedman, we do not need nor do we seek angels to organize society. While Phil Donahue may have been flummoxed, none other than chief framer of the US Constitution James Madison had a complete answer to your prescription of increasing concentration of wealth and plutocracy, over 200 years ago.

US Consumer Rising from the Dead?

The shock of "Black September", at least on consumer non-durable spending, might be wearing off somewhat. Like Freddy Kreuger, Michael Myers, or Jason Voorhees, it appears that American consumer simply refuses to stay dead, but instead is rising, zombie-like, from the grave to spend another day.

Private retail service Shoppertrak issues weekly bulletins about foot traffic and sales in the nation's malls. While not a perfect indicator, it is both more frequent and also a separate source to compare with the official data. In the past it has provided early indications of the holding up -- or not -- of the consumer. For example, by the end of September it had published a special note on the collapse of foot traffic that month, the first indication of the appearance of the consumer collapse of "Black September."

What Real Residential Investment's Cliff-SPLAT! indicates about the Recession

We all know by now that the economy is cliff-diving. Many bloggers can ably describe the dive in progress. One of the distinguishing things I have been trying to do over the last year is to look ahead to determine, "Where is the bottom of the cliff, and When do we get there?" Unlike most recessions, which might be described as bungee-jumps, where you get to the bottom and rebound quickly, this recession heralds a secular change, as housing and financial bubbles burst. In those circumstances, typically there is a crash or cliff-diving stage (also described by Russ Winter as the "guillotine" phase) followed by a slower, more sideways, grinding stage (described by Russ Winter as the "sandpaper" stage). Or, as I've described it many times, a Slow Motion Bust.

A more visual depiction of such crashes is to liken them to going over the American falls. First there is the free-fall, then the bouncing to the bottom of the rubble. For example, in my last blog, I noted how new home sales almost had to be nearing the bottom of the cliff. Or, visually:

Why New Home Sales' Cliff-SPLAT! is not bad news

January New Home Sales, released yesterday, were -- perversely -- good news! Despite the perfectly correct mantra that new home sales continued to cliff-dive, and that, as my friend Bonddad said not once but Twice(!) yesterday, "We're Nowhere Near a Bottom in Housing" the simple fact is that the housing market is showing ample signs of the beginning of a transition.

Deflation is coming! Deflation is coming!

So says Tim Iacono of "The Mess that Greenspan Made", and who am I to disagree? After all, I've been writing about the dangers of deflation for awhile now.

Actually, Tim makes the comment in a mocking sense, noting that

In the U.S., the latest consumer price data will be reported on Friday and we may be in for a veritable "Deflation Tsunami" from the mainstream media since we were teetering on the brink of a negative consumer price index last month.

Tim's essential point, if I read him correctly, is that the deflation we have experienced is really just the popping of the Oil price bubble.

So, am I going to get into a mud-pie flinging contest with Tim? Hardly. Actually our two views aren't that far apart.

Just how historic is the Consumer retrenchment?

Although retail sales data reported last week surprised by not being as awful as expected, nevertheless the plunge in consumer spending since "Black September" has been dramatic.

Just how dramatic? Let's compare the cliff-diving plunge in retail sales at the end of 2008 with past retrenchments.
Below is a graph of real retail sales (i.e., adjusted for inflation) since the original, now-discontinued series was started in 1947 (in red) with the more modern version since its inception in 1990 (in blue):

The 2009 Parable of the Talents

“Once upon a time, a man went on a journey, and summoned his slaves and entrusted his property to them. To one he gave five talents, to another two, and to another one, each according to his ability. Then he went on his journey.

The one who had received five talents went off right away and put his money to work in a Wall Street investment bank speculating in complex derivatives.

In the same way, the one who had two took out a negative-amortization, stated income subprime mortgage on a McMansion.

But the one who had received one talent went out and invested in a money market account, which dug a hole in the ground and hid his master’s money in it, earning only 2% a year.

More evidence for the "Black September" consumer fear thesis

Here's how the NY Times described the "surprse" not-so-bad Fourth Quarter GDP yesterday:

The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output.

“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”

(hat tip Ksho1)

Economic Indicators during the Roaring Twenties and Great Depression (V).

This is the concluding installment in my series examining how the most reliable economic indicators during the Inflationary Era, perform during periods of deflation. I have done this by examining the Roaring Twenties, Great Depression, New Deal, and the Post WW 2 deflationary recession. The reason for doing so is that we are now in the midst of the first deflationary recession in 60 years. Most indicators used by economists and pundits do not exist or have never been tested that far back in time. Indicators which may work during inflations may not work during deflations. Having set forth the data for you, today we show exactly how two such indicators -- monetary and interest rates -- panned out, and the implications of those conclusions to our present situation.

Economic Indicators during the Roaring Twenties and Great Depression (IV).

Previously in Part I of this series, I explained the need to re-examine economic indicators to determine how they performed in previous periods of deflation. In Part II, I looked at the year-over-year M1 vs. CPI indicator during the Roaring Twenties. In Part III, I looked at the same indicator during the 1930s and the post-World War 2 deflationary recession of 1948-49. That examination showed that, in the 1920-1950 period, the M1 vs. CPI indicator generally worked well, but missed the 1927 recession and most importantly of all completely failed to appropriately signal the beginning, duration, or end of the 1929-32 Great Contraction.

IV. Interest rates and the yield curve

In this installment, I will look at NY Fed interest rates, short term rates, and long term rates as they apply to the entire 1920-1950 period.