Saturday, April 24, 2004

What the #@$%^*&#!!!? Iraq and Economy, oui vey!!!



Before I explain my reaction, first let me discuss some news from Iraq. MSNBC reports a ratcheting up of violence. The oldman also heard a BBC interview on the radio recently that the attacks on the oil ports there finally has the oil industry in a tizzy and Stirling Newberry has a good post up at the Agonist discussing why such anguish on behalf of the purveyors of black gold.

Next for those who are still saying that the anti-Bush coalition should stay calm about Kerry's current fortunes, they should read two articles. The first is Joshua Marshall's post on why Kerry's strategy is a smart strategy. The next is Ellen at BOP blog wringing her hands about what the oldman would call the painful absence of anything remotely resembling decisive leadership or charisma in Kerry.

As a personal note, the oldman would like to add that he had a depressing phone call with a friend of his who works in New York last night. To put it in perspective, his old buddy and former roomate once upon a time was a rural raised Republican former Illinois farm boy turned scientist. Well the oldman's buddy had before actually registered Democrat in order to vote for a Democratic candidate, but now he called me with sad news.

"I'm sorry but I just can't vote for Kerry." was what my buddy had to say. I told him I couldn't blame him. The oldman while not believing that Bush is better than Kerry, understands that most people need more than a "lesser of two evils" argument to vote a guy into the Presidency. While people may be terribly disappointed in Bush, Kerry's problem is that people don't have much good to say about him besides his former war record in the first place. And this my compadres is a problem. Kerry has no buzz.

Those who suggest that Kerry isn't in trouble ought to take such an anecdote to heart, because it's not the first such sentiment that the oldman has heard along these lines recently.

Depressingly along the lines of Iraq, we have more stories about how our boys in Iraq are getting shafted big time back on the home front (NYT).

"If he doesn't come back soon, we're going to lose it all, and he's going to have to start all over again," said Ms. Johnson, who works full time as an insurance adjustor. "He's proud to serve his country, but the Army doesn't seem to care about him or us."

Not to take anything away from the suffering of military families and with all due respect for the men and women in our armed forces serving overseas, let me take an irreverant moment to note that Mrs. Johnson is in my POV pretty damned attractive as a lady.

Meanwhile in Iraq, we're ticking away the count down to the explosion in Fallujah I've come to resign myself as expecting. This one sentence summarizes the clueness of the Administration "In Washington, officials still describe the fear of uprisings in Iraq as a theory, one they say may be overblown."

When the oldman earlier predicted an explosion in Iraq regarding Najaf and Fallujah, and there seemed to be a last minute reprieve in both cases, the oldman initially made some noises about admitting making a mistake and then retracted such an admission. On the same day if you will recall, the Bush Admin announced the nomination of Negroponte to head the US Embassy to Iraq and the oldman promptly took that as a sign that the Admin was so clueless that they would find a way to go back and totally screw up Fallujah and Najaf. And now, right on cue, they are doing just exactly that.

Right now as the NYT reports the word on the street in Iraq is "Iraqi first; Sunni or Shiite second." This being the case, going back and dealing with Fallujah in a heavy handed way is merely going to cause a rallying point inside Iraq.

Of course they have to go in and do it, but they have to work (a) hand in hand with Iraqi troops (b) work on pincering, cordoning off, and then clearing Fallujah one house at a time (c) use when appropriate non-lethal weapons such as rubber bullets, etc. to minimize collateral civilian damage.

A good example of such methods is the British progress into Basra last year when they took the city despite resistance which turned what could have been a bloodbath into a relatively minor situation that blew-over and whose situation has been one of the more stable cities in Iraq since that time. Calling in artillery or airstrikes and using vehicle weapons is a big no-no. Undoubtedly the Bush Administration will go in shooting first and sorting out the bodies later.

They could learn a great deal from the Astronaut's prayer:

"Dear God, please don't let us screw this one up!"

SO WHAT'S UP WITH THE #@$%^&#!!! REMARK?

Via the Washington Monthly blog of Kevin Drum, we see this chart of a divergence between Industrial Production and GDP. Kevin Drum get's the reference from the premeire economic blogger Nathan Newman who has further analysis from the chart taken from the Economist.

The headline from the Economist is "Grossly Distorted Product: Are official statistics exaggerating America's growth?"

The answer is of course: YES

As the oldman has maintained on this blog and for a long time, official growth numbers are way overstated. This seems to be the final nail in the coffin since as the Economist, hardly a liberal outlet, notes that the Industrial Production numbers are more accurate since they're taken from reports taken from various industries as opposed to estimates made by bureacrats at the offices of the government.

In other words, Greenspan is all hooey and what the oldman and others have been saying all along is correct - the economy was significantly weaker than official numbers indicated the past four years, that jobs numbers were not understated but rather reflected the actual economic state of affairs, and that inflation has been massively understated since it is only by understating inflation and overstating productivity that the bad numbers could have been created. In addition, liberal economists like Brad Delong who essentially buy into the official numbers even if they criticize the Bush Administration still have egg all over their faces.

As it turned out, those who have had to make real decisions regarding the market have had to cobble together our own numbers and estimates and in retrospect these now seem to have been completely vindicated.

One of my more regular readers, Jim Coomes, asked below how I come to the conclusion that this is a late surge in a top-heavy economy about to undergo a turnover. Or as he put it so colorfully, the last "sucker's rally". Well Jim, the answer is that you have to look at a variety of indicators and believe the ones that agree with your own experiences, and you have to widely sample people of different backgrounds and businesses.

Most people choose to congregate narrowly with people from one background or one area. The oldman attempts to associate widely with people from many career interests and backgrounds. One must always believe the reality of one's empirical experiences, if carefully spread out so as to be fully representative.

Putting together the trail of evidence this time, most of the positive economic indicators are associated with real estate development. However as commentators have written, interest rates are under pressures that will move them upwards by at least two and a half and possibly more percent in the upcoming months. Mortgage rates are already rising, up a percent or so for the 30 year mortgage yields already.

Also in my practical experience, costs are rising much higher than the government is reporting - a measy 2.5% for the core inflation rate and a 5% overall including energy and food is understating things.

Given that rising interest rates will cause the real estate development, which everyone practically agrees is at bubble like price speculation levels, to rein itself in considerably then this part of the economic engine will knock off. In addition debt levels at individual levels are quite high, and defaults and bankruptcies are up despite Congress having tightened conditions for declaring bankruptcy last year.

The real economy then is in a final stage liquidity extraction scenario, as can be seen in reports of the money supply. As this Quicken article explains, money supply is a measurement of economic activity or deposits made to put it more crudely.

***
It may be intuitive to suppose that the money supply grows when the government prints currency. But in fact any money held in a bank or Federal Reserve vault that isn't in a customer's name is not included in money supply. So when currency is printed, it doesn't get added to the money supply until it's needed. (This will be important when we talk about the Y2K issue next week).

However, at any given time, there is a finite and an approximately calculable amount of money circulating in the economy. This is the money supply.

Still with me? Good. ... the effect of a shrinking money supply is to choke off the stimulus necessary to keep an economy expanding. The Fed tries to allow for enough money growth to sustain economic prosperity, but not so much as to cultivate inflation.
[emphasis added]
***

Well the Federal Reserve Statistical Release indicates that money supply last year at about the same time grew year over year at 6.5% and this year it grew at 4.5%.

Still with me? But as Krugman wrote in the NYT about recently about inflation that "...in the first three months of 2004, prices rose at an annual rate of more than 5 percent. That number included soaring gasoline prices, but even the "core" price index, which excludes food and energy, rose at a 2.9 percent rate."

Got that? So if money supply only grew at 4.5% and inflation grew at 5%, that means that the real economy shrank by 0.5%.

Where is the money going? Well as the Quicken article points out "in fact any money held in a bank or Federal Reserve vault that isn't in a customer's name is not included in money supply."

So the money is going into higher price increases and since the higher price increases include asset valuations ... we have the money supply getting sucked into large real estate and stock market asset valuation bubbles. When those "correct" due to higher interest rates, and we've established that higher interest rates are coming then the "liquidity extraction" phase of the economy will occur as those bubbles are pricked and the released money is "extracted" in the form of rapid asset devaluations - firesales in other words. Not everything will go into firesales, just the most interest rate sensitive assets like junk bonds, speculative real estate development, etc.

Another sign of liquidity extraction? How about good old-fashioned capital flows.

A lot of individual people will probably be rolled up since the number of people who are unable to service their debt will be at an all time high due to the expansion of consumer lending throughout the recession and the racking up of consumer debt.

It isn't helping that tens of thousands of families throughout the United States are being affected by our ongoing deployment. Remember each of those deployed soldiers have families and the number of families being disproportionately punished by the extended deployment is increased because the National Guard and Reserve Families don't expect such long deployments.

The most recent word is that some of those "weekend warriors" may end up serving 22 months in Iraq. Twenty two months! No wonder why their families are going under. Given that most families are two income households and have to take quite a hit in income since their military pay is much lower than their average civilian income ... and you have a recipe for bankrupting tens of thousands of families in the next year or so.

If Bush expands the call-up to include the rest of the National Guard and Reserves, this could be amplified many times over. If he wins the election, still a gloomy possibility to consider, he's likely to call for a draft in December - which the Administration all B.S. aside has not ruled out. What would he have to lose at that point really?

Think about the economic carnage that would result in, a D-R-A-F-T. To be fair, I'm not sure Kerry wouldn't do it either, but it just shows how the average American is pretty much screwed from the get-go here.

We also should consider that two-thirds of Americans according to a recent poll believe that there will be a major terrorist attack before the Election. I wrote in the aftermath of Madrid 11-M that this would likely be looked back upon as period of escalation leading up to a major US terrorist strike.

Well since then, there has been a foiled terrorist attack in Britian where they stopped a plot to blow up a soccer stadium on live TV meaning possibly hundreds of deaths there. Also Jordan stopped a major chemical bomb attack that by their estimates could have easily killed many thousands. Finally Saudi Arabia had a successful attack performed upon them by terrorists.

Remember that Alqueda tends to attack in streaks. The pattern of the attacks also picked up after an announcement to that regard by Al-Zawahiri. We could see an attack on the 4th of July or maybe 7-11-04 this summer, perhaps a big dirty bomb attack in Chicago, something requiring a major urban evacuation exodus.

So as an economic event that would probably be major, and with a top-heavy stock market looking for an excuse to plunge beneath 10,000 ... well let's just say that the oldman's money is in his savings account right now and it's staying there for a bit.

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