There Will Be Bubbles

My rant on Gonzalo Lira's hyperinflation prediction has prompted me to make a clearer prediction for the future. I think that the Lira's of the world will speculate into commodities, driving prices up. Producers will be squeezed, their production costs will rise, but no one will buy their products if they raise prices. They won't hire, certainly won't be giving any raises, probably even let some more people go. As unemployment stays flat or even rises, stockpiles of commodities will accumulate until prices fall again back to normal levels. This scenario will play out several times over the next few years. The only very dangerous bubbles are debt fueled. We are already over-indebted, and this debt has to work its way out before a new debt fueled bubble can occur.

Hyperinflation

I read this and am impressed with the logical progression. I haven't really seen it laid out and with the difference between hyperinflation and inflation it seems really convincing. There is a big problem though - where does the money come from? The fed printed it, you say? Well, no, they didn't actually print it. They made it available for banks to lend out. Tried getting a loan lately?

People are tapped out, who has the money to go speculating into hard commodities? If no one has any money to buy these commodities, how high can they get? Going to get a bank loan for some silver? Good luck. Think about it, everyone is already just scraping by as it is. Are they suddenly going to go rush out and stock up on gasoline? Or are they going to stop driving as much en masse and buy up Priuses - like oh that last time oil shot up to 150 for no reason.

Here's what I think is going to happen instead. Worried inflationistas will continue to hedge into commodities, predicting Lira's scenario. The prices may very well rise, even balloon for a while until, well until the next report comes out that sees stockpiles have risen because no one in the end market is buying it. Because they can't. There's no extra money in the economy, no one will suddenly get a raise to go get their hands on pork bellies. The money on the Fed's balance sheet will stay right where it is because no bank is going to lend anyone money to speculate in commodities. Then they will come crashing down again and everyone will go back to treasuries and we may have another bad quarter or so with more deflation worries until QE3. This scenario will happen several times over the next 1 to 3 years until the economy recovers on it's own.

Update
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Another point that Lira's argument hinges on is that government can do nothing right. I'm not one that believes government is perfect, far from it, but I don't believe anything is. Every system has problems - including unfettered free markets. Government has been growing the entire time America went from being an "also-ran" to the dominant economic force in the world. When you let blind ideology guide your decision making you will make mistakes. Lira DEPENDS on the Fed making mistakes - not seeing inflation and fueling it by printing dolalrs. He then fails to deliver on "printing dollars". There is a complicated mechanism to "printing dollars", but he assumes you think they've already been printed - they haven't. The Fed can simply make those dollars not available to loan, and it's unlikely the banks will loan it anyway.

All Kinds of Stuff Wrong With This

Paul Krugman attacks the deficit commission co-chair report here. He neglects a lot of detail when he claims it's a huge transfer from the middle class to the wealthy because of lower rates. It looks to me like everyone's taxes will be going up, especially the super-rich.

1. It keeps PPACA medicare rate increase on the rich in place
2. It taxes dividends and interest as income - this is where the REALLY rich derive most of their income today.
3. As the report states, the middle class don't benefit nearly as much from the mortgage interest deduction as the rich do since the amount of this is only the delta it gives one over the standard deduction.
4. The rate for the middle class is also reduced in a trade-off for the increased tax on medical benefits - and this is a terribly distorting tax expenditure that is partly to blame for the high cost of health care.
5. Estate tax seems to revert to 2001 levels.
6. Expands payroll taxes to incomes beyond 105k.

As a middle-classer, it looks to me like I'd pay more in gas taxes - but Saudi Arabia will too and that's good (producers tend to share the cost of a retail tax with a consumer because the producer will lower their prices to reduce the dead weight loss). The loss of my current deductions would be a wash because a significant portion of my income would change from being taxed at 25% to 15% - my average tax rate last year was right around 15% after all the dust settled. Once I have paid off enough of my mortgage to where itemizing no longer makes sense I'd likely be ahead AND I'd save about 4 hours of time inputting stuff into turbo tax.

Bad Stuff That's Actually Good Stuff

Posts like this are amusing to me. It boils down to "If the Fed succeeds in righting the economy and creating inflation, we could have inflation!" (my paraphrase). The Fed would not be doing it's job properly if we did not expect inflation when the current predicament is disinflation. In other words, one of his "risks" is actually that the policy will work.

The concerns about borrowing dollars to buy hotter currencies are worries that ignore balancing effects. Stronger Brazilian currency for instance could be offset by more Brazilians buying American vacation property and USD denominated assets and goods.

Mankiw vs. The World

Greg Mankiw's recent column at the Times has caused a lot of furor at some of the other blogs I read. Mankiw uses a very specific, though probably unlikely, sequence of events to show the ridiculousness of the current marginal rates. The points made from other bloggers - that these taxes are easily avoided by doing x or y miss the point in my opinion.

What exactly is wrong with writing a column, investing the proceeds in an American company which makes money, keeps its profits here and pays dividends to its shareholders that the tax penalty should be so high?

Where Greg loses me is his treatment of the estate tax - he describes an estate below the exclusion (7 million I think!) when he says he hopes his children inherit a house down-payment and college tuition. While including the estate tax illustrates his overall point, this description of a small estate seems deliberately misleading to me.

original column:
http://www.nytimes.com/2010/10/10/business/economy/10view.html?_r=2&ref=business

and some replies:
http://www.politico.com/news/stories/1010/43772_Page2.html
http://www.ritholtz.com/blog/2010/10/10-questions-for-greg-mankiw/
http://gregmankiw.blogspot.com/2010/10/mckinsleys-mistakes.html

And Stan Collender with a better retort:
http://capitalgainsandgames.com/blog/stan-collender/2001/taxed-more-and-work-less-barry-ritholtz-slices-greg-mankiw

Bush Tax Cuts - There Are Better Ways To Incentivize Saving

The only somewhat coherent argument for keeping the Bush tax cuts around for the top 2% is that it will create incentives for long term investment. Yes, this is important, no extending the Bush tax cuts will not help. Long term means just that - people need the expectation that long term tax rates will still be low.

1. Even an indefinite extension cannot work because it is unrealistic that we can cut spending alone to eliminate our current deficits. Realistic expectations are that taxes will have to go up - right around the time you expect to realize the fruits of your investment today. There is no one that would expect a long term commitment to low marginal tax rates.

2. How is a low tax on realized income an incentive to save? It's not, it's incentive to realize income and maybe use it to invest.

3. The best way to create savings incentives is directly: create accounts that can grow tax free (like a Roth but for anything) and tax deferred (like a 401k, but for anything). Then offset the cost of these accounts by raising taxes on realized income - this could likely be done without raising tax rates and simply by removing the existing bribery in the tax code that is distorting market prices in everything from corn to houses. This way it works more like a consumption tax - people who choose to realize a large income would only do so to consume - they need not have realized income in order to save - and if they do, realized income from savings can later be tax free.

Update:

Corporate taxes are also a tax on savings - your 401k grows slower because good companies that don't have good enough lobbyists to not have to pay a ridiculous 40% corporate tax rate grow more slowly. Savings incentives will be raised by being able to invest in companies not held back by high tax rates. The Bush tax cuts are simply the wrong argument and keep us in a consumption now trap.

Government workers or ...

Much has been made about how Federal workers make far too much money. I'm inclined to think it's not as bad as this: the government is made up of far more white collar workers and it's disingenuous to compare accountants to McDonald's fry cooks. That said, benefits ARE more generous in federal government jobs by any comparison and should be scaled back.

The point of this post however is this:

Lobbyists Rush to Hire G.O.P. Staff Ahead of Vote

I'm not trying single out G.O.P. here, but rather make the point that no matter how much you scale back Federal salaries, you still have a ridiculous amount of money going to people who produce nothing - and this is a drag on the economy.

Ground Zero Mosque

What is the moderate position on this issue? The answer is no position - this is polarizing non-issue that moderates should ignore unless you can have a direct say over New York's zoning laws. People have a right to build a religious building anywhere subject to local zoning laws. People also have the right to protest a place of worship regardless of affiliation and offer opinions on why.

This mosque would get little attention in anything but an election year. If you are voting for someone who agrees with you on whether the mosque should or should not be built, rest assured that they will not even mention the words "Ground Zero Mosque" after the election. If you are voting for someone you think will block the building of the mosque, 1) you are being fooled - they cannot - and 2) shame on you.

OK, Now It's Time

According to The Economist, vacancies are up, and unemployment remains high. I think it's safe to say SOME people are staying on unemployment and not taking a good job when they see it. Time to stop extending benefits.

See the link here

Unemployment Benefits

Are people using their unemployment benefits to put off looking for work? Probably. Does it matter? Probably not.

Consider this - assume there are enough resources to feed 500 people in a town of 2500. ( not coincidentally, this is also about the ratio of job openings to job seekers.). Now let's say the government steps in and distributes some of that resource, or a suitable replacement. What may happen is some townspeople stop going out to collect that resource since they are now being supplied. The problem is STILL the resource shortage, not the fact that the townspeople have stopped going to collect it.

It is much the same for jobs. If we were facing a shortage of workers, we would see wages creep up to attract them. This is not occurring, which tells me that whether people seek work on unemployment or not is irrelevant. The fact is, as long as job openings are much fewer than job seekers, continued unemployment benefits are the best way to keep money flowing. The cbo agrees:

see page 9 here:
http://cbo.gov/ftpdocs/113xx/doc11353/3-17-10-NLGA.pdf

The Health Insurance Mandate

Other things the government "forces" you to buy:
Mortgages, water heaters, hybrid cars ... In all cases, all other things equal, you will pay more tax if you don't buy one of these. The same thing occurs if you don't buy health insurance. Questioning the constitutionality of something that is effectively the same as raising taxes and offering a tax credit for health insurance is ridiculous.

There are many things to dislike about this bill, the mandate is NOT one of them. Keeping the mandate and pre-existing condition portions of the bill does not make Republican favored reforms impossible (never mind that Republicans used to favor the mandate see here, here, and here.).

Within the confines of the general bill, Republicans can still push to lower the Cadillac tax threshold (all the way to 0 is my preference), move more people from employer sponsored health insurance to the exchanges - especially from small businesses, and allow and promote high deductible health plans. The Republicans' gamble on a Democrat failure and refusal to negotiate has left us with a bill to the left of where it could have been, but it's not too late to fix it.

Where in the Constitution is There a Guarantee for Health Care?

Consider the state of medicine in the late 1700s. The Founding Fathers may have been smart guys, but why would they have anything meaningful to say about health care? It had only been 25 years since barbers were legitimately doing amputations. Physicians still balanced humors. Medical licensing did not happen until 25 to 50 years later. The Constitution is a living document because they KNEW it wasn't perfect.

Fair and Balanced?

Wonder if they would cover a Democrat holding up nominations because they wanted pork for their home state?

http://thecaucus.blogs.nytimes.com/2010/02/05/white-house-blasts-shelby-hold-on-nominees/

Stories on Shelby's move are conspicuously absent on Fox's site:

http://www.foxnews.com/search-results/search?q=shelby

Really?

A lot of conservative economists seem to think that the unemployment rate is stubbornly high because of uncertainty created from the cap and trade and healthcare bills being debated in congress. So as I drive from strip mall to strip mall in my hometown, noticing there are at least 2, sometimes more, businesses shuttered I have to marvel at how disconnected from reality they are.

We are in the midst of a debt crisis - is it so unbelievable that over-leveraging of commercial businesses is still responsible for continued unemployment? No, it's not because of "uncertainty" created by government. It's because there's no dang customers! Businesses were so leveraged, based on everyone thinking housing prices would keep going up, that they were running razor thin profit margins in the best of times. Take away 20% of those customers in a matter of months and they cannot pay off their loans anymore. That, combined with banks now unwilling to refinance these businesses means none can keep their doors open, much less worry about hiring because of the uncertainty created by congressional bills.

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Update:
The real problem?
no customers.