Volcker fears for the future of America

Paul Volcker, who chaired the Fed through most of the 1980s, thinks the dollar is in trouble:

Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.

“The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night.

The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.

From Bloomberg (h/t Eric Janszen in this iTulip thread). Not surprisingly, Volcker takes it for granted that this will be a bad thing. But perhaps most interesting is this:

Volcker offered no prescriptive solutions as he spoke in broad terms of the country’s loss of stature.

When a guy who's supposed to be in charge of America's economic recovery admits that he has no clue what to do about it, it certainly does look like that country is in trouble.

The "D-word" continues to appear

This time it's the Globe and Mail:

What’s a depression anyway? Basically, a depression is a very long recession.

You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.

The economy is in a depression when the banks are sitting on $1.3-trillion (U.S.) of cash and yet there is no lending going on to the private sector. It’s called a liquidity trap.

Depressions, usually, are caused by a bursting of an asset bubble and a contraction in credit, whereas a “plain-vanilla” recession is typically caused by inflation and excessive manufacturing inventories.

You tell me which fits the bill today.

It could be a long time before this settles down. But surely this will at least prevent the hyperinflationary scenario, right? Well, maybe not:

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

From Gonzalo Lira, via ThePythonicCow in this iTulip thread. I'm not entirely sure what to make of this; it has a ring of plausibility to it, to be sure, though hyperinflationary scenarios are a favourite bugbear of the right and should thus be taken with sizeable quantities of salt.

The fate of Detroit

One thing that communities do well to avoid is becoming overly dependent on a single industry. In some cases, it's hard to avoid (places like Leaf Rapids and Elliot Lake come to mind). But it's harder to explain when it happens with a large city, and the effects are much more dramatic. The Guardian's John Kossik has some ideas about how Detroit came to be the way it is:

The auto industry has always been cyclical and, from its origins when there were over 200 different manufacturers to its currently dominant "big three", the brunt of these ups and downs has fallen on the inhabitants of the Detroit area. As the US economy went through its numerous swings, when these hit the auto industry they had significant effects on Detroit. Even in the 1950s, when the rest of America was in postwar economic euphoria, auto plants were closing in Detroit – long before the effects of globalisation were felt in the US.

Where other major cities in the US had populations of varied education and skill levels, Detroit was unique in being heavily skewed towards unskilled or low-skilled workers. The assembly line required only limited technical ability to perform highly repetitive tasks. Since Detroit was dominated by the industry (albeit converted to wartime uses during the second world war), its population was chiefly a pool of labour for the auto factories. Detroit enjoyed middle-class levels of affluence, but without middle-class levels of skills and education.

Moreover, Detroit developed traditions of workplace segregation and racial prejudice not seen in most other major industrial cities. As the economic cycles moved through the general US economy, they were intensified by the Detroit area's dependence on one industry. And these economic tensions manifested themselves in enduring racial chasms. Even today, south-eastern Michigan is one of the most racially divided areas in the US, with a black population in Detroit exceeding 80% and a white population in the surrounding suburbs exceeding 90%.

And for a look at what this has done to the city, check out these videos:







What does the future hold for a place like that? Nothing good, I fear.

Word of the day: Hysteresis

Those with a scientific background might recall this term from their high school physics classes. In that context, it refers to a property of ferromagnetic materials (like iron, steel, nickel, etc). If you wind coils of wire around a piece of steel and run electricity through it, the device becomes attractive to other magnetic materials. When the power is cut, the magnetism drops considerably... but not to zero. The tendency for the magnetism to not drop to the old baseline but a new, higher one is known as hysteresis.

What some folks, like Paul Krugman (h/t Eschaton), are saying is that something like this applies to other things, such as unemployment rates:

Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.

And this is precisely what is happening in the US. Check out this graph of the median duration of unemployment in that country:


There seems to be a sort of "ratchet effect", where even after the recessions (shown in grey) have ended, the median duration of unemployment increases. And what's happened in the last couple of years is something else again. The effect of this on a society cannot be good...

Wal-Mart taking a beating

Seems the American consumer's spending spree is slowing:

Wal-Mart Stores (WMT, news, msgs) has a problem: Its typical shopper appears to be tapped out.

The world's largest retailer reported $112.8 billion in worldwide revenue in its fiscal fourth quarter, up 4.6% from a year earlier. But Wal-Mart also said U.S. same-store sales fell 1.6% in the period and noted that traffic in U.S. stores fell slightly. Same-store sales are considered an important measure of a retailer's health.

Wal-Mart's financial results unnerved investors, outweighing plenty of good news in the Bentonville, Ark., company's quarterly report. Wal-Mart has been slashing expenses and inventory, and international sales growth remains strong. Earnings per share last quarter were $1.17, beating Wall Street's estimate of $1.12.

Still, Wal-Mart shares fell 1.1% after the quarterly results were announced on Feb. 18.

One explanation for sales weakness is deflation. The company said prices for groceries and consumer electronics continued to fall, causing customers to spend less on each shopping trip.

The tough economy and high U.S. unemployment are also playing a big role. U.S. consumers are still feeling squeezed, Wal-Mart Chief Financial Officer Tom Schoewe told reporters. "We see the influence of the paycheck cycle as pronounced now as it's been in the past," he said, according to Bloomberg News.

From here (h/t Mega at iTulip). The risk of a double dip is increasing, I think.

How long will the recovery last?

So far, the world economy seems to be on an upswing from the depths of the last couple of years. The participants in the G20 meeting have, in fact, agreed to slash their deficits by half. But is it really time for this? Paul Krugman thinks not:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

From the New York Times (h/t flintlock at iTulip). Despite the dismissive attitude taken by flintlock and other iTulipers in that thread, I don't think Krugman's warnings should be ignored.

House seized over $363 water bill

In the US it's common for municipalities to sell the rights to collect on utility bills, much as they do with property taxes. Sometimes the results are horrible:



Via LargoWinch in this iTulip thread. Possibly the most perverse aspect of this is that the house this unfortunate woman was evicted from was still vacant months after the fact. Lovely, eh?

More on that "recovery" thing

It's become a mantra in the mainstream business press to say that we're in a recovery. But what does that mean? David Rosenberg has this to say (h/t pogge):

There are classic signs indeed that the recession in the U.S. ended last summer — output, sales, etc. But the depression is ongoing and the reason we say that is because real personal income, excluding handouts from the government, has barely budged. In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trendline for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits. The share of U.S. personal income being derived from Uncle Sam’s generosity has risen above 18% for the first time ever.

What's going on here? Simply put, a recession is defined solely in terms of overall GDP. If the GDP declines for two consecutive quarters, the economy is considered to be in recession; once it gets back on a solid growth track the recession is considered to be over. We normally think of a "depression" as simply a large recession, but I think Rosenberg is suggesting that it should be seen as a measure of how people are actually faring (what a radical idea!) So a "jobless recovery", or a recovery in which people are going back to work but at lower wages, would be a continued depression, because people's actual wages are depressed.

Another bump in the road to economic recovery

Markets around the world are in turmoil yet again, this time because Dubai's economic development agency has, er, a cash flow problem:

The global stock slump was in response to Wednesday's surprise announcement of an overhaul of Dubai World, the state-run organization that holds almost three-quarters of the Middle Eastern country's total debt. As part of the restructuring, Dubai World's creditors were asked to hold off on requiring debt repayments until at least May 30, 2010.

Funny thing is, the word "default" doesn't even appear in that article, but what else do you call it when they tell their creditors they can't pay for six months?

Dubai is actually a truly strange place, if this story is any indication. The United Arab Emirates, which includes Dubai, has the largest per capita carbon footprint of any nation, owing largely to the energy needed for desalination. And those desalination plants are expensive to run. So what if they can't afford to?

If a recession turns into depression, Dr Raouf believes Dubai could run out of water. "At the moment, we have financial reserves that cover bringing so much water to the middle of the desert. But if we had lower revenues – if, say, the world shifts to a source of energy other than oil..." he shakes his head. "We will have a very big problem. Water is the main source of life. It would be a catastrophe. Dubai only has enough water to last us a week. There's almost no storage. We don't know what will happen if our supplies falter. It would be hard to survive."

Crazy. I wonder if Raouf is right? You'd think the water supply would be kept going above all else, but...

And what would happen if a resident of Dubai were to default on his or her debts the way Dubai World has? Dubai actually still has debtors' prisons. A bit of an irony...

The modern American-style funeral

Totally DIY:

HOCKINGPORT, Ohio -- Jesse Hayes' family, already overcome by grief after he died in a house fire last month, quickly had to come to grips with another unthinkable reality.

With no money for a funeral, they would have to bury him themselves.

And so the day before Hayes' graveside service Oct. 15, his cousin and a handful of volunteers gathered with their shovels at Stewart Cemetery, a quiet spot in the woods not far from the Ohio River in southern Ohio.

They spent four hours digging with the shovels before finally being forced to bring in a backhoe when they hit rock about 3 feet down.

After a brief graveside service the next day, the family went to the nearby Lions Club for a meal provided by friends while the volunteers returned to cover the casket with dirt, finishing the grim task.

From the Columbus Dispatch, via zadok in this iTulip thread. This wasn't always so:

The state once provided assistance for indigent funerals, but the aid was eliminated a few years ago and not restored in this year's budget. The burden had fallen to counties, townships, churches and community groups to bury the dead when money is short. But many of those sources are running dry, too.

"Now, what's started happening is people are digging their own graves to make it more affordableit's the result of a long cycle of picking away at programs and cutting benefits, and because the economy is bad, other resources that may have been available before just aren't anymore," said Jack Frech, director of the Athens County Department of Job and Family Services.

It's noteworthy to see the responses, both the comments on the story itself and the replies in the thread. One of the comments reads as follows:

This is a tough situation .......... been there and done that .......... my brothers and I dig our father's grave , there wasn't enough money . But we understood , that is not the Governments responsibility , it first of all was our job to provide for our own, and when that isn't possible , it is the church, that needs to step in , even if they were not members , and of course the relatives and community are responsible.

My emphasis. How ironic that many people support separation of church and state, but then advocate that most of the state's functions be transferred to the church.

"Is it true that the Americans used to make cars, Grandpa?"

The likelyhood that grandmas and grandpas of the future will be asked that question has increased significantly over the last 24 hours:

A planned $14-billion US federal bailout of the Big Three carmakers died Thursday on the U.S. Senate floor after negotiations between Democrats and Republicans collapsed over a dispute about wage cuts for autoworkers.

The Senate rejected the bailout 52-35 on a procedural vote — well short of the 60 votes needed to pass the plan.

Ahead of the vote, Democratic Senate Majority Leader Harry Reid said he was "terribly disappointed" to see several hours of unprecedented private talks in Washington with Senate Republicans, representatives from the country's auto industry and labour groups come to naught.

"There's too much difference between the two sides," Reid said from the Senate floor.

Asian financial markets fell sharply Friday as news of the failure emerged, with the Nikkei and Hang Seng both down more than five per cent. Reid could only speculate on the potential fallout when North American stock markets opened.

"I dread looking at Wall Street tomorrow," Reid said late Thursday night. "This could be a very, very bad Christmas as a result of what takes place here tonight."

From the CBC. Expect the pundits to be pouring blame onto the UAW, while ignoring management salaries and benefits (not to mention the fact that the Big Three have been making a lot of shitty and/or impractical cars of late). There's a thread about this aspect of the story on babble. Of course, there's still a chance that they'll go back to the table, and some or all of the automakers may be saved (for now at least). In the long run, though, the auto industry is going to have to contract a fair bit regardless; we use too many cars in our society.

Note that even before this happened, some (such as the folks at iTulip) were predicting unemployment rates of 25% or more among American men between 18 and 25. As Fred points out in the linked thread, unemployment in that demographic in Greece has been in that range for several years, and we've seen where that can lead.

As an interesting side note, the price of platinum group metals is dropping significantly, presumably owing to a likely reduction in demand for catalytic converters. Indeed, platinum is actually slightly cheaper than gold as I write this, according to Kitco:





Platinum isn't the only thing falling either. The price of recyclable materials is crashing, according to the Waterloo Record:

Last summer, our garbage was suddenly worth its weight in gold.

Today it's priced like garbage again and probably even less.

Blue box revenues have fallen through the floor since July, mirroring the price collapse for oil and other commodities.

* Newsprint has dropped from $190 per tonne to $35. It's the biggest waste stream at 13,400 tonnes.

* Cardboard has dropped from $130 per tonne to $25.

* Aluminum has been slashed from $2,000 per tonne to $1,000. It's the most lucrative waste stream at 420 tonnes.

* Scrap metal has dropped from $310 per tonne to $40.

* Plastics are down from $800 per tonne to $400.

It's a roller-coaster plunge but Jim Archibald, regional director of waste management, isn't fretting about taxpayer impacts.

If garbage prices stay low, the region will dip into savings and rely on an industrial subsidy to cushion impacts, he said. But Archibald expects prices to recover to more reasonable levels next year.

"It has dropped significantly since the summer but those prices were ridiculous," he said.

Residents generate 36,000 tonnes of blue box waste a year.

It's good that their committment to recycling remains strong; let's hope other municipalities don't decide to cut corners.

JPMorgan to buy crisis-hit US bank

Interesting...

US banking giant JPMorgan Chase has agreed to buy crisis-hit investment bank Bear Stearns for a bargain-basement price.

But the deal announced late on Sunday in the US has failed to sooth worries among Asian investors over the strength of the US economy and the continuing fallout from the global credit crunch.

Hours after the deal was announced in the US, Tokyo's benchmark Nikkei index plunged more than 4 per cent in Monday morning's trade.

Shares in Hong Kong also dropped by more than 5 per cent.

Via Al Jazeera. For an idea of how big this could be, consider this:

JPMorgan is buying the troubled bank for just $2 with the US Federal Reserve, which has already approved the deal, providing special funding.

Before it faced speculation about liquidity problems, triggering a run on the bank last week, Bear Stearns stock had been trading at around $70 a share, plunging to $30 on Friday.

From $70 to $2 a share in a week? Crazy. Needless to say, the forums at itulip.com are abuzz about this.

Here's another weird thing I've noticed. As most of you know, I'm a bit of a science geek, and as a result I've picked up some information on the composition of our coins. See, Canadian quarters and dimes made before 2000 are made of (virtually) pure nickel, while those made after 2000 are nickel-plated steel. I've tended to accumulate the old ones, in case I want to do a chemistry experiment with them sometime. Well, I ended up using my last ones in the dryer this past Friday, and since then I haven't received a single one in change. Not one. I have received a larger than normal number of American ones, interestingly.

Of course, the reason for this is that the old quarters contain more than 25 cents worth of metallic nickel, but until very recently there were still plenty of the old ones in circulation. Could it be that the mint is quietly taking the old ones out of circulation, and if so, why? Are they actually concerned that large numbers of them will be melted down for their scrap value?

Incidentally, bugsybrown has some more commentary on this story, including a nice summary explanation of what a bank run is.