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June 18, 2004

Big Daddy

It appears that the late playwright Tennessee Williams is a big favorite here in Dymaxia. Several times we've echoed Bill Bonner of the Daily Reckoning intoning on the "kindness of strangers' when talking about the massive US foreign debt, which by the way, in case you didn't notice, bumped up a bit last month to a rate that is close to $600 billion on an annual basis. Those dollars go for things like Arabian oil, IT outsourcing and the mass of manufactured goods that flow into the nation's malls. We've warned that if ever the holders of those dollars lose confidence in our capacity to borrow and spend, there will serious consequences.

But where Tennessee Williams comes in today, is in his deftness in putting the word "mendacity' into the railing mouth of Big Daddy in perhaps his most famous play, "Cat on a Hot Tin Roof". We have to admit we were pretty naive back in those days and that play, actually the movie version, with Elizabeth Taylor and Paul Newman, was the first time we had perhaps ever heard the word "mendacity". And so we learned from this master that there are lies and damned lies and, most importantly, that glossy surfaces can be highly deceptive.

In Washington last week, among the plethora of cliches that flew around regarding the great imperial funeral procession (for more, see the Holy Teflon Emperor) was this nugget: " Washington rises to the occasion when it comes to pulling off big events". This is of course the same city that failed to tell its residents that their drinking water was full of lead, that has by nearly every standard one of the worst school systems in the country, the highest per capita murder rate of major cities and list of firsts in poor health statistics that covers an entire page. Yes, Washington loves big events.

For some reason we couldn't keep Big Daddy's admonitions from ringing in our ears all week long. Yesterday, it was ADM, the guys who feed a starving world, Archer Daniels Midland `copping a plea that they had conspired to fix the sweet syrup market. They didn't admit guilt but agreed to pay what amounted to the largest antitrust fine in history, $100 million. In the Business Section of the Washington Post today there was a story that two of the largest newspaper companies in the country, Tribune Co. and the Chicago Sun Times have both admitted that they have been lying about their circulation figures and, of course, thereby overcharging their advertisers. On the same front page in the lower right hand corner there is a story about IBM lobbyists secretly altering a Treasury report on pension plans. That's what they call thinking ahead, these days, it seems.

A couple of weeks ago it was Boeing being penalized for massive government fraud regarding military contracts. Actually, this kind of mendacity is so common that we hardly blink as it rolls in one eyeball and out the other.

But events aside, what Washington actually does best is spin. We were glued to our TV's this week watching the hearings of the 911 Commission. It was just the kind of fascinating stuff that makes our wonky weeks. Here was the rare occasion when someone was actually checking the facts and doing the hard work of looking and comparing the numerous pieces of a story with the precision and fearlessness of a master stone sculptor tapping on a massive piece of Carrara marble. And so we heard pretty much everything the Committee's staff had to say about the famous Bin Laden, Saddam Hussein connection.

Here, in our minds, at least, was one of the major rationales for the invasion of Iraq: It went like this: Osama Bin Laden is clearly bent on attacking the US with whatever he can get his hands on. He, and his organization, al Qaeda are patient, adequately funded planners who have proved what they are capable of in spades. On the other hand, Saddam Hussein hates the US --who has him in a box-- is oil rich, has weapons of mass destruction and just might supply them to OBL and company.

There was even an oft-stated report that Mohammed Atta, the leader of the 911 attack, met secretly with Iraqi intelligence in Prague at a certain point leading up to the main event. What the Commission staff report stated went something like this: there was no meeting between Atta and Iraqi intelligence in Prague on the day it was reported. There was substantial evidence placing Atta in the US within a time span that would have made it impossible for him to have traveled back and forth to Prague. Further, the Commission reported that Bin Laden and Hussein were known ideological enemies who may or may not have negotiated a truce in a few scattered meetings during the 90's.

Sensing the criticality of this link, the Administration put up a major "it depends on what the meaning of is, is" campaign. On Wednesday and Thursday we heard both the President and Vice President say that they had never claimed that Saddam Hussein was directly linked to 911, only that the emissaries of the two parties had met on more than one occasion over the last decade and a half. By that logic, it could have been argued that the Soviet Union and the US were busy conspiring, given the number of summit meetings that occurred during the Cold War.

The other major twist of the week came from Alan Greenspan in his testimony before Congress. According to Greenspan, who apparently doesn't buy food, pay for his own fuel and utilities or for healthcare, send anyone to college but spends a lot of time buying cheap computers (yes, CPU for the buck is part of the way inflation is measured), inflation is under control; that despite the fact that producer prices (the costs producers pass on to wholesalers) rose .8% in May. "The PPI rose 5 percent in the 12 months that ended May 31, the fastest such rise since 1990" according to the same Washington Post of June 18.

Greenspan needs to start raising interest rates. Here's his dilemma: if he raises them in any serious way he risks taking the sugar out of the diet, so to speak. This is the most stimulated recovery in US history with the printing presses running day and night. Greenspan knows that Bush needs the illusion of "solid growth" if he is to stand any chance of winning the upcoming election. The chance that anything but images of bloodshed and chaos will come out of Iraq in the summer and autumn are pretty much null. And as we noted above any credible rationale for the war other than oil has also pretty much washed out of the picture.

But Greenspan also knows that the only reasonable tool the Fed has to influence the economy, it's hold on short-term interest rates, is presently running on empty. In other words, come next Spring, if economic conditions begin to sink back to where they were or if the economy is hit by another major attack, the Fed will be powerless to play the only stimulus it knows it can truly manage, the interest rate card. There just isn't any way down from 1% and the speculators and hedge funds know it. Meantime we are beginning to see the signs of price rises throughout the economy.

If the Fed can't use interest rates to restimulate, it will have to start pushing down on the value of the dollar. But even there, the dollar is trading at 1.20 to a Euro, a rate that is probably at the outer band of what is sustainable for the major trading partners in the West. Petroleum prices also threaten to throw a further monkey wrench into the mix.

And so the next time you see your favorite pundits touting the strength of the present recovery, wish them Godspeed and hope they know what they are talking about. On the other hand, if that character that Burl Ives played so well keeps intoning "mendacity" into your mind's ear, well, think shelter and safe harbor and whatever you do, don't bet on continuing low interest rates.

Posted by dymaxion at 04:12 PM


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March 26, 2004

Competition and the Deep Web

 


.................................................


Regular Readers of DW may have noticed that the contributions from this department have fallen off considerably in the last few weeks.  You should all be reassured that this lack of editorial activity in no way reflects a lessening in our ongoing dedication to the mission of bringing studied, knowing, perhaps fanciful but always alternative views of reality to light.  The mission of the Dymaxion Web is, through a combination of enhanced communication, sophisticated probing and deep searching, to create an information dimension faultline; a direct echo on the screen, we'd like to think, of the dynamic that our patron saint, Buckminster Fuller, found in the physical world.


We are, of course, also in this for the fun of it.  And if getting our hands greasy tinkering with the nuts and bolts that connect the nodes seems like fun for the moment, then so be it.  Yes, we have been tied up not in some exotic adventure at a posh watering hole but rather in the extension of the structure that we are attempting to build here in cyberspace. All this to say that in the coming weeks and months we expect to begin realizing our goal of creating a very special opportunity for a multiplicity of participants to bring clarity to what are highly fudged over macro and micro- economic areas.


In other words, despite the lack of surface activity, things are moving along here at DW even though it seems that sometimes our efforts better resemble a bird moving a desert to another solar system one grain of sand at a time.


 .........................................
 
 There are so many areas of significance to talk about after this hiatus that is hard to settle on just one.  First off, the dust hasn't quite settled around the currency wars but after several weeks of confusion some things seem to be clearing up.  The last time we talked about the greenback was when it had reached its nadir vs. the euro of 1.30 to 1.  Since then, the dollar has rallied a bit and as we stand today one euro can now be had for a mere $1.21.  For a while it has also looked like the Japanese had finally given up on their program of throwing billions of good dollars after bad in an attempt to keep the Yen from getting too strong.
 
 Not that the confusion has been completely driven from the picture, particularly today, when rumors of a drop in the key  European Central Bank interest rate, helped to further dampen the collective European currency.  From our perspective, the fundamentals have not really changed and we are, of course, personally pleased to see that the gold bugs have finally figured that out and put the yellow metal back on its ascendant course.
 
 The problem, of course, is that the Europeans and Japanese were supposed to take the brunt of the cheaper dollar in Alan Greenspan's scenario so that the US economy could get back on track and fulfill its dominating role of being "the world's engine of economic growth".  Instead, what had been a slow but steady emergence of growth in Europe has been nipped in the bud as German industry had to shoulder the burden of a rising euro.  In other words, VW, Audi, and Mercedes sales in the US will be down this year as, more generally speaking, German-made goods get priced out of the market.
 
 But the "great engine of growth", despite the most massive stimulus program in history with resulting record domestic and trade deficits, has been doing a bit of its own sputtering.  And now, even the Fed is hinting that they will have to raise rates at some point fairly soon (once the election is over, we guess)  as the price of gasoline at the pump, for one instance, shoots off the charts.  It's been noted that each penny rise per gallon sucks $1 billion out of consumers' pocketbooks.  Yes, as we have noted, money gets printed as fast as the presses can go, and there is no one in the maxed out consumer class left to take it, except, of course, our Chinese purveyors.  Yes, Virginia, the Chinese will not hesitate to take those much diminished bucks; after all, they've got a whole bunch of internal bad debt sinkholes that can be papered over with them.
 
 Gold, which somewhat slavishly followed the euro up and for a while seemed to be following it down, now seems to have come unhooked from that anchor.
 
 And now for our main issue of the day:
 
 Competition and the Deep Web
 
 Two phenomena have come together in the last couple of years that have already had an amazing impact on how much information we can get at with a little persistence.  Let's first acknowledge that Google is the potent information gathering weapon ever devised.  If you don't believe us, watch out, you may one day find some memo you wrote in confidence that it would never be seen by more that the eyes it was addressed to, all of sudden show up in a search you (or somebody tracking you) do.  Even if its been estimated that Google only touches about 10% of what's accessible on line, that 10% already represents the most massive library of flotsam and jetsam ever conceived.
 
 The second factor is the phenomenon we are participating in here, the weblog.  Yes, weblogs are searchable and while there are millions of people out there writing their own brand of inanity, there is also the opportunity for some very interesting posts.  Imagine, for example, someone knowing a thing or two abou

t what Richard Clarke had to say this week, who might be sitting at a keyboard right at this moment, adding even more fuel to the story of how we got to this very costly, in every way, occupation of Iraq.
 
 Do a search on a few key words and you may just find one of these postings on the subject you are digging into.  The implications are somewhat mindboggling going forward.  Spinmeisters in control of the megaphone will always dominate the debate and serve to muddy the waters by cancelling each other out but Google-like engines can serve to act like that old magic trick where the man in a tux pours some clear liquid into a colored cocktail and changes it back to the transparency of a gin and tonic.
 
 Somebody wrote yesterday, and we apologize for not having a link and for our weak paraphrasing, that if one of the main political parties announced tomorrow that the world was indeed, flat, not round, the headline in the New York Times would read something like the following:  "Parties Debate Merits of New Theory Regarding Earth's Shape". We could then expect to have the weekend talk circuit loaded with advocates shouting talking points over each other.
 
 Competition was very much on the minds of the Europeans this week when they came down hard on Microsoft for monopolistic practices that the Seatle giant has been getting away with for years.  Microsoft has successfully snuffed out competition for desktop products and threatens to grab the same level of control over the web.  MS, ironically, argues that they need the ability to bundle their own strategic products into the operating system in order to foster innovation.  In other words, in their own monopolistic world, innovation is okay as long as it comes from the goliath.  Let all other players get squashed, they say, that's show business!  And indeed, show business has to be grateful for the European Commission ruling.  The media player, of course, acts as a gateway between the producers of entertainment products --ever more digital-- and the consuming public.  The system of payments for such products will take place on the "desktop" (substitute set-top for the emerging home network reality) and who controls that set-top will have enormous muscle in determining what happens to different products. 
 
 We should bear in mind that even as NASDAQ rocketed back up to about half of where it peaked during the bubble, MSFT has remained flat.  The Redmond guys desperately need another huge source of revenues beside the golden goose they now own.  The Europeans, in their ruling, also  tried to keep MS from forcing companies that want to use Windows on the desktop --nearly everybody-- to start using MS on their servers, as well.  In other words, build the operating system in such a ways that it talks best to a MS server product.  Time will tell how successful the agency will be.
 
 So now that we have affirmed that MS, like IBM before them, tries to snuff out competition wherever it can, and of that there should be no doubt, we have a bit of good news on the competition front.  And it comes, of all places, from MS, themselves, who have announced today that they are planning to compete with Google in the search engine space.  This, of course, comes on the heels of the announcement by Yahoo that they were dumping the Google engine for their own effort.
 
 And so we hopefully can look forward to some real competition in this really critical area. Let's hope that Google, Yahoo and MS go at it, feathers flying everywhere.  The result just might pull the kimono off some significant piece of the hidden 90%.  Here in the nosy reaches of the Dymaxion Web, we just can't wait!
 
 rmb  
 
  dymaxionweb@verizon.net


Copyright 2004 Richard Mendel-Black All Rights Reserved


If you would like to receive the DymaxionWeb musings directly to your e-mail box, please provide your email address in the subscribe box below.



If you would like to reproduce any DW postings you  must include the source of your quote and an email address
dymaxionweb@verizon.net.  Please refer to the Creative Commons License at the bottom of the page.


 



 

 
         

Posted by dymaxion at 03:41 PM


| Comments (0)

Competition and the Deep Web

 


.................................................


Regular Readers of DW may have noticed that the contributions from this department have fallen off considerably in the last few weeks.  You should all be reassured that this lack of editorial activity in no way reflects a lessening in our ongoing dedication to the mission of bringing studied, knowing, perhaps fanciful but always alternative views of reality to light.  The mission of the Dymaxion Web is, through a combination of enhanced communication, sophisticated probing and deep searching, to create an information dimension faultline; a direct echo on the screen, we'd like to think, of the dynamic that our patron saint, Buckminster Fuller, found in the physical world.


We are, of course, also in this for the fun of it.  And if getting our hands greasy tinkering with the nuts and bolts that connect the nodes seems like fun for the moment, then so be it.  Yes, we have been tied up not in some exotic adventure at a posh watering hole but rather in the extension of the structure that we are attempting to build here in cyberspace. All this to say that in the coming weeks and months we expect to begin realizing our goal of creating a very special opportunity for a multiplicity of participants to bring clarity to what are highly fudged over macro and micro- economic areas.


In other words, despite the lack of surface activity, things are moving along here at DW even though it seems that sometimes our efforts better resemble a bird moving a desert to another solar system one grain of sand at a time.


 .........................................
 
 There are so many areas of significance to talk about after this hiatus that is hard to settle on just one.  First off, the dust hasn't quite settled around the currency wars but after several weeks of confusion some things seem to be clearing up.  The last time we talked about the greenback was when it had reached its nadir vs. the euro of 1.30 to 1.  Since then, the dollar has rallied a bit and as we stand today one euro can now be had for a mere $1.21.  For a while it has also looked like the Japanese had finally given up on their program of throwing billions of good dollars after bad in an attempt to keep the Yen from getting too strong.
 
 Not that the confusion has been completely driven from the picture, particularly today, when rumors of a drop in the key  European Central Bank interest rate, helped to further dampen the collective European currency.  From our perspective, the fundamentals have not really changed and we are, of course, personally pleased to see that the gold bugs have finally figured that out and put the yellow metal back on its ascendant course.
 
 The problem, of course, is that the Europeans and Japanese were supposed to take the brunt of the cheaper dollar in Alan Greenspan's scenario so that the US economy could get back on track and fulfill its dominating role of being "the world's engine of economic growth".  Instead, what had been a slow but steady emergence of growth in Europe has been nipped in the bud as German industry had to shoulder the burden of a rising euro.  In other words, VW, Audi, and Mercedes sales in the US will be down this year as, more generally speaking, German-made goods get priced out of the market.
 
 But the "great engine of growth", despite the most massive stimulus program in history with resulting record domestic and trade deficits, has been doing a bit of its own sputtering.  And now, even the Fed is hinting that they will have to raise rates at some point fairly soon (once the election is over, we guess)  as the price of gasoline at the pump, for one instance, shoots off the charts.  It's been noted that each penny rise per gallon sucks $1 billion out of consumers' pocketbooks.  Yes, as we have noted, money gets printed as fast as the presses can go, and there is no one in the maxed out consumer class left to take it, except, of course, our Chinese purveyors.  Yes, Virginia, the Chinese will not hesitate to take those much diminished bucks; after all, they've got a whole bunch of internal bad debt sinkholes that can be papered over with them.
 
 Gold, which somewhat slavishly followed the euro up and for a while seemed to be following it down, now seems to have come unhooked from that anchor.
 
 And now for our main issue of the day:
 
 Competition and the Deep Web
 
 Two phenomena have come together in the last couple of years that have already had an amazing impact on how much information we can get at with a little persistence.  Let's first acknowledge that Google is the potent information gathering weapon ever devised.  If you don't believe us, watch out, you may one day find some memo you wrote in confidence that it would never be seen by more that the eyes it was addressed to, all of sudden show up in a search you (or somebody tracking you) do.  Even if its been estimated that Google only touches about 10% of what's accessible on line, that 10% already represents the most massive library of flotsam and jetsam ever conceived.
 
 The second factor is the phenomenon we are participating in here, the weblog.  Yes, weblogs are searchable and while there are millions of people out there writing their own brand of inanity, there is also the opportunity for some very interesting posts.  Imagine, for example, someone knowing a thing or two abou

t what Richard Clarke had to say this week, who might be sitting at a keyboard right at this moment, adding even more fuel to the story of how we got to this very costly, in every way, occupation of Iraq.
 
 Do a search on a few key words and you may just find one of these postings on the subject you are digging into.  The implications are somewhat mindboggling going forward.  Spinmeisters in control of the megaphone will always dominate the debate and serve to muddy the waters by cancelling each other out but Google-like engines can serve to act like that old magic trick where the man in a tux pours some clear liquid into a colored cocktail and changes it back to the transparency of a gin and tonic.
 
 Somebody wrote yesterday, and we apologize for not having a link and for our weak paraphrasing, that if one of the main political parties announced tomorrow that the world was indeed, flat, not round, the headline in the New York Times would read something like the following:  "Parties Debate Merits of New Theory Regarding Earth's Shape". We could then expect to have the weekend talk circuit loaded with advocates shouting talking points over each other.
 
 Competition was very much on the minds of the Europeans this week when they came down hard on Microsoft for monopolistic practices that the Seatle giant has been getting away with for years.  Microsoft has successfully snuffed out competition for desktop products and threatens to grab the same level of control over the web.  MS, ironically, argues that they need the ability to bundle their own strategic products into the operating system in order to foster innovation.  In other words, in their own monopolistic world, innovation is okay as long as it comes from the goliath.  Let all other players get squashed, they say, that's show business!  And indeed, show business has to be grateful for the European Commission ruling.  The media player, of course, acts as a gateway between the producers of entertainment products --ever more digital-- and the consuming public.  The system of payments for such products will take place on the "desktop" (substitute set-top for the emerging home network reality) and who controls that set-top will have enormous muscle in determining what happens to different products. 
 
 We should bear in mind that even as NASDAQ rocketed back up to about half of where it peaked during the bubble, MSFT has remained flat.  The Redmond guys desperately need another huge source of revenues beside the golden goose they now own.  The Europeans, in their ruling, also  tried to keep MS from forcing companies that want to use Windows on the desktop --nearly everybody-- to start using MS on their servers, as well.  In other words, build the operating system in such a ways that it talks best to a MS server product.  Time will tell how successful the agency will be.
 
 So now that we have affirmed that MS, like IBM before them, tries to snuff out competition wherever it can, and of that there should be no doubt, we have a bit of good news on the competition front.  And it comes, of all places, from MS, themselves, who have announced today that they are planning to compete with Google in the search engine space.  This, of course, comes on the heels of the announcement by Yahoo that they were dumping the Google engine for their own effort.
 
 And so we hopefully can look forward to some real competition in this really critical area. Let's hope that Google, Yahoo and MS go at it, feathers flying everywhere.  The result just might pull the kimono off some significant piece of the hidden 90%.  Here in the nosy reaches of the Dymaxion Web, we just can't wait!
 
 rmb  
 
  dymaxionweb@verizon.net


Copyright 2004 Richard Mendel-Black All Rights Reserved


If you would like to receive the DymaxionWeb musings directly to your e-mail box, please provide your email address in the subscribe box below.



If you would like to reproduce any DW postings you  must include the source of your quote and an email address
dymaxionweb@verizon.net.  Please refer to the Creative Commons License at the bottom of the page.


 



 

 
         

Posted by dymaxion at 03:41 PM


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February 09, 2004

Get Ready for Stagflation

Sooner or later the dam will burst.  Right?  The government prints more money (M3 is back on the rise), the price of stocks goes up to bubble-level P/E's, gold is up, bonds are up sort of, art and antiques prices go up as do collectibles (watch the Antiques RoadShow any give Monday to see appraisals of $75,000 for the works of relatively unknown 19th century painters) and yet....


Wages remain flat to depressed and Americans face rising healthcare, education and property tax costs.  Are we on the verge of a big rush up of prices as the Fed is forced to push interest rates up (after the election, of course) to stem the collapse of the dollar and incentivize foreign investors to pick up US debt through the T-Bill market.  If all this sounds out of whack or just plain whacky, we think it is because we are, indeed, in a truly whacky moment.  In other words, there's just so much borrowing against the future that can be done unless that future is sure to be  mighty bright.  And is there anyone out there who truly believes we have a ghost of a chance that the 90's will somehow re-emerge out of the primordial soup described up above?


Well, if you're hoping, here's a sobering bit of information, in case you thought there weren't many more new ones out there.  It's one we got off of the Reuters feed Sunday evening:  http://biz.yahoo.com/rf/040208/economy_tools_1.html with the following headline: "US 2003 Machine Tool Demand Lowest on Record".  Now in this dismal world of rates and percentages, the figures reporting on something as pedestrian as machine tool demand aren't going to get a lot of notice.... unless, of course, you are a glutton for punishment.


There is, we are quite sure, no subject as diametrically opposed to a certain spangled breast in terms of getting public attention than machine tools.  If interest rates are boring at least some of us trying to pay down our own excesses or making an effort to earn a relatively risk-free buck against this crazy backdrop can relate to them.  But machine tools?  What the hell are they?


Having done the set up, I'll step right up:  machine tools are the machines that companies use to make machines and other more consumable items.  They are the backbone, the thing that people who work in manufacturing work on.  In other words, if you expected to see manufacturing jobs coming back in this country in 2004 you would most likely have seen the pace of machine tool purchases start to rise in 2003.  And as a whole, manufacturing jobs pay better than service jobs.


What we're getting at is this:  The government says we have no inflation yet the price of valuables and financial assets keeps going up.  If we lived in a rational world --and let's put that to immediate rest, we don't-- then you could argue that the smart money is betting on future price inflation and therefore they are tying up their money in things that are bound to gain in value to keep pace with inflation.  In other words, there is no real estate (or Faberge' egg) bubble, just an anticipation that rates and prices will start to rise at some point and there may be no holding them back.  In this scenario in the tug of war for US consumer dollars, even the Chinese and Japanese will be forced to loosen their grips and let their currencies rise against the dollar to protect their relative margins.


But hold on a second.  Rising interest rates, rising tchotcke prices, rising mortgages against a backdrop of an anemic if not phony recovery (phony because you can't have a recovery based on borrowing and no job creation) are more likely to be the prelude for a much deeper non-recovery where even the heroic American consumer family, mired in debt (read "The Two Income Trap" by Elizabeth Warren for a little background) hard-pressed to find two decent paying jobs, runs out of cajones.


Yes, we may once again see inflation but it might just be the really ugly kind we saw back in Jimmy Carter's oil crisis days, the kind they call Stagflation.  That's the kind where prices go up but the economy staggers along.  It's also the kind that doesn't push up the price of houses, luxury goods and obscure 19th century oils.  Something to bear in mind:  the last great gold rush (prices that is) occurred during the reign of none other than brother Carter.


rmb 
 


Special note:  For those of you receiving this through email notification, please also see: http://radio.weblogs.com/0130824/2004/02/06.html#a45 :RFID's:  Get Ready for Your Own Personal Jammer


dymaxionweb@verizon.net


Copyright 2003 Richard Mendel-Black All Rights Reserved


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must include the source of your quote and an email address:
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Posted by dymaxion at 05:36 PM


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January 30, 2004

Last Tango in DC: The Budget Deficit Drag

  Yesterday morning on NPR's Diane Rehm Show there was an interesting discussion on "The Budget" between Michael Mandel, chief economist at Business Week Magazine and Alice Rivlin, of the Brookings Institution, former member of the Clinton administration and founding director of the Congressional Budget Office.  It was the same CBO that last week issued it's "red ink as far as the eye can see" report noting that this year's deficit will reach $497 billion and that we can expect similar massive deficits throughout the decade.


Where Mandel and Rivlin differed from the politically spun debate we usually have here; i.e.,  the guys that have a deficit play it down and the guys trying to get back in hope it has some negative resonance with voters; in today's dialogue, aptly moderated by Rehm, there was a somewhat more nuanced approach, particularly on the part of Mandel.  Both guests, with some tugging to and fro, agreed that deficits perforce result in a growing drag upon the economy, though Mandel took the approach that the impact was largely little more than noise.


Rivlin cited what she called the "remote" possibility, albeit one we should insure ourselves against, that the ever growing deficit could result in a meltdown of the dollar while Mandel took the historical or rearview mirror approach; that is.; because it's never happened before it isn't likely to happen now. To strengthen his position he argued quite preposterously --given the 40% dip  in the value of the dollar over the last couple of years—that investing in T-Bills is a safe and prudent strategy for foreigners. You have to wonder if he doesn't know who those foreigners are and why they are really buying up our government paper.


Mandel has just written what he describes as an optimistic book on the coming years called "Rational Exuberance".  Judging from his appearance today, his tune seems to go: "technology got us to our dominant position and technology will drive the economy forward" and, I suppose it's fair to paraphrase "we'll grow our way out of this mess."  Mandel further argued on the Rehm show, whenever he got the chance, that the discussion on the deficit was more or less a waste of time. We should, he insisted, be talking about how the US is going to maintain its technological dominance going forward.


And that's what got our attention.  After all, we agree with Mandel on this point, or don't we?.  Technology is what drives this economy.  We cannot compete with cheap disciplined and growingly better educated Asian labor, particularly when we are exporting our know-how as well as our capital to China and everywhere else.  We have, in a way, been hoisted on our own petard as, in our burning desire to smooth over the bumps, we have turned ourselves into the ultimate consumer society.  We now measure economic growth in this country not on how much we build but on how much we can allow ourselves to consume (consumption now accounts for 80% of GDP).  What Rivlin and Mandel fail to acknowledge is that buying more stuff at Wal-Mart, driving bigger SUVs and moving into macmansions on ever flimsier borrowing schemes  http://radio.weblogs.com/0130824/2004/01/19.html  while exporting our capital ($1.5 billion per day to support the trade deficits) does not build a real economy.


What Mandel suggests might be important in some abstract way but utterly preposterous --and therefore misleading-- within the real world of Washington politics. Does he really believe we are going to have a meaningful discussion in Washington about terribly complex subjects within the context of those august branches of government, the White House and Congress, that will transcend money and politics? What planet does Michael Mandel live in? 


What Silicon Valley used to, and most people for that matter still, get quite readily is that the last guys you want messing around with real industrial and economic planning, are the denizens of the political trough and their co-conspirators.  In other words, sure the government funded the development of the Internet but not because they knew what they were doing. It was, after all, because they wanted a bomb-proof; i.e., distributed network that just happened to end up looking like a web.


Ok, so let's see where we might go with this.  If you ask the great Pooh-Bahs of today's Silicon Valley --the five or so guys left standing-- you'd probably get unanimity.  The country needs to get a wide pipe into every home and office in the land.... and then a program to subsidize the cost of supplying such a service to all those people who just don't know what they are missing.  How much would that cost?  They shrug their shoulders. Hard to say.


In other words, out in the real world, you can get a family to shell out $60 a month for cable or satellite so they can upgrade from free antenna service to get ESPN and HBO but don't ask them to spend the extra $15 it costs to upgrade from dial-up to broadband.  There is, perhaps sadly for these folks on the West Coast, a limited demand for broadband services in this country even though dial up is about as clunky as you can get.  Compared to the US, countries like Sweden and Finland have nearly twice as many broadband users per capita.  The Baby Bells, satellite and  cable providers can get faster service into the homes as soon as they figure out a killer app, and it ain't going to be video on demand.


At the same time, we desperately need some old-tech concrete and steel (job creating) infrastructure like high speed transportation networks, so that people have a reasonable chance of getting around in places like Washington DC, Los Angeles and Atlanta.


Okay, so maybe a high speed internet network isn't worth all those billions of public money while we're already running the highest deficits in history.  Not having read Mandel's book, perhaps, his key is, say, biotechnology?  After all, no technology will change the world more in the twenty-first century, than biotechnology.  But wait a minute.  Isn't the biotechnology industry just another synonym for the pharmaceutical industry and aren't these companies some of the most highly capitalized and competitive corporations in the world and didn't the Congress just vote them multiple hundreds of billions of dollars in subsidies with the latest Medicare drug bill?  No, you say, that extra money will be used for TV ads. Okay, so maybe we should give them a boost in exchange for lower drug costs. They'll agree to that! Sure.


How about nanotechnology? That's going to change everything. Perhaps, instead of spending trillions putting a man on Mars in the year 2020 or knocking out a lone North Korean missile in flight we should put that money into creating molecular replicators and assemblers that by the middle of the century might start  growing  products from the ground up, (without human intervention, mind you) much the way organic objects are created, rather than through traditional manufacturing methods?


But, besides the usual problems of government manipulation in markets, both biotechnology and nanotechnology bring their own enormous hyperdisruptive baggage.  Both technologies threaten our very existence on this planet and both will have to be carefully regulated by governments globally.  Can the wisemen in Washington both sponsor and regulate these very tricky developments and get world bodies to follow?  For instance, just today in the Washington Post a company was running an ad promising engineered sex choice for prospective parents.  Just imagine what biotech will be like in 20 or 30 years!  And imagine a world in which molecule-size devices can be trained to make anything that nature can make and anything else that someone might think profitable or the ultimate dominating weapon.


Meanwhile, there is no need to worry that Mandel will be listened to in Washington.  The budget will continue to be stretched into red ink by needs going forward of a deeply entrenched military industrial establishment, an aging baby boom population for healthcare and pension benefits, and a political establishment that can't say no to the lobbyists behind them or an electorate before them desperately seeking another influx of spending money so they can rush out to Wal-Marts and buy some more Made-in-China tchotchkes.



rmb


 


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January 19, 2004

Asset Bubbles: Crystal Balls and Rear-View Mirrors

 



The following article was taken from the January issue of The Hill Rag, a monthly magazine that covers the Capitol Hill area of Washington, DC.  From our perspective, it might just give pause to anyone thinking of investing in any company or entity that has a measurable footprint in the home mortgage market. It also clearly says to us that when considering the average amount of debt per family (at hyper record highs no matter how you count it) in the US, it is no longer valid to leave mortgage debt entirely out of the equation. As willing lenders (see below) encourage families to tap the maximum value out of their homes at hot market valuations and agree to interest-only and adjustable rate mortgages to stretch their ability to make monthly payments on other items, like plastic debt and automobile or real estate investment payments, both parties are betting on three variables:


1. Family incomes will rise in the future


2. The price of real estate will continue to climb, or at least, not fall significantly


3. Interest rates will stay at or near historic lows


From our perspective none of the above are good bets for many people and the odds on all three? ...rather long for everyone.


If Alan Greenspan can only see a bubble in his rear view mirror, these may indeed by halcyon days for those who bet that the US/First World economy is so dynamic and robust that it has built in anti-fail levers known only to central bankers and the IMF.


rmb



BUILDING WEALTH BY LEVERAGING YOUR REAL ESTATE VALUE (www.hillrag.com)


By Marianne Segura




Homeowners and buyers are taking advantage of the incredible growth in value of real estate in the greater DC area. And, they are profiting from mortgage loan programs that require low payments and free up capital for other investments. Instead of the one-size-fits all 30 year fixed program which, over its first ten years, builds very little equity, borrowers now seize the opportunity to lower payments with interest only loans where they pay only the cost of borrowing and have cash available for other investments or to pay principal when they choose. They may opt for 100% financing with a combination of loans. Such loans include: mortgages with rates fixed for three, five, seven, or ten year periods; home equity lines of credit where the borrower uses and pays only what is needed. Equity lines allow for home improvement, debt consolidation, college tuition payments, and large consumer purchases. The housing renaissance in DC, funded by flexible programs, allows home owners to live well for less and use their homes as a powerful investment tool.


One young couple refinanced their home and used the cash to expand their retail shop on Capitol Hill. On their $500,000 property, they selected to finance 80% of their home with a 10 year interest only loan at 4.65%.Thus, they took $150,000 in cash away from the transaction to use for their business. Their actual payment on this larger loan was just about the same as for their previous traditional thirty year fixed rate. “Since home prices in our neighborhood continue to soar, we expect the housing market to build equity in our home. Meanwhile, sales have really jumped with the improvements to our retail store and merchandise line,” they told me.


Another investor took a commercial mortgage on his gallery, and used the cash from that loan to finance restoration on a property that he purchased in one of DC’s rapidly improving neighborhoods. The house will be his primary residence, but once the work is complete, his home will be worth twice the amount he has in it. He plans then to refinance the home at the newly appraised rate, and use the cash he takes out for purchase of a residential apartment building. And, so continues the spiral. He particularly likes the low payments on his one year adjustable rate mortgage for the primary residence since he does not plan to hold the mortgage for more than a year.


All this may be fine for those customers who come to the table with property that they can borrow against, but what of the customer who has no way of securing cash for a down payment. They can now finance 100% of the purchase price for a new home plus up to 3% more to cover closing costs. Such an option has proved extremely attractive for first time home buyers with limited assets.



Marianne Segura is a Senior Loan
Officer with NovaStar Home Mortgage,
Inc.


January edition of The Hill Rag


 


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 rmb


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January 15, 2004

Greenspan to IMF: Go Jump in the Reflecting Pool

 


You'll be happy to know that the Reflecting Pool, which stretches along the Mall below the Lincoln Memorial, is only about knee deep.  It's also frozen solid today. The Fed Gov, Alan Greenspan, was in Berlin yesterday mumbling soothing words publicly just a week after his Washington DC neighbor, the IMF published a (well it's hard to call anything written in central bankese, scathing, as you will see below) a searing report, with the hot title, "U.S. Fiscal Policies and Priorities for Long-Run Sustainability", http:/www.imf.org/esternalPUbs/NFT/Op/227/index.html.


This bit of Cassandra coming out of the Mordor of anti-globalization was echoed the next day in Brussels by the head of the ECB, the European Central Bank.  The new President of the ECB, a Frenchman who is known for his advocacy of a strong euro, Jean-Claude Trichet,perhaps with his hand twisted behind his back by a bunch of angry German manufacturers, was heard whispering something about not tolerating "brutal" currency movements. Everybody understood this to mean that even he thought the dollar was dipping a bit too fast.


But it now looks clear that while Alan was hobnobbing with his fellow bankers in Berlin, --or was it in Brussels?-- something else got whispered.  At least, that's what the currency and gold markets believe.  Brutal movements, there were, indeed, but in the opposite direction than the one Trichet was talking about. In the last couple of days the euro, which had peaked at $1.29 was trading at a little south of $1.26.  Even more brutal was the move in the gold market.  Just a week ago, gold moving in concert and even faster than the euro, had broken through a long-term high at over $430 to the troy ounce.  Bam! Today it is trading in NY at $408.70.


Is this just overreaction on the part of traders who want to lock in their big gains or is something unseemly going on?  Can we now expect to see the Europeans in the overnight markets buying up dollars to prop up the staggering greenback like their Japanese co-conspirators and are there nefarious forces planning to dump a big quantity of gold onto the market to squelch what might begin to look too much like a move back to hard money? All we can say, is that it's definitely time to keep your powder dry and your eye cocked. Folks who got into gold late, may get a second reprieve on the dip.


So what did the IMF say and was it just coincidental that it came out just a week before this flurry of activity?  We, of course, have no flies on the wall at the Fed or in any of the other highly ornate ceilinged rooms that European bankers like to congregate in, so we can only wonder.


As for the IMF report:  They might have dusted off one of their old papers on Malaysia or Argentina or one of those other places that fell apart in recent memories.  There it was in black and white:  The US is running deficits that are unsustainable.  Government spending, what with the Iraq war and rebuilding effort, homeland security costs and the usual mix of entitlements, programs and pork has increased from 6 1/4 percent of GDP in 2001 to 7 1/4 percent by 2003 thus adding %25 percent to the deficit.  An additional 25% of the deficit was the direct result of the tax cuts that have been voted in since Bush took office.


The IMF then turns its attention to the global implications, noting that the US is running unprecedented budget deficits at the same time it is running up record trade (current account in bank speak) foreign debt:





"Moreover, against the background of a record-high U.S. current account deficit and a ballooning U.S. net foreign liability position, the emergence of twin fiscal and current account deficits has given rise to renewed concern. The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years—an unprecedented level of external debt for a large industrial country (IMF, 2003b). This trend is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.


Although the dollar's adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored. Episodes of rapid dollar adjustments failed to inflict significant damage in the past, but with U.S. net external debt at record levels, an abrupt weakening of investor sentiments vis-à-vis the dollar could possibly lead to adverse consequences both domestically and abroad."



And so, what we have, says the IMF, is a country in debt up to its ears even before the big rush of retiring baby boomers goes to cash in their payroll tax levied social security and medical benefits, states fighting huge deficits, (typically but even more acutely in places like California where the voters will have to approve floating a $15 billion dollar bond bailout), family plastic debt (non-mortgage) the highest in history, stagnant wages,and a consumer-based economy that buys $1.5 billion more than it sells every day.


Meanwhile the stock markets boom and housing values continue to grow!


It's a strange balancing act that could be tipped over by a feather.  So, maybe the rush to get the dollar down to $1.45 to the euro before the election was a little too fast and we're seeing the kind of legerdemain that only central bankers know how to pull off.


A cheap dollar and budget deficits, if not temporary, will begin to weigh heavily on the economy in the form of higher prices and interest rates.  Karl Rove et al. are just praying that super Alan can keep a lid on it until after the elections.  You can be sure we will stay tuned.


rmb



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January 07, 2004

Kingmaker of the Universe

We have a sneaking suspicion --perhaps based on a few choice words by Fed Gov. Ben Bernanke over the weekend-- that the Fed wouldn't mind boosting prices as it administers its next all-sugar suppository.  "The only thing worse," we imagine Ben sitting back at his desk and musing, "than a consumer who thinks prices will even get better if he waits to make a purchase is a guy who hasn't taken out a loan on his house to get back in the market.  No," he goes on, "if those cunning Asians insist on sticking to the dollar standard, we'll, well, hmmm, we'll show them some IPO's that will suck the wind out of everybody's sails." "Sooner or later, they'll all see what stocks and awe really means.  We will inflate! we will inflate!"  He bangs his loafer on the desk for emphasis, further crumpling the latest warning on America's finances hot off the presses from the IMF, and gazes up on the wall at an engraved plaque with quotes from a speech he made last year, mumbling to himself, "they just don't understand; carved in bronze it reads:



Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. ...........


What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.


In the story books I read as a kid, central bankers were an austere lot, who never wore loafers, and from their Olympian heights used to throw bolts of wisdom down on the madding crowds.  "Trade deficits, they'd admonish, trade deficits mean we are living above our means, buying more than we're selling."  Budget deficits got the same intonation: "no country can continuously spend more than it takes in in taxes; that's tantamount to passing down our profligate ways to our children and grandchildren."


The role of the central banker back in those days was to make sure that things didn't veer too far out of control so we wouldn't all end up in a ditch. They knew from a long history that the politicians in pinstripes and kings in ermine left to their own devices would invariably let their self-serving ambitions bring everyone to ruin.  For most of monetary history, the cost and natural scarcity of precious metals, principally gold, has served as a greater brake than any stern banker or moneylender's admonitions.


Throughout history, whenever the good faith and credit of the issuing country has been the only thing backing the currency, there has been first a great bubble and then when the realization finally dawned on the paper's major holders, a terrible crash.


Here's a somewhat more scary thought:  inflation wipes out savings and erases debts!  Is Ben, the dauphin, dreaming that the Fed will resurrect all those American consumers now weighted down by an avalanche of plastic and other mortgage and non-mortgage debt for yet another go round?  Well, when Mr. Bernanke talks about a little inflation, he imagines a managed inflation target of several percent a year. We, of course, wonder just how he's going to get everybody else, including the debt holders, to hold still like a turn of the century family being photographed while the Fed keeps an underlying stagnant economy at a slow boil.


Well, tomorrow for starters we'll find out whether the Europeans are readying themselves to drop their interest rates.  It's expected that an actual rate drop may not be in the cards but instead the problem will be fought by words at a press conference given by Jean-Claude Trichet, the ECB central bank president.  In other words, will that sucking sound coming out of the Fed start to move the European bureaucrats ever closer to the fire?  Or, are they just trying to slow the inevitable down a bit?


In Detroit over the weekend, Volkswagen, Europe's largest automaker announced that the strong dollar was going to hurt their earnings in 2004.  This was certainly not good news for an economy that has been in the doldrums for years.  Meanwhile the stock markets back in the US keep heating up.  If you looked at your 401K lately, you'll know that your net worth is probably up.


There's an inevitability to the downward march of the dollar.  There will be blips, moves up and down but there are no blinking red tail lights on at the Fed in an election year, the bubble will continue to inflate and the piper will be paid ..... but later! When Alan Greenspan looks in the mirror, he only sees as far as kingmaker of the universe.


rmb


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Posted by dymaxion at 09:58 PM


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