Wednesday, January 23, 2008

You Can Take A Bipolar Cow To Water...

Why are lower interest rates and tax rebates mostly useless in averting a coming deep recession? For the same reason that you may drive a cow to water, but you can't force her to drink.

American households are in deep structural trouble, so they aren't going to borrow more and they won't spend their rebated pennies from heaven. They are finally waking up to the reality that in the past two decades they have borrowed and consumed too much, while saving very little. Call it Aesop's "The Ant and The Grasshopper" or the hangover after a binge, the effect is the same: people will go into a prolonged period of abstinence in order to repair their financial damage.

Personal Saving Rate (Income Minus Spending)

This is not a morality tale, however. It's not about castigating people who, as I said in previous posts, had to borrow in order to maintain a decent lifestyle. Look at all the data you want: in the end you will find that while corporate earnings rose as much as 40% per year, wage increases for working Americans came to a pittance (see chart below, click to enlarge). Businesses "did not share" and this is a monumental mistake that corporate America is going to regret for decades to come.

Annual Change in Corporate Profits (blue) and Hourly Earnings (red)

This is not a morality issue, either. It's not about ethically "bad" corporations vs. "good" workers - though I bet that's how it will ultimately play out when the political pendulum swings to populism. Instead, it's all about competence: if top managers don't have the common sense to pay workers enough to comfortably afford their own goods and services a la Henry Ford, then they are immensely incompetent businessmen, plain and simple. If they face dumping from abroad, then they should be screaming bloody murder to Washington, instead of sending campaign contributions.

Furthermore, making up lost earned income in the form of increased asset wealth is a fool's errand: financial asset ownership is highly concentrated to the top 5-10% of the population and real estate, though more evenly distributed, is not liquid enough to substitute for income. In fact, borrowing against housing "wealth" while incomes stagnated was the proximate cause for the current mess.

Washington needs to wake up. This is not their daddy's ho-hum recession but a virulent grand-daddy come to visit from the late-19th century. The trifecta of high debt-low income, zero saving and asset deflation cannot be overcome with low interest rates and pocket change. The credit crunch shows us that borrowing is part of the problem, not the solution, and panicky tax rebate proposals are proof that it is income that is lacking, not lower taxes.

Finally, Dr. Bernanke should understand that financial markets are in practice composed of manic-depressives that always demand more meds, not reasonable ivory tower academics who realize when to stop. It is his job to know when to give in and when to just say no, otherwise the inmates will take over and tear the whole place apart. Look at what just happened: the Fed did the biggest one-day cut in its history, down to 3.50%, but the inmates are already back demanding more, with 3m T-bills at 2.30%, 2-year notes at 1.95% and 5-year at 2.50%. I hope the Chairman can recognize market blackmail when he sees it.

Watch out Mr. Chairman. If you pay too much attention to us bipolar misfits we're going to take you down to the ZIRP hole faster than you can spell Sikorsky. And I mean it - right now, anyway. In 30 seconds I may change my mind. Or not.


  1. H:

    I am somewhat of a populist, so I am closer to the "bad corporation, good employee" line of reasoning. The problem is that American workers have suffered from a lack of bargaining power. They did not demand higher wages because it would have been futile to try.

    Believe it or not, but there actually is a line of reasoning being taught in our universities right now that companies should underpay employees. The idea is that they will become more productive because they will have to work more hours to make the same amount of money.

    There are two other factors: laws designed to discourage unionization and Chapter 11 bankruptcy provisions that allow corporations to raid pension and health care funds to pay "retention bonuses" to upper management. This latter policy creates a true moral hazard. Bad behavior by those running the store is rewarded at someone else's expense (the employees and taxpayers -- think PBGC).

    I don't quite get the reference to Sikorsky (Igor?). What point were you trying to make here?

    I like your attempt to analogize the stock market to bipolar disorder; but you need to know that in real life, bipolar people want off their meds, not on them. Although, having said that, they often "self-medicate" with other, more dangerous, street drugs wherein they try to mimic the manic stage all the time. If the analogy were to be correct, Bernanke would have to be acting like a pusher giving them amphetamines when they act like they are having withdrawal symptoms.

    Even so, it was still a good post and your point was well taken.

  2. Sikorsky was the "inventor" of the helicopter and founder of the firm that bears his name.


  3. Great post! No, it wasn't. Yes, it was a great post! No...

    I am going to take my meds now...

  4. I couldn't agree more, and the greed alone would have been bad enough, but add the fraud and... oh my.

  5. Henry Ford realized long ago that if workers don't get decent wages, they would not be able to buy his cars...even looking at it from his own best self-interest...??? how to drive the lesson home???

  6. great article.

    the "reason" U.S. "workers" did not demand more pay is that they are no longer "workers", they are "debt slaves"...

    ...and everybody knows that a slave cannot demand anything.

  7. The problem with actually saving money at this point is trying to find a safe place to keep it, other than a mattress, if you are one of "us" who does not understand economics or investments. After trying to understand it for the last few YEARS, I've ultimately decided that the system is ass backwards and the code doesn't exist, or... I'm dumber than dirt! Financial planners are all well and good assuming that you can find one that you believe is honest and/or has a clue, and I've gotta tell you that I've not met one face to face! If the cart doesn't get back behind the horse pretty soon, I'm taking what's left of my savings and replacing it with a very fun, very expensive new car!

  8. Oops, meant to say "Great Post!" Sorry for the rant, time to take my meds.
    By the way, it's been my experience that Okie lawyer is correct, Manic/Depressives do not want to take their meds... it would seem the meds make them come down!

  9. Has the fiscal irresponsibility been an attempt to raid the Treasury while there is some tax revenue and credit available for the U.S. government instead of paying the 43 trillion in entitlements coming due in the next few decades? It seems apparent that with peak oil, a massive U.S. debt and effective Chinese competition, there would be no way to grow the economy enough to meet these debt obligations. The Iraq war is an excellent excuse to hand-out money to every well connected corporate contractor in the U.S. as well as arms manufacturers (Halliburton, Big Oil). And are sovereign wealth funds also being suckered into taking over failing U.S. banks whose capital has been depleted and don’t have any reserves?

    This seems to be a final ploy to pound down a U.S. middle class that is no longer labor price competitive and to eliminate all of those future liabilities that were promised during an energy rich period. By dropping the interest rate and handing out cash rebates we should see the dollar fall and inflation skyrocket thereby cutting the average U.S. citizen’s purchasing power in half in maybe a matter of a 2-3 years. If you are able to keep a job, it will be like getting a 50% pay cut and watching those fat social security checks vanish in a blink of Ben Bernanke’s eye.

  10. Dopamine is correct. Grover Norquist has drowned us in a bathtub of our own making. By "us" I'm refering the poor slobs that kept voting against their own interests for the past thirty years. In all fairness though, we didn't own the megaphones, the FCC did.

  11. I, for one am very happy that the Chairman acted in such a predictable way. I can just imagine the conversation that took place.

    Dubya: You guys better fix this market thing, or whatever the hell you wanna call it....

    Hank: Yes Mr. President well get something done.... What do you think Benny, think we can trim a point or two off the Fed funds, it worked the last time.

    Benny: Well, our models indicate....

    He gets abruptly cut off by Dubya.

    Dubya: Then it's settled, you're gonna cut two points.

    Benny: But! But! But!...

    Hank: Listen let's just go with 75 basis points and fuck it... We can always cut more later... Wait a minute, I've got to make a call....

    Dubya: I gotta make a couple of calls myself.... What da ya call them god damned things, puts, calls, which ones are they...? Hank, what the fuck is it that I gotta buy or sell here...?

    Hank: Don't worry about that Mr. President.... I'll take care of that for you.....

    Have a lovely day,


  12. Do you read ?
    You should find yourself in agreement with the diary series in recap here

    You'd be welcome to join in & crosslink.

  13. Henry Ford raised wages to five dollars a day in large part to combat incredibly high worker turnover after he launched the assembly line. Maybe employees now are trapped, because there are fewer good alternative jobs.

  14. How can you say it's not an issue of morality? Pick any belief system you want and I'm pretty sure you'll find that it says those with the most have an obligation to those who have less. It's pretty fundamental. But since the casino is amoral at best, it doesn't surprise me that people who live in it lose sight of that. Wall Street corporatists are not just bipolar, they're sociopaths (with rare exception). Although on rereading the post it seems like you might be trying to head off the "those stupid irresponsible poor people are to blame for their suffering" argument that truly contemptible people often make.

    If my Bipolar cow won't drink when led to water or refuses to take its lithium and even itself out, it might be time to lead it to the slautherhouse so it can feed many people.

  15. Rather than the Fed feeding Wall Street meds; I think there is another appropriate analogy here.

    I sort of view the rate-cuts as an unintentionally 'populist' measure as much as a Wall Street bailout. If the "trifecta of high debt-low income, zero saving and asset deflation" is the main de-motivator of the US consumer; then it stands that, rather than increase consumption (as it did in the past), the lowered rates at least allows the over-extended consumer (with high debt, low - or flat- income, no savings) to continue making payments on HELOCs, ARMs and credit cards. The current market slide is in part fueled by fear consumers failing to make loan payments.

    As interest rates ticked up last year, defaults soared quickly. The affordability of ARMs was based on the assumption that a buyer currently qualified at the lower rate would be able to pay the future, higher rate because of future increased income. It's obvious now that was wishful thinking, counting chickens before they hatch, whatever; but stagnant income growth was never going to match rising i-rates and re-setting mortgage payments.

    With inflation in commodities and slower business environment, wages will not be increasing anytime soon.

    Given that, and the debt level of the US consumer, the only way possible to avoid total collapse is to keep rates low; the financial equivalent of getting the heroin junkie onto methadone. Not ideal, but the cold-turkey will be too brutal for anyone to deal with. On top of it, both dealer and junkie are bi-polar; leaving the "doctor" little room for radical measures.

  16. I agree with the posts but not the comments. I'm not a supporter of unions any more. They've become a way to lock people out of jobs. One of the reasons why the auto industry is not as competitive has to do with the deals the unions cut. (Not to mention that a lot of union officials are primarily in it for themselves and not for the workers.)

    I also disagree with the concept that people went into debt to maintain a decent lifestyle. The "middle class" lifestyle today bears absolutely no resemblance to the more frugal middle class lifestyle I saw in the 50s. People have a total disconnect of what they can truly afford on their income, thanks to easy credit.

    I will agree completely with two things that I think are causing the current mess. The first is the wage deflation you mention. The second is what I call "career deflation". These are skilled workers who have been pushed down into less skilled, lower paying jobs. It's a waste of talent and has led to people who can't afford their mortgages, health care or retirement planning. Here's hoping we can outsource a few of these CEO jobs and let them have a taste of their own medicine.

  17. I love the market today.

    The entire market is bouncing on the presumption that the regulators of NY and Wisconsin (original homes of MBIA and Ambac, respectively) are going to find a way to backstop the CDS losses of the two companies.

    Anyone care to predict how hard the market will fall when they realize nobody can backstop the monolines?

    Interestingly, the swaps of both are still defaulting with coverage at the rate that would be expected for a completely insolvent company. Zip, nada. 0% coverage and the market thinks they're bailed out?

    Good times.

  18. love the blog, really, i do.'re going to be bleeding from your finger nails before we see "19th century grandpa style depression"

    we will inflate our way out of this......will it work? of course it will. will it devalue the dollar even further? of course it will. do i like that? no, i do not. the only way to get ahead is to invest in stocks......even with a low cost index fund you'll beat inflation...........barely - but you will.

  19. I agree with Teri.

    I believe in people’s right to organize against their employers but unionizing is often just exchanging one master for another. Take the disastrous hold that the California Teachers Union has on state is criminal -- education stakeholders have to sit by and watch while they bargain away the future of the state, all the while held accountable for nothing. No one is held accountable for students' collective or individual success.

    I also agree with your historical perspective vis-à-vis the "lament of the middle class" goes: our rich, fat, entitled, fast-food-eating, mall-shopping, never-want-for-anything, government-assistance right-around-the-corner ASSES will really get an idea about the true prudentially involved in even remaining in the “middle class” really means.

  20. Hell, I was wondering if you might comment on how possible deflation might effect the ability of the various branches of the US Government (i.e. federal, local and municipal) to pay off their public debt.
    Wouldn't deflation make current public debt even larger in future dollars?

    Are entitlement programs indexed up with inflation but not indexed down with deflation? (I do not know this for sure)

    Would monetary leaders recognize this (if I am correct) and try to avoid this scenario and therefore literally turn interest rates negative if they had to to avoid deflation? (has such a thing ever been done?)

    If my memory serves me correctly, the US government is not permitted by its own rules to renegotiate interest down with its debt holders (that is one of the advantages of treasuries over commercial debt)



  21. Excellent. You have been on fire lately

  22. Let it all bounce then, and re-short. Charts for the Big Bounce bounce that's developing:


  23. And speaking of the Fed, here is the last word
    on Greenscam.

  24. It was rumors of a bailout of the bond insurers that drove the late advance.

    Leading US banks are under pressure from New York state's insurance regulator to provide as much as $15bn to support struggling bond insurers,...There is widespread concern that rating agency downgrades of the specialist insurers known as monolines could force a fresh round of writedowns by banks, which could damage already battered investor confidence. This has led to speculation that banks would band together to prop up the insurers, which guarantee payments on thousands of ­billions of dollars worth of bonds issued by municipal governments and other borrowers.


    Are the banks supposed to supply the capital so that their bond insurers, to whom the banks paid insurance premiums, can pay them back?

    Where will the banks get this money? Was this scheme the reason for the emergency rate cut? If so, what will the banks put up as collateral for the loans? Please don't tell me it will be their 'insured' bonds. Or is the money going to be just given to the insurers? If it's going to be loaned to them, what is the future cash flow projection for repayment?

  25. The American middle class worker must change, and he hasn't yet.

    Globalization means global competition, and right now the Chinese worker can do what the American worker can do, only for pennies on the dollar. So the work goes to China, and our buying power follows. Our economic troubles are based on falling relative productivity, and denial in the form of IOUs.

    Instead of dealing with this squarely, the American middle class keeps expecting "someone" to "take care of them". The government. The union. The TV. Those nice people that send credit card applications in the mail. The President, who says "your job is to shop".

    The only salvation for the U.S. worker, and therefore the U.S. economy in general is to get much, much better at innovation. Robotics, artificial intelligence, solar and solar-derivative power, power conservation (telework, mass transit, household thermal management) and disease prevention are all wide-open fields of endeavor which the U.S. middle-class could easily lay claim to. Nowhere in the world is acquiring knowledge, organizational and capital formation easier to achieve than here in the U.S.

    If the middle class is being squeezed, it's because it's not adapting. It's not like there's any shortage of marketplace needs, information or financial resources available.

    If I was running a multinational, I'd outsource work in order to stay competitive. So would you.

    The question on the table is "what does the American worker have to do in order to have a compelling value proposition .vs. the rest of the world's productive capacity?"

    It might mean to graduate from "worker" to "thinker".

  26. Thinker vs. worker...

    The Chinese and the Indians can think just as well as the Americans, also for pennies on the dollar. That's a dead-end, too.

    The Chinese (and others), however, are by-passing other costs to stay competitive: environmental and worker protection, pension and medical benefits, and a whole slew of other social costs.

    In the end it may come to slapping balancing import duties...

  27. Hel, great post.

    Re: Figure 2 (percent change in corporate profits vs. earned income).

    Last year, the WSJ had an article that said financials and energy accounted for almost half of the corporate profits in the S&P 500.

  28. I agree that forcing the Chinese to deal with environmental and social problems is necessary.

    I don't agree with you about the "thinking" bit. The U.S.' infrastructure is largely built. Our environment is less compromised, our health system is established (but inefficient). We have much, much more available resources for education, and the inculcation of and expression of entrepreneurship. Our lack is one of intention, not one of opportunity. Most of the rest of the world suffers from significant resource (information/knowledge, capital, infrastructure) or cultural constraints.

    China is where the U.S. was, in terms of moving workers from farm to city, in the 1930's. They have some advantages (e.g. use cellular .vs. copper comm plant), but they have a great big long way to go to get their population on the same educational and cultural foundation we currently occupy.

    We should use our strengths.

    While I'm at it, I'll reflect your objection back: are you saying that forcing China to implement environmental controls, social safety net, etc. is our only means of economic competition with them?

  29. Cheese, they can't stop a Depression. Why, because when Big Ben, and Hammerin' Hank and CONgress
    try their jiggery pokery the bond market revolts as per today's action. Make no mistake, the Bond market rules. And today it said FUCK YOU ALL!

    Adam Smith's The invisible (and almighty) hand of the market was out in force today. Let them try another rate cut next week and you will witness the unthinkable, a plunging stock market.

  30. Regarding your comment :
    "Anonymous Anonymous said...

    The American middle class worker must change, and he hasn't yet. "

    Yeah, they must change and stop allowing corporations and lofty executives to take away their hard earned $$$$$. It is not a matter of competition or globalization. It is a matter of one person getting paid the equivalent of : 10,100,1000 time the pay of one person for effectively doing no more and in some cases less than that person....

    Even out the pay scales at companies and make dividens fair and maybe then you can argue your point if the middle class is still being squeezed. The way I see the world right now is in a distributed pyramid scheme. The rules of the pyramid are such that the more you screw people the higher you climb. Those at the top wanting to slim the middle more and more so as to not have any competition and the people in the middle too dumb to realize they are getting kicked down to the bottom because they have bought this false lifestyle of 'credit' that has more or less been shoved down their necks and are now helpless slaves to debt... Instead of getting a nice bonus or salary increase at the end of the year to offset inflation, they are handed a credit card and loans.... I see a society of rich trying to exploit the middle class and poor... There aren't enough opportunities in the U.S, so they export it to countries where there are more opportunities (mindless workers who dont ask questions.. A group of people who will be happy for any money you pay them over what they made before). .. They said prices would be lower and they have been by about 10% or so and the rest of the 'difference' has been pocketed by the people atop the pyramid... So, the game continues and the middle class gets squeezed out .. When they revolt and say 'WTF'.. the people on top say : It isn't our fault.... You just weren't being competitive enough. We have capitalized ourselves out of a healthy society into one filled with con-artists, lairs , and suited thieves. For those who master the art of being a liar and thief, they rise to the top and the world is their playground. This lot has no race/gender or age...