Decline of the Empire

Remedy du Jour -- July 31, 2010

We've got some real good stuff on this week's remedy for what ails us. First up is Randy Newman playing Guilty as recorded live in Rotterdam, the Netherlands, 1979. (You may have to turn the volume up on this one.) Second we've got Dave Grusin doing In the Middle Of The Night from his 1989 album Migration. Aside from being a great jazz musician, Dave has long been one of the best film composers in the business. I had the pleasure of seeing him live a number of times at the Conference on World Affairs held each April at the University Of Colorado in Boulder, where I used to live.

The film clip is from the late, great Stanley Kubrick's Barry Lyndon. It's the seductive scene in which Ryan O'Neal seduces Marisa Barenson without saying a word. They don't make them like this anymore.

Updates To The Usual Horror Stories

An Orwellian Twist

Yesterday, I wrote a post The Contraction Watch citing Rick Davis' work tracking on-line durable goods orders as it relates to GDP. Today, the Commerce Department (BEA) revised all GDP numbers for the last three years. In an Orwellian twist, we now learn that the Great Recession has been much deeper than previously thought—

The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the Commerce Department said today in Washington. Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.

The BEA's revisions were based on more complete information—

The estimates released today reflect the regular annual revision to the national income and product accounts (NIPAs), beginning with the estimates for the first quarter of 2007. Annual revisions, which are usually released in July, incorporate source data that are more complete, more detailed, and otherwise more reliable than those previously available.

In The Contraction Watch, I cited the annual growth rate of GDP for the first quarter of this year (2010 Q-I) as 2.7%, only to discover at 8:30 this morning that it was now 3.7%! It had started out at 3.3%, then became 3.0%, and the "final" revision was 2.7%. But not anymore!

In other words, they raised the most recent quarter's growth rate (among those they revised) a full percentage point, which also happens to be the quarter they know least about. You would think the economy was booming from January through March of this year. On the other hand, 7 out of the 8 quarterly rates during the years 2008-2009, which now lie safely in the remoter past, were revised downward or showed no change. I'll have more to say about this in a future post. Fool me once...

Oh, by the way—today's number for the 2nd quarter is 2.4%, which is being reported as a "slowing" of the economy... Yeah, right... we're in the midst of a "modern day" Depression, says Dave Rosenberg.

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The Times Figures Out What A Dead Zone Is

It's always a treat when the New York Times discovers the obvious. One of my more "popular" posts was The Gulf Of Mexico Before The Oil Spill, in which I discussed the ongoing environmental damage in the Gulf, including coastal erosion, hypoxia (low oxygen) and harmful algal blooms(red tides). Now along comes the Times' Gulf of Mexico Has Long Been A Dump Site For Industry—

Loulan Pitre Sr. was born on the Gulf Coast in 1921, the son of an oysterman. Nearly all his life, he worked on the water, abiding by the widely shared faith that the resources of the Gulf of Mexico were limitless...

The gulf has changed, Mr. Pitre said: “I think it’s too far gone to salvage”...

Now that the oil on the surface appears to be dissipating, the notion of a recovery from the spill, repeated by politicians, strikes some here as short-sighted. The gulf had been suffering for decades before the explosion of the Deepwater Horizon rig on April 20...

Runoff and waste from cornfields, sewage plants, golf courses and oil-stained parking lots drain into the Mississippi River from vast swaths of the United States, and then flow down to the gulf, creating a zone of lifeless water the size of Lake Ontario just off the coast of Louisiana...

There's more Good News in the Times article.

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Colbert Describes Trickle Down Economics

The Obama Administration says it will let the Bush tax cuts for the wealthy expire at the end of the year. This has provoked outrage from apologists for the rich, including would-be mental patient Larry Kudlow. These tax cuts were supposed to filter down to us according to an economic "theory" the Republicans call supply-side economics. To the rest of us, this brainstorm is called Trickle Down Economics (DOTE, June 11).

Stephen Colbert has some interesting comments on this theory in The Ownership Society...

The Contraction Watch

Tomorrow the BEA will release it's advance estimate for GDP in the 2nd quarter (2010 Q-II). The consensus calls for a 2.5% annual growth rate from April through June, led by business spending.

Business spending on equipment and software, however, is projected to contribute heavily to growth. Thanks to super profit growth, large corporations have the cash to spend while cost cutting during the recession has triggered a need to upgrade equipment.

The capital-spending picture was sketched out by Wednesday's data on durable goods. Although total new orders unexpectedly fell 1.0% in June, the category dealing with business spending—non-defense capital goods excluding aircraft—rose 0.6%. Read more on durable goods.

Shipments of capital goods -- the measure that goes into the GDP calculations -- grew at an annual rate of 15.8% in the second quarter, says Jay Feldman, director of economics at Credit Suisse.

"Business investment remains the bright spot in an otherwise dull economic outlook," says Feldman.

That's the spin, but let's get back to reality. If the advance GDP number is 2% or greater, we'll be told that the economy is experiencing "moderate growth" and there's nothing to worry about. If the number comes in below 2%, we will be told the economy is experiencing "disappointing but continued moderate growth" and there's nothing to worry about—yet.

Very likely, the advance estimate has no where to go but down. The advance first quarter estimate (2010 Q-I) started out at 3.2%, which made everybody happy. That number was subsequently revised down twice, first down to 3.0%, with the final number coming in at 2.7%. Unfortunately, only wonks like me wait around to see what the final number turns out to be.

There are numerous indicators telling us the economy is slowing down, including declining retail sales, slumping durable goods orders, the growing trade deficit, historically low new & existing home sales, slumping new home construction, the end of the inventory rebuild (which accounted for 2/3^rds of the 2010 QI increase), spending cutbacks at the State and local levels, higher personal savings rates, the dwindling fiscal stimulus, three consecutive months of deflation in the CPI, etc.

You get the picture. For all that, tomorrow's GDP number is likely to be another cause for celebration among Administration officials, accommodating economists and hopeless optimists. Unless the number is really terrible, it can hardly be otherwise.

Rick Davis of the Consumer Metrics Institute (CMI) has a different perspective on how the economy is doing. In fact, he is somewhat alarmed, as am I. CMI carries out daily, real-time measurements of on-line consumer demand for discretionary durable goods. The results are shown in his Daily Growth Index (DGI), aka. the Contraction Watch.

The Contraction Watch. The blue line indicates a fairly steady (and now accelerating) decline in the Daily Growth Index starting about 190 days ago (mid January of this year). The observed 2008 data (red line) and 2006 data (green line) are shown for comparison. This is not Good News.

Rick explains how this relates to GDP.

Our Daily Growth Index reflects the strength of consumer demand over the trailing 91-day 'quarter', weighted according to the contribution that goods involved in on-line transactions make to the GDP (per the BEA's NIPA tables). It is designed to serve as a proxy for a 'real-time' GDP, and it slipped into net contraction on January 15th, 2010. To put this decline in perspective we offer the following observations:

• The current contraction in consumer demand for discretionary durable goods has now extended for more than 6 months.
• The day to day level of the year-over-year contraction is now worse than a similar reading of the 'Great Recession' of 2008 was after 6 months.

I first discussed the CMI alternative view of reality in my post GDP — Do We Have Walking Pneumonia? The DGI proxy for GDP predicted that 2010 Q-I would show a growth rate of 2.62%. After the 2nd revision, BEA's final number was 2.7%. Not bad!

But wait, it gets better. In an e-mail, Rick offered me some further guidance, which I will pass along to you. Here it is, suitably edited—

First of all, I am dead certain about what consumers are (or are not) doing. We measure that in a timely manner with accuracy and reliability. I'm not shy about saying what those numbers are telling us.

My problem is that I can't say the same for the BEA's GDP, for several reasons:

[lists reasons A.1-A.5, technical stuff pertaining to why the GDP measurement is flawed (e.g. inventory measurements), differences between the DGI and GDP]

To be brutally honest:

1. We are certain that consumer demand on November 30, 2009 was growing at a 2.62% year-over-year rate. That demand should have flowed to factories during the first quarter of 2010.
2. The BEA benefited from utter and blind luck to get that close to the correct number. A full 2/3 of their number came from factories unwittingly growing inventory in anticipation of soaring demand during the summer (we're waiting for the other shoe to drop when factories draw down inventories in the third quarter).

How about that for hubris? We're right, and the BEA was lucky to match our number?

It may be hubris, but I do like it! So what does the Daily Growth Index predict 2nd and 3rd quarter GDP will be?

If the GDP lags our Daily Growth Index by the (insanely consistent) 123 days it has lagged on average over the past 3 quarters, the numbers will be:

1. 2nd Quarter (2010 Q-II) = -1.57% (ends 6/30/2010, corresponds to Daily Growth Index on 2/27/2010)
2. 3rd Quarter (2010 Q-III) = -1.93% (ends 9/30/2010, corresponds to Daily Growth Index on 5/30/2010)

I fully expect to have people calling for my scalp when the BEA misses those numbers, getting them wrong because of the items (A.1-A.5) listed above. C'est la vie.

But what do I ACTUALLY expect? Probably flat for the second quarter (net after inventory), but with the inventory reversals killing the number just 4 days before the mid-term elections.

If Rick is right, and he's got a pretty good track record, GDP for the quarter just past will be flat (at best) after all the revisions are in. But better worse yet, the advance GDP estimate for 2010 Q-III, which will come out just 4 days before the midterm elections, is going to really suck (perhaps a contraction of 2%). That should really stir things up in a world in which the sacred GDP number means everything.

The truly sad thing about the Contraction Watch is obviously the event itself. Rick and the rest of us are literally watching the de-leveraging process at work, wherein a society whose economy ran on easy credit and asset bubbles is now painfully going through withdrawal in an attempt to to get clean. We're like junkies at a Betty Ford Center for alcoholics credit addicts. We have to learn to live without the stimulus. This is why I do not and will not tolerate sanguine fantasies about our economic future.

Memo To Blinder And Zandi — Stop Your Bullshit!

I don't usually post twice in a day anymore, but today I will make an exception. The New York Times has a story  on a forthcoming new report by economists Alan Blinder (Princeton) and Mark Zandi (Moody's economy.com) which says the wise & prudent policies of the Federal Reserve and the Federal Government saved us from a second Great Depression.

WASHINGTON — Like a mantra, officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression.

Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved.

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. 

Fuck this noise! Did we avert a second Great Depression? Who knows? It's too early to tell. The economy is going down the tubes again, which I will be detailing tomorrow in anticipation of the sacred GDP number. And we are indeed experiencing deflation according to the consumer price index (CPI), and if the CPI were calculated to include actual house prices, instead of some owner's equivalent rent nonsense, it would have been obvious that we've been in deflation for some time now, not just the last 3 months. The housing market is crashing again. And about 18.3% of Americans are underemployed. The list goes on & on.

But what of the analysis itself? Here's the reaction of Stanford's John Taylor (of Taylor curve fame) from the Times story—

Told about the findings, another leading economist was unconvinced.

“I’m very surprised that they find these big impacts,” said John B. Taylor, a Stanford professor and a senior fellow at the Hoover Institution. “It doesn’t correspond at all to my empirical work.”

Mr. Taylor said the Fed had successfully stabilized the commercial paper and money markets, but he argued that its purchases of $1.25 trillion in mortgage-backed securities have not been effective. And he said the Obama administration’s stimulus program has had “very little impact and not much to show for it except a legacy of higher debt.”

The disagreement underscored the extent to which econometric estimates are heavily reliant on underlying assumptions and models, but Mr. Blinder and Mr. Zandi said they hoped their analysis would withstand scrutiny by other scholars.

The key word Taylor uses here is empirical, as opposed to econometric estimates. But we don't need any economist to tell us what a blind man can see—things are bad & they're getting worse.

In putting lipstick on this proverbial pig, Blinder and Zandi have handed us some rubbish, as in Garbage In, Garbage Out—that's what it's called in computer science. No, let me amend that. It's called Garbage In, Ass-kissing Politically Expedient Garbage Out. Those of us who do not specialize in praising the status quo & brown-nosing have a more colloquial term for it—bullshit.

Calculated Risk informs us that Mark Zandi completely missed the Housing Bubble. But now, together with the academic economist Alan Blinder, he purports to tell us that we should be grateful to the oblivious Powers That Be, who are said to have prevented things from falling apart altogether. But of course, the verdict is not in on that one yet.

Memo To Alan Blinder And Mark Zandi—

cc: Ben Bernanke, Larry Summers, Tim Geithner, Barack Obama

Stop It! Stop Your Bullshit! Your macroeconomic models left out 90% of how our phony economy worked, and all the time Main Street was drowning in a River Of Debt, you high priests economists were giving us all a Big Thumbs Up. Ben Bernanke, whose remedial actions you praise, called this time of endless "prosperity" The Great Moderation (~1983-2007) . Ben didn't see the crash coming either. You are part of a disgraced profession. Get used to it.

And now you have the chutzpah to cite imaginary numbers you obtained  from delusional econometric models to say that Things Could Have Been A Lot Worse following an ongoing disaster you didn't even foresee and therefore did not comprehend (using similar models).

The key word in the phrase "ongoing disaster" is ongoing. I will quote Tim Iacono's Lindsey: U.S. Entering Deflation Trap—

Despite yesterday’s somewhat sanguine view, if Federal Reserve Chief Ben Bernanke really thinks that the U.S. economy is headed for serious trouble due to various traps that have been encountered (said traps having previously been set by the deflation and/or liquidity monsters), he has more company with each passing day. Earlier today in “the land of deflation”, [Lawrence Lindsay] lent his support to this view as reported by Reuters—

Former Federal Reserve board member Lawrence Lindsey said on Thursday it will be “obvious” by the end of this year that the U.S. economy has entered a “deflationary trap.”

... “I would expect by December we will see further quantitative easing” by the Fed, Lindsay said.

December seems like such a long time away…

Paul Krugman sketched out the situation for Bernanke creating a new “Fed misery index” that he chose to call a “Fed fail index” since he figures the central bank deserves an “F” for the job it’s been doing in achieving full employment and stable prices.

Like many others in recent years, this discussion again strikes me as something that historians will look back upon in a few decades and wonder, “What were those guys thinking? They run an economy on asset bubbles for twenty years and then they wonder why normal monetary policy doesn’t work any more.”

Get it?

So stop trying to wallpaper over your incompetence. We wish we could issue a Cease & Desist order on subservient, status quo-justifying nonsense, but we can't as long as people like you exist. So I am asking you to be honest for a moment, and stop bullshitting the American people.

I just had to get all that off my chest.

Our Crumbling Infrastructure — Patch & Pray

You can not pick up a newspaper without bumping into signs of the Empire's Decline. As I was perusing the editorial page of the Pittsburgh Post-Gazette, which is usually filled with political pontification by clueless Washington courtiers pundits who will leave this life precisely as ignorant as they were upon entering it, I ran into a commentary by Pennsylvania Governor Ed Rendell called Rebuild our infrastructure. Here's the article's subtitle, which I have only slightly modified—

The U.S. is in danger of becoming a third-rate economic power

As it turns out, there is a coalition called Building America's Future spearheaded by Rendell, California's Governator and New York mayor Michael Bloomberg. Rendell's commentary quoted the American Society of Civil Engineers (ASCE). Every year these worthy people put out a report card on the state of America's infrastructure. Here's the 2009 assessment—

2009 Grades

Aviation  D

Bridges  C

Dams  D

Drinking Water  D-

Energy  D+

Hazardous Waste  D

Inland Waterways  D-

Levees   D-

Public Parks and Recreation  C-

Rail  C-

Roads  D-

Schools  D

Solid Waste  C+

Transit  D

Wastewater  D-

America's Infrastructure GPA: D
Estimated 5 Year Investment Need: $2.2 Trillion

Governor Rendell harkens back to the glory days of the Republic and the early days of the Empire—

Presidents Jefferson, Lincoln, Franklin Roosevelt and Eisenhower understood the potential of investing in great projects like the Louisiana Purchase, the transcontinental railroad, rural electrification and the national highway system. Each public investment generated vast returns in safety and quality of life, as well helping to create thousands of jobs and economic growth.

It's time for that same sort of vision and leadership. Congress should establish a National Infrastructure Bank to invest in and save the foundation of our country and build for the next generation.

Should establish? What do think the chances are that America will come up with $2,200,000,000,000 (trillions) to revamp America's infrastructure in the next 5 years after decades of Imperial neglect? 10%? — certainly not! 1%? — getting closer. 0.1%? — that's just about right. There is such a large multitude of factors determining these odds that I won't endeavor to list them here.

I'll bet you're wondering what Patch & Pray means. Dr. Wayne Klotz, President of the ASCE, explains all in this short video.

And be sure not to drive over any bridges, you never know what might happen. And don't drink the water...

The Price Of Political Paralysis

If you are still paying attention, you will see prescriptive policy analyses everywhere you look. Such views specify what we need to do to fix the economy & the coming fiscal crisis. Each analysis assumes, as it must, that strong, bipartisan political policies will be defined & implemented in the future.

None of the people offering these prescriptions are willing to admit that our political system is irrevocably broken. They must pretend—do they know they are fooling themselves?—that strong, concerted political action is still possible in the United States. During the first half of Obama's presidency, the Congress barely squeaked out financial reform that did not reform, health care reform that did not bend the disastrous cost curve, and a huge fiscal stimulus that did not stimulate. This is why I was so confident that regulating CO₂ emissions to fix the climate would be postponed indefinitely—it was.

If you were asked to predict what policy actions will be taken in the future, and you are attuned to reality, you would likely say: none! It is very likely we will continue down the current path of huge fiscal deficits and an economy which at best will get no worse. This nothing-happens political outcome is virtually guaranteed by the dysfunctional nature of our two-party system and the upcoming elections, in which the Republicans may take back the House and make 60 votes in the Senate impossible.

A cynic might say that it's a good thing that further political action is impossible—Congress & Obama can't do anymore damage. But the way things are set up, our situation will get worse all by itself. The main danger for the United States is not that we might embark on a disastrous policy course. The real danger is that we are completely incapable of embarking on any policy course!

It is as though we're on a runaway Doom Train and nobody has a hand on the throttle. Everyone knows that the track runs right off a cliff, but nobody is able to take back control of the train. And unlike the movies, no Hero is available to crawl through the burning engine house to apply the breaks just in the nick of time.

This is how we fool ourselves. I've included a typical prescriptive analysis in a video at the end of the post to give you an idea of how such self-delusion works. But right now I will turn to a cynical, highly partisan analysis by Martin Wolf of the Financial Times called The political genius of supply-side economics—

The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.

I don't know if Republicans "think" per se, at least much beyond how to give their wealthy supporters a new round of tax cuts. But let's move on. The bottom line is that nothing will be done. Wolf's got this part right, however he arrived there.

Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”...

There's another debatable reference to Republican "thinking" but again, I will ignore it. Wolf goes on to describe the sordid (silly?) history of supply-side economics, which I covered in my post Trickle Down Economics. Let's concentrate on Bruce Bartlett's speculation—the Republicans will intentionally forestall political action long enough to ensure that America's Doom Train goes off the cliff. This would, in turn, create the biggest financial crisis in world economic history.

Wolf's analysis is wrong only because of the way he frames it. His analysis assumes that strong, bipartisan political action to stop the Doom Train is still possible provided that some extremely radical Republicans do not run the Federal government into the ground. This is simply nonsense, as I described above. Bipartisan guidance of the Ship Of State died many years ago. However, and tragically, we are still left with the increasingly likely outcome Wolf suggests might occur—the biggest financial crisis in world economic history.

Notice that once one filters out the partisanship in Wolf's remarks, the frightening conclusion remains the same. That is the price we will likely pay for political paralysis.

In the video below, Mark Dow argues that the United States (currently) has "policy credibility." You'll have to take that with a grain of salt. His subsequent analysis goes on to assume that strong bipartisan action to fix "structural deficits" and the economy is still possible. Watch this video critically. Are Dow's arguments credible?

The Apple Cult

In a world of narcissistic, overpaid CEOs, Steve Jobs stands alone. Steve knew it was not enough to produce a good product at a good price—that wasn't going to cut it. To really lure the suckers in, you need to create a religious cult whose central belief system centers around veneration of & unquestioning faith—is there any other kind?—in your products & perfection. And who would lead that cult? Why Steve would, of course!

And Jobs has succeeded, but not beyond his wildest dreams because these are unlimited in scope—he is a narcissist, after all. In a waning Empire with a Consumer Culture, stuff is the answer to everything. But not just any old stuff—it's gotta be the Right Stuff. Jobs made sure that whatever iShit he produced would always be perceived as the answer to what ails us, regardless of the question.

• Question — Manufacturing jobs are leaving the United States like rats fleeing a sinking ship. Apple itself employs 10 times more people in Asia manufacturing iShit than it does here in America. How will we secure good-paying jobs for Americans in the future?
• Answer — Buy an iPhone 4.

Etc. Any nascent religion needs a mythological framework to support it. Naturally, scholars are working hard to describe Apple's central myths. Thus we get The Varieties of Religious Experience: How Apple Stays Divine from Atlantic Magazine blogger Alexis Madrigal —

There are scholars who study Apple's consumers as religious devotees. Consumer behavior specialists Russell Belk of York University and Gulnur Tumbat of San Francisco State, even put together a framework for assessing Apple's mystical mythology. The company was built on four key myths, they argued.

Here are the four narratives, as summarized by media scholar Texas A&M's Heidi Campbell, who distilled their work for her May paper "How the iPhone became divine":

1. a creation myth highlighting the counter-cultural origin and emergence of the Apple Mac as a transformative moment;
2. a hero myth presenting the Mac and its founder Jobs as saving its users from the corporate domination of the PC world;
3. a satanic myth that presents Bill Gates as the enemy of Mac loyalists;
4. and, finally, a resurrection myth of Jobs returning to save the failing company...

The stories they identified aren't myths in the sense that they aren't true, but more in the Joseph Campbell sense of being a story that helps people make sense of their relationship with the world...

Did the recent iPhone 4 antennae fiasco change the belief in the infallibility of Mac technologies and Jobs himself?  Fuck, no! How could it? — it's a consumer cult!

But after last week's press conference quelled questions about the company's practices and this week's iPhone sales report, Jobs not only seems like a hero again, but he reinforced the resurrection myth too.

Jobs even let media representatives into an inner sanctum at Apple, the antenna testing center. Fans responded with appropriate enthusiasm at being shown one of the powerful shrines to Jobs' dedication to perfection...

"This resurrection myth, and the belief in the infallibility of Mac technologies is going to keep people still invested," Campbell said.

Who said materialism can not be a religion?

Occasionally the question arises as to whether Americans will wake up & smell the coffee. Will they realize just how bad things are? Will they rebel? Will there be riots in the streets? A revolution? Will the young figure out that they have been sold down the river? That the future doesn't work, no matter what we do on our current path?

I believe the answer to these questions will always be more or less the same: buy an iPhone 4.

Both The three videos below are worth watching if you want to understand the Apple Cult. The first, called Apple iPhone Mania Is Actually A Profound Phenomena, features a discussion by Tech Ticker's Aaron Task and Henry Blodget describing the hysteria surrounding the release of the iPhone 4. The second is brought to us by tinywatch productions at YouTube. This video speaks for itself.

Update: I won't likely be returning to this subject anytime soon, so I've added another informative video from the Onion News Network.

Say Goodbye To The American Dream

Even die-hard optimists must admit that the housing market is rolling over again, as I recently discussed in The New Housing Bust. Ad hoc government programs that artificially pushed demand forward have wound down. House sales are falling and inventories of houses for sale are increasing. A nationwide decrease in average home prices can't be far behind. When prices fall, more home owners become home owers—these underwater home "owners" owe more on their house than it is worth. This circumstance is called negative equity.

As of June, 11.2 million Americans were underwater on their mortgages. Of these, about 5 million were paying on a mortgage that exceeded their home's value by 25% or more. Talk about red ink—these home "owners" taken all together were $656 billion shy of getting even at current prices. (See my post The New Housing Bust.) What a disaster!

A new report from the New York Fed calculates the "effective" home ownership rate in the United States—

The severe decline in house prices in the last few years, combined with the large number of borrowers who had little or no equity at the origination of their mortgages, has led to a dramatic rise in homeowners with negative equity. This rise in turn has opened a large gap between the Census Bureau’s official homeownership rate and a measure that we term the effective rate. The effective rate recognizes that negative equity homeowners are likely to convert to renters over time and thus excludes them from the count of owner-occupied housing. The effective homeownership rate for the nation is currently 5.6 percentage points below the Census Bureau rate, and in some of the metropolitan areas hurt most by the housing crisis, the effective homeownership rate falls short of the official rate by a striking 20 to 39 percentage points.

The New York Fed's calculation subtracts home owers from home owners, and thus puts the "effective" rate of home ownership in the United States at 62%. But like all such metrics, this is merely a snapshot in time. With the housing market rolling over again, the "effective" rate could settle out at or south of 60%. We haven't seen anything like this since 1965. I first used the graph below in my post The End Of Suburbia—Really!

Source: The Homeownership Bubble—An Economic Crisis Explained

How bad will things get? The New York Fed analysis assumes that you "own" your house if you have a mortgage and positive equity (i.e. the house is worth more than the mortgage). They further assume that all of those with negative equity will choose to rent rather than continue to pay down a debt they can effectively never get rid of.

On July 8th the New York Times reported that the biggest defaulters on mortgages are the rich. It's easy to see why—they regard their homes (or second homes, or investor properties) as investments. For the little people, that home they owe more on than it's worth is where they live. Rather than sell it, especially if their negative equity is relatively small, these home owers might choose to tough it out & hope for the best.

For many decades the federal government pushed home ownership as the Road To Financial Salvation & Security. That entire system, which led to the push into the suburbs and the exurbs, has now fallen apart. The equity wealth lost following the collapse of the Housing Bubble will likely never be recovered. The jobs markets will remain depressed for years, and downward pressures on wages will continue. The fate of the home owers reflects our shrinking Middle Class. 

Where is that American Dream now? Say goodbye...

Remedy du Jour -- July 24, 2010

What a week it was! The U.S. Senate gave up on regulating carbon dioxide (CO₂) emissions. Thus, given the abject failure of the Copenhagen climate get together, we (and by extrapolation) the rest of the the world have unofficially decided to shelve the climate issue for the "indefinite" future. Which basically means forever, given the forthcoming elections. Other nations can point to the United States and say why should we do anything if the Americans won't and the Chinese won't? I'd say that was a Big Week in the history of Humankind, wouldn't you? 

Thus we need some relief from Human Ignorance and I need something to do because it's too hot to leave the house here in Pittsburgh. I've been listening to a lot of Aimee Mann lately, so I'll play some of her stuff. For those of you who don't know her—and I'm confident that's most of you—she started out in the 1980s as the lead vocalist/bass player & composer in the most underrated band of that decade, 'til tuesday. Since then she's made several critically acclaimed albums that never really sold much. Some of you may know her work on the soundtrack to the film Magnolia, including Save Me and Wise Up. Let's start out with 'til tuesday's What About Love, followed by the tune Freeway off Aimee's latest album @#%&! Smilers.

In the film clip, Lewis Black has something to say about Human Ignorance.

Who Will Buy Our Debt?

Professor James Hamilton put up an interesting post this week. His first question was who has been buying up U.S. Treasuries? Here's the answer for the years 2007-2009.

Compared with previous categories of bond holders, the largest increases were in foreigners, mutual funds, banks and households. Hamilton calls this a "flight to quality" in uncertain times. His second question goes to the heart of the matter—

The biggest single factor in that willingness of foreigners, mutual funds, banks, and households to increase their holdings of Treasury securities is a flight to quality-- people wanted out of risky assets and into something they regarded as safe. But, unless financial conditions deteriorate further, I wonder why there would be a similar increase in demand for Treasury debt over the next two years. And, if things ever improve, one would expect some of those holdings to move back into higher-paying assets.

So I can see who bought the $2.7 trillion in net new Treasury debt issued between 2007 and 2009. What I'm having more trouble seeing is who is going to buy the additional $8 trillion in net new debt that would be issued over the next decade under the CBO's alternative fiscal scenario.

I expect financial conditions to deteriorate further, so this flight to quality safety will continue. It is particularly ironic that Treasuries become more attractive as the American economy goes downhill, which just exacerbates future debt levels. And it is doubly ironic that if financial conditions improve, investors will move into "higher-paying assets."

Hamilton asks who is going to buy the next $8,000,000,000,000 (trillions) of our debt? 

Good question.