Editore"s Note
Tilting at Windmills

Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

January 23, 2008
By: Kevin Drum

STIMULUS....Yesterday the Fed announced a stunning 75 bp interest rate cut in advance of its regular meeting. Dramatic! But apparently Wall Street wants more. Here's the third paragraph of today's Washington Post report:

Investors in futures markets are betting there is a strong likelihood that the Fed will cut rates again at its regularly scheduled meeting next week.

Meanwhile, the European Central Bank, apparently, plans to do nothing at all.

Kevin Drum 1:49 PM Permalink | Trackbacks | Comments (53)

Bookmark and Share
 
Comments

Translation: We are sooooo screwed.

Posted by: Buford on January 23, 2008 at 1:51 PM | PERMALINK

That ought to push oil over $100 for good. I'm looking forward to $4/gal. gas this summer.

Posted by: lampwick on January 23, 2008 at 1:53 PM | PERMALINK

What we really need is more tax cuts for millionaires!!

Posted by: Gore/Edwards 08 on January 23, 2008 at 1:55 PM | PERMALINK

I feel a bit sorry for all those counterfeiters who now have to drop the US $100 bill and retool for the Euro.

Posted by: David W. on January 23, 2008 at 1:56 PM | PERMALINK

Europe is betting that they can trail behind us a few months in terms of lowering interest rates. With the recent decline of the dollar a lot of capital is flowing to EU instead of US and they want to continue this by paying a premium for that capital. This will help them reduce the effects of this crisis more than lowering the interest rates would. In the process it will also hurt US because it will be harder for us to compete with international capital.

Posted by: yep on January 23, 2008 at 2:01 PM | PERMALINK

I just love how the Fed continues to screw over those holding cash (or simply living paycheck to paycheck) in order to prop up the bubble cap markets.

Stagflation, here we come!!!

Posted by: Disputo on January 23, 2008 at 2:03 PM | PERMALINK

What to do to avert a recession is a difficult question Kevin. But I think we should keep several things in mind.
First, during Bush Sr.'s term, he raised taxes. After that a recession hit. So one thing we should certainly not do is raise taxes like the Democrats recommend.
Second, one of the big problems with the economy right now is the numerous foreclosures. Companies are scared to sell homes because they are afraid buyers won't be able to pay for the whole house and banks aren't willing to lend to buyers for the same reason. A federal bailout of banks and housing companies would stem this problem and put our economy back on track.
Third, the most immediate cause of the stock market meltdown is the constant barrage of news that the economy is falling. Media companies like CNBC and the New York Times should think twice before "reporting" every whisper and gossip about how bad things are supposedly going. This would help the economy a lot and prevent mass hysteria from spreading.

Posted by: Al on January 23, 2008 at 2:11 PM | PERMALINK

Kevin,
I recommend that Inkblot not use Al as his economic advisor.

Posted by: optical weenie on January 23, 2008 at 2:13 PM | PERMALINK

I feel a bit sorry for all those counterfeiters who now have to drop the US $100 bill and retool for the Euro.
I've heard that the 500 Euro bill is already the big bill of choice.
Suitecase full of 500 Euro bills vs suitcase full of $100 bills.

Posted by: Bill Arnold on January 23, 2008 at 2:19 PM | PERMALINK

For a country that prides itself on the wonders of capitalism, it's humbling to see so many eagerly awaiting a socialist solution ("economic stimulus"). aka "rebate" aka "we really don't have a clue how to save our economy from a catastrophic contraction."

Hmmm.

Posted by: Tom Nicholson on January 23, 2008 at 2:20 PM | PERMALINK

Al is right. This is the fault of the liberal media.

Round up the usual suspects. Maybe if we shut down the newspapers, there will be no crisis at all! Woohoo!

Posted by: Bokonon on January 23, 2008 at 2:21 PM | PERMALINK

The problem as I see it is that US domestic demand is weakening. Let's say European domestic demand is still strong. Then US interes rates should fall while ECB rates should not. Of course, this will make the Euro stronger and the US$ weaker, which will increase our net exports to Europe (and decrease their net exports to us). Not necessarily a bad thing.

Posted by: pgl on January 23, 2008 at 2:24 PM | PERMALINK

Just think happy thoughts people! Rush says thats all you have to do! Just don't be negative and the economy will fix itslef. LOL!

Posted by: elmo on January 23, 2008 at 2:26 PM | PERMALINK

Well, consumer confidence is a big part of the economy. I watched some analysts on CNBC this morning discussing how the economy can be turned around. I was waiting for one of them to say, "Turn off CNBC, quit trying to react to every twitch and tick of the market, and go outside for a while." This isn't CounterStrike, it's Civilization.

Posted by: ArkPanda on January 23, 2008 at 2:27 PM | PERMALINK

The rumor I heard was another 0.5% drop at the regular fed meeting.

Sigh.

So much for an economy where Wall street trumps Main street and the intention is to keep the US dollars as the world's currency while falling farther and farther in debt.

I just heard a local Republican shill addressing some conservative club and spouting the same old lies - progressives want to expand government and raise your taxes. I wanted to shout at the radio "Expand government?! We aren't even paying for the government we already have. How about we restore the taxes on the rich and try to pay for the government we already have?"

Sheesh. Eight years of having total control of all three branches of government and all they can say is the same old, old rhetoric.

Posted by: Tripp on January 23, 2008 at 2:30 PM | PERMALINK

Al:

Shortly after Bush JR came into office he lowered taxes. A recession came soon after. Another one will soon be upon us. So using your logic we certainly shouldn't think about lowering taxes.

Shortly after Clinton took office he raised taxes on those earning over $150,000 a year. The greatest economic boom in history soon followed.

It appears that Mr Clinton got it just right, so maybe you should be advocating a return to the tax rates that Bush JR started with.

I don't need a media company to tell me that it is getting harder each week just to get by (and my wife and I earn well over $150,000 a year). I don't need a media company to tell me that my 401(k) has been savaged thruout this administration's tenure. I can see this all too well myself.

Posted by: Jay Perry on January 23, 2008 at 2:31 PM | PERMALINK

pgl,

The problem as I see it is that US domestic demand is weakening.

Well, yeah, but the underlying reason is stagnant wages and the middle class coping mechanisms (have women in the workforce, borrow against your home, and finally borrow against your credit cards) are all tapped out.

Posted by: Tripp on January 23, 2008 at 2:32 PM | PERMALINK

Parody Al, you are too good - it's almost impossible to tell the difference between you and the original.

Posted by: chasmrich on January 23, 2008 at 2:36 PM | PERMALINK

What Tripp just said.

But let's not overlook the chance that next week they'll bring the *other* rate they control into line with the one they just cut-- discount rate to match the overnight funds rate cut. It's what they did the last time, just a few months ago.

Posted by: Altoid on January 23, 2008 at 2:37 PM | PERMALINK

Since Bush has overseen the gutting of the American manufacturing base and the reckless selling out of the economy to the Arabs and Chinese, an insignificant tax cut is about as effective as pushing a wet rope. We are about to learn the very difficult lesson of what happens when you piss off your banker - they end up owning you.

The United States is like a rusty, hollowed out old hulk of an automobile - it looks like it should move, but there is nothing left inside to make it work. We need to imprison the people responsible for the destruction of the American economy, starting with Bush.

Posted by: The Conservative Deflator on January 23, 2008 at 2:46 PM | PERMALINK

If you're going to get rid of anything, get rid of those stock futures markets. They don't invest in companies, they just bet on the price. And all we heard from the Media was how the stock futures markets were "predicting a big drop in prices" on Tuesday.

Posted by: tomeck on January 23, 2008 at 2:52 PM | PERMALINK

Al says:

"First, during Bush Sr.'s term, he raised taxes. After that a recession hit. So one thing we should certainly not do is raise taxes like the Democrats recommend."

Problem is, recession started in June 1990 and the tax increase took effect in November 1990.

Posted by: Jose Padilla on January 23, 2008 at 2:55 PM | PERMALINK

Every single time Kevin posts about this and someone complains about inflationary pressures, remember that Kevin thinks it's complete crackpot territory to ask what might happen if we returned to a gold standard. Complete crackpot territory, so you're not even allowed to ask about it.

Posted by: jerry on January 23, 2008 at 3:04 PM | PERMALINK

There must be some pretty serious problems in the banking sector for the Fed to make a move like this in a supposedly increasingly inflationary environment- bank capital and interest rates have an inverse relationship. I don't know what to make of the ECB's decision, but they may simply move later as a secondary reinforcement if the Fed's moves prove to be insufficient.

Posted by: Yancey Ward on January 23, 2008 at 3:04 PM | PERMALINK

So don't ask about it, Jerry, because it IS complete crackpot territory.

Posted by: CN on January 23, 2008 at 3:19 PM | PERMALINK

There is going to be a LOT of anger and frustration when this thing really gets to unwinding in the next few months. People are going to be SO pissed over how this was allowed to happen. Even Samuelson has an op-ed in the WaPo today that makes him sound like John Edwards:

Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It's not as if these CEOs weren't compensated in all those years. If you leave your company a shambles -- with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders -- do you deserve a gold-plated send-off?

Posted by: Doc at the Radar Station on January 23, 2008 at 3:25 PM | PERMALINK

I wonder who dumped all the money into the market at the end of the day today? It could not have been just because of the profits reported by big oil, could it?

Posted by: elmo on January 23, 2008 at 3:26 PM | PERMALINK

What's the point of trying to save an economy based on greed and speculation?

I do think we all would benefit greatly by a barter-based reality.

We weep at the volatility of global markets yet don't have a clue how to damn the Fed and their vaporous attempts at inflationary stabilization.

Gold Standard it is. All else is pissing in the wind.

Posted by: Tom Nicholson on January 23, 2008 at 3:27 PM | PERMALINK

Oops, maybe I was too pessismistic.

The U.S. economy is ''resilient, its structure sound, and its long-term economic fundamentals are healthy. And our economy will remain a leading engine of global economic growth.'' -- U.S. Secretary of State Condoleezza Rice. 1/22/08

But then again, Saddam had weapons of mass destruction.!

Call me pissimistic.

Posted by: Tom Nicholson on January 23, 2008 at 3:35 PM | PERMALINK

How does giving us some ready cash for us to use paying credit card debt or buying more toys made in Asia help the American economy?

In the old days when the government engaged in a stimulus package we spent the money on a new car from Detroit or a new TV from Omaha or some other place, which meant that an American went back to work but now all our stuff is manufactured in a Chinese sweatshop and our software support is provided by India.

The only effective stimulus package would create high paying jobs right here in America.

Posted by: corpus juris on January 23, 2008 at 3:40 PM | PERMALINK

I say we start with the Rockefeller family. This is a great link

Posted by: Tripp on January 23, 2008 at 3:53 PM | PERMALINK

How can we go back to the gold standard if we don't have the gold?

Am I missing something?

Posted by: Tripp on January 23, 2008 at 4:00 PM | PERMALINK

That's what I warned about when I commented yesterday. The ECB is more worried about inflation, isn't going to move, and our dollar is going in the effing toilet.

Tripp, love the Trilateral Commission conspiracy angle in your link.

Al, I know we're in a recession because even you're weak today.

Goldbuggers: Gold has no intrinsic value. If you want a non-"fiat" currency (which the greed value for gold is, anyway), try oil, coal or uranium as the dollar's backing and stop slobbering over gold.

Posted by: SocraticGadfly on January 23, 2008 at 4:20 PM | PERMALINK

Hey Tripp, it's the "Wish we had gold" standard.

Posted by: slanted tom on January 23, 2008 at 4:21 PM | PERMALINK

CN >"...it IS complete crackpot territory."

You are far, far too polite.

Basing currencies on ANY physical item is handing control over human affairs to a small elite group, which specific one depends on the item you desire to base your currency on. Which back room decides things will depend on which small elite group controls said item.

The only reasonable solution is to base currencies on the physical world and behavior therein. The laws of biology, chemistry & physics point the way. No externalities allowed. No magic paper games and no hidden hands.

[homework]

The basis for doing this, as I have posted before, resides in the work of Eugene, Howard & Nicholas as well as Herman & Robert.

[/homework]

Shouting into the wind I am but the truth shall make you free if you act on it. Get moving !

"Our ignorance is not so vast as our failure to use what we know." - M. King Hubbert

Posted by: daCascadian on January 23, 2008 at 4:31 PM | PERMALINK
How can we go back to the gold standard if we don't have the gold?

Well, by stopping selling gold reserves and starting to buy more. Which is a really good deal if you, say, own a gold mine (or just lots of gold.)

For everyone else, not so much. Which is why (aside from the uncritical sheep that are just following), the big supporters of proposals to return to the gold standard are people who have huge current investments in gold. Even the talk of the possibility drives up (because of speculation) the value of their assets, so they are all for it.

Posted by: cmdicely on January 23, 2008 at 4:38 PM | PERMALINK

SocraticGadfly >"...Gold has no intrinsic value...."

That statement is incorrect but your following statement shows you are on the correct track.

ALL things physical have some intrinsic value based on the energy and matter necessary to manifest them. See the work of Eugene & Howard in my post above (4:31 PM). The basis of this approach is explained in "Environment, Power & Society" (1971) for those that want to investigate further & not just rant on and on about this critical topic.

We are all in this together, like it or not.

"Proof depends on who you are. We're looking for a preponderance of evidence, and some people need more of a preponderance than other people." - John Kantner

Posted by: daCascadian on January 23, 2008 at 4:57 PM | PERMALINK

Tripp,

The US Government holds over 4000 tons of gold alone. Private citizens in the US probably hold more.

As cmdicely points out, though, there will be objections raised to returning to a gold standard by those who would not actually own gold at that moment of the conversion. Since reversion to a gold standard is not something I expect to happen other than via collapse of the present system, I think such objections are meaningless, but if done by government action, private gold could be confiscated at a greatly reduced price in the new currency while setting a much higher price (or no price at all) for the reverse conversion. This has been done before.

Posted by: Yancey Ward on January 23, 2008 at 4:57 PM | PERMALINK

God will provide.

Posted by: dr sardonicus on January 23, 2008 at 5:36 PM | PERMALINK

George Soros on the current crisis:

The worst market crisis in 60 years

... Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral...

... Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy... The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception...

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced...

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves...

Everything that could go wrong did...

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

Posted by: JS on January 23, 2008 at 5:43 PM | PERMALINK

Wat does Soros know? He's one of these ivory tower academics whose never made a living in the real world.

Posted by: Phake Al on January 23, 2008 at 7:07 PM | PERMALINK

That's what I warned about when I commented yesterday. The ECB is more worried about inflation, isn't going to move, and our dollar is going in the effing toilet.-SocraticGadfly

Well, the American financial wizards are the one that baked up all those turdcakes (thanks Buford for that analogy!) and sold them to everybody all over the world, so now we are the self-appointed financial janitors.

Posted by: Doc at the Radar Station on January 23, 2008 at 7:10 PM | PERMALINK

In the last 25 years America went from creditor nation to debtor nation, theres simply no way this debt can continue as it is. Printing more dollars wont solve anything.

Posted by: Ya Know.... on January 23, 2008 at 7:42 PM | PERMALINK

Ya Know.... >"...Printing more dollars wont solve anything."

No, but if the Bureau of Printing and Engraving started to print Euros, Pound notes, Yen notes...

Hey, it`s all just some paper with ink on it.

"Stop quoting the laws to us. We carry swords." - Pompey

Posted by: daCascadian on January 23, 2008 at 8:56 PM | PERMALINK

We're not on a gold standard and a good thing too, but de facto it seems to me that our dollar has been backed by oil-- convertibility into oil, more exactly-- because oil is priced in dollars and payment has been settled in dollars.

$90 a barrel oil is the least painful way to devalue the dollar; I can't believe this is purely a supply-demand thing because supply is so clearly being manipulated. We're the most oil-dependent of the world's economies so we have to pay it no matter what. The Europeans and Japanese, at least, can afford the increase because oil is so much less important in their economies. And besides, they can convert strengthening currencies into depreciating dollars to settle the payments.

With those dollars held overseas they're being much more clever than I would have been. They're not just buying up assets, which can be seized after all. They're buying up banks and brokerages, which a capitalist economy can't run without.

Thanks, george.

Posted by: Altoid on January 23, 2008 at 10:43 PM | PERMALINK

Hey, Conservative Deflator!

Is it true, that you can't borrow your way to prosperity?

Posted by: osama_been_forgotten on January 24, 2008 at 12:58 AM | PERMALINK

Goldbuggers: Gold has no intrinsic value. If you want a non-"fiat" currency (which the greed value for gold is, anyway), try oil, coal or uranium as the dollar's backing and stop slobbering over gold.
Posted by: SocraticGadfly on January 23, 2008 at 4:20 PM | PERMALINK

Oil is also worthless.

Well, as a chemical feedstock, I suppose it's quite valuable.

But as an energy source, it's actually CRAP.

When you get FREE ENERGY all day long from the sun, forever, and compare that to having to:
1. Fight a war.
2. Pump the crap out of the ground.
3. Refine it.
4. Ship it.
5. Burn it in an engine to produce X kilowatts, one-time-only.
6. Deal with the ill effects of the waste products.

(calculate the economic effects of #1 and #6, and it may actually turn out that the VALUE of petroleum is a net-negative in the long run).

Now - SOLAR on the other hand;
You pay for the solar cell manufacturing, you set it out in the sun, and you collect X kilowatts, every day. . . for ever.

Economically, it's an apples and oranges comparison. Sure, some solar panels manufactured in the 1970's have "worn down" in efficiency rating. Yes, there's ongoing maintenance costs for wiring, and storage. Yes, there is a certain cost for the real-estate to host the solar collectors. But there is no danger of melting the polar ice caps, and destroying the planet's ability to support most life. Nor do you really need to fight wars over control of the sun.

So if energy is the input to all economic work, and thus the determiner of VALUE. . . and if Gold doesn't figure anymore, and if Oil doesn't figure - when compared to clean renewables - then exactly what is the basis for value in a future currency?

Unfortunately, probably Intellectual Property. Which is even MORE artificial and absurd than the modern concept of fiat currency.

Posted by: osama_been_forgotten on January 24, 2008 at 1:14 AM | PERMALINK

This seems like a good way to take some of the hurt out of those mortgage resets.

Posted by: bob h on January 24, 2008 at 7:21 AM | PERMALINK

Hey, it`s all just some paper with ink on it. - Posted by: daCascadian

Today's comments brought to you by the letter 'P'.


“The primary function of the government is - and here I am quoting directly from the U.S. Constitution - "to spew out paper."” - Dave Barry

'They [the US] get our oil and give us a worthless piece of paper.' - Iranian President Mahmoud Ahmadinejad

'It is unclear how much longer the world will trade Americans real goods for pieces of paper that the US economy cannot redeem with tradable goods and services.' - Paul Craig Roberts

"Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless." -- Ludwig von Mises

'The present gang of Wall Street warlords have transformed the world's most transparent and resilient markets into an opaque galaxy of complex debt-instruments and shady "off-balance sheets" operations. It's no better than a carnival shell-game.' Mike Whitney
Posted by: MsNThrope on January 24, 2008 at 9:40 AM | PERMALINK

Translation: We are sooooo screwed.
Posted by: Buford


"The United States is so broke, its people at every level from the Federal Reserve on down don't know whether to shit or go blind."
- James Howard Kunstler/'Fullblown Panic'/21Jan08

Posted by: MsNThrope on January 24, 2008 at 9:42 AM | PERMALINK

O_B_F,

then exactly what is the basis for value in a future currency?

Potable water, my friend. Isn't it obvious?

You should point out that ALL petroleum energy is solar - it was simply stored from back when the bacteria didn't yet know how to eat the stuff.

Solar is steady but it simply cannot compare to the reserves of solar that we used to have in oil.

Besides, back when we were burning wood, then coal (at least Europe was) and finally 'rock oil' we did not have the technology to harness solar.

But people were thinking about it. Who here has read the original "Frankenstein" book. What was used to animate the new life, the "monster?" It wasn't lightning - that was added later by Hollywood to make it spookier. Nope - it was solar power, concentrated by mirrors.

Posted by: Tripp on January 24, 2008 at 10:00 AM | PERMALINK

Tripp: I just heard a local Republican shill addressing some conservative club and spouting the same old lies - progressives want to expand government and raise your taxes.


gop: only suckers pay their bills

Posted by: mr. irony on January 24, 2008 at 12:01 PM | PERMALINK

I want markets to be well regulated. The Fed, however, is not regulating markets, it is a state agency setting interest rates. It is very bad for our economy and well being to have a Soviet style agency dictating interest rates to the market. The Fed is a command economy institution now, and it needs to be destroyed.

Posted by: Brojo on January 24, 2008 at 12:23 PM | PERMALINK




 

 

Read Jonathan Rowe remembrance and articles
Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

Advertise in WM



buy from Amazon and
support the Monthly