Another Economic Thread

[sToNED_CAT]

[quote name='davos' post='1663102' date='Jan 26 2009, 16.21']remember that the depression didn't really hit its depths until 32 and 33. Now there is strong reason to believe that the hoover adminstration could have limited its effects if they had taken action, but like good free market disciples that they were, they waited for the market to correct itself. Now its hoped that taking early action will prevent the worst, which only time will tell. Of course assuming that the early 30's corresponds to our present situation and hence we can apply lessons learned then to bring about a different outcome is risky at best and pure folly at worst.[/quote]

Hoover took action. He was interventionist and he certainly wasn't just waiting for economy to correct itself. Even Roosevelt supporters later admited that New Deal was based on Hoover's programs.
He raised the taxes from 25% to more than 60%. If you think about it it's very similar to what Obama wants to do now...

[The White Wolf]

[quote name='anguy' post='1663548' date='Jan 26 2009, 21.28']Hoover took action. He was interventionist and he certainly wasn't just waiting for economy to correct itself. Even Roosevelt supporters later admited that New Deal was based on Hoover's programs.
He raised the taxes from 25% to more than 60%. If you think about it it's very similar to what Obama wants to do now...[/quote]

From what I have heard recently the package has tax cuts for the middle classes and small businesses and Obama is in favor holding off on repealing the Bush tax cuts and instead letting them expire in 2011.

[sToNED_CAT]

[quote name='The White Wolf' post='1663582' date='Jan 27 2009, 00.13']From what I have heard recently the package has tax cuts for the middle classes and small businesses and Obama is in favor holding off on repealing the Bush tax cuts and instead letting them expire in 2011.[/quote]

He also wants to get rid of ceiling for payroll taxes - that means defacto 14% higher income taxes for rich plus increased rate because of expired tax cuts and the top tax rate can easily hit 55% without state income taxes on top of it. Sure maybe they will be able to afford it, but it doesn't mean it will be good for economy (or federal budget too when they start to avoid paying taxes more than today).

[Nuri Snow]

[quote name='anguy' post='1663644' date='Jan 27 2009, 07.43']He also wants to get rid of ceiling for payroll taxes - that means defacto 14% higher income taxes for rich plus increased rate because of expired tax cuts and the top tax rate can easily hit 55% without state income taxes on top of it. Sure maybe they will be able to afford it, but it doesn't mean it will be good for economy (or federal budget too when they start to avoid paying taxes more than today).[/quote]

As I don't live in the U.S.: What does "ceiling for payroll taxes" signify? Is there a fixed maximum amount of taxes you pay on what you earn?

Upping taxes for the rich does not hurt consumption as much as upping it for the lower and middle classes; and usually, rich people have good tax advisors and therefore optimize tax avoidance whatever the state does.

Edit: @Raidne & SHP: I hated unemployment too, it disintegrates your daily routines, if you aren't extremely disciplined. Good luck with your job search.

[Bill Foote]

[quote name='Nuri Snow' post='1663765' date='Jan 27 2009, 07.15']As I don't live in the U.S.: What does "ceiling for payroll taxes" signify? Is there a fixed maximum amount of taxes you pay on what you earn?[/quote]
FICA and something else are straight % from both you and your employer (I think 6-7% total from you and your employer). Self-employed means you pay both parts, which hella sucks. It currently caps around $100k income, don't know if that's a per job or per person basis, but that's the ceiling (Obama campaign was talking about raising to $250k or somewhere around there...don't remember specifically why or if a [i]good[/i] reason was even given).

[ztemhead]

herein I shall respond only to the thread title and sub title, and call into question the actual definition of "recession" and the common understanding of it.

common understanding- "I can afford to buy less shit for me and mine"

definition- "two quarters of neg. GDP"

hence this leads to all sorts of bullshit stats like those I've been hearing, and those I've been reciting; me being somewhat trained in this. most common one is, "unemployment is a lagging indicator"

while this is true, the reductionist, cost-conscious media doesn't bother to follow up with what it is lagging, they also equate the classical B-school definition of "recession" with that of national misery, the "I can afford to buy less shit for me and mine" definition. While I deplore the constant 100% negative tone of economic news out there today, even more disheartening do I find the erroneous leaps of logic perpetrated that higher unemployment is a "lagging indicator" of some good outcome which has some nebulous benefit, right around the corner for us all.

"lagging indicator" of what? What tangible benefit can be gleaned for a family of four living in South Phoenix by their main earner being laid off today?

[Shryke]

[quote name='Ser Hot Pie' post='1663235' date='Jan 26 2009, 17.36']I keep very irregular hours. I sleep when I'm tired, which sometimes is 4 in the afternoon and sometimes is 4 in the morning.[/quote]

Hey, you sound just like me!

Hi5???

[ThinkerX]

Welcome back Ztem! How goes the job hunt? For what little it might be worth, I do wish you luck. Perhaps you should look into the 'Alternative Energy' thing for a job of some sort as that is likely to get very big in the next few years.

As to the technical definition of 'recession', once the professional economists finally stopped lying a few months ago, they finally fessed up to what most of us have known for a while: the US, at least, has been in a state of 'Recession' for a year now (or longer). The figures claiming otherwise probably fall into the 'deliberate fabrication' catagory.

Meanwhile, the nutjobs are starting to mull over an article which claims the big banks were kept afloat during the current crisis at least partly through illegal drug money:

[url="http://www.doomers.us/forum2/index.php?PHPSESSID=afda24eb6ce3dd9c586573779d824328&topic=36776.0"]http://www.doomers.us/forum2/index.php?PHP...p;topic=36776.0[/url]

[Swordfish]

[quote name='ztemhead' post='1665067' date='Jan 27 2009, 23.04']herein I shall respond only to the thread title and sub title, and call into question the actual definition of "recession" and the common understanding of it.

common understanding- "I can afford to buy less shit for me and mine"

definition- "two quarters of neg. GDP"

hence this leads to all sorts of bullshit stats like those I've been hearing, and those I've been reciting; me being somewhat trained in this. most common one is, "unemployment is a lagging indicator"

while this is true, the reductionist, cost-conscious media doesn't bother to follow up with what it is lagging, they also equate the classical B-school definition of "recession" with that of national misery, the "I can afford to buy less shit for me and mine" definition. While I deplore the constant 100% negative tone of economic news out there today, even more disheartening do I find the erroneous leaps of logic perpetrated that higher unemployment is a "lagging indicator" of some good outcome which has some nebulous benefit, right around the corner for us all.

"lagging indicator" of what? What tangible benefit can be gleaned for a family of four living in South Phoenix by their main earner being laid off today?[/quote]


I heard a commentator on the radio yesterday say without shame that we've been in a recession for 18 months.

True story.


[quote name='El Chico' post='1663517' date='Jan 26 2009, 18.40']Ahmadeinajad has a fan? Why is he always so pissed off, then? :P



Hmmm....the consensus seems to be that the worst is yet to come. To draw on the board's undoubted wisdom, what should I invest in at the moment to best profit from society's woes?[/quote]


Bullets.

[Altherion]

It is interesting how macroeconomic numbers can sometimes obscure the scale of what exactly happened. For example, a 2% increase in unemployment doesn't really reflect the fact that [url="http://news.yahoo.com/s/nm/20090202/ts_nm/us_china_economy_migrants_sb"]20 million people in China lost their jobs[/url].
[quote]About 20 million Chinese rural migrants have lost jobs as the nation's economic growth has faltered, a senior official said on Monday, promising policies to boost incomes and a softer approach to potential unrest.[/quote]
These are migrant workers so it's not actually as bad as it sounds (they have some work back where they come from), but the scale... that's more people than the total currently unemployed in the US.

[Ser Scot A Ellison]

Okay is it true that China has stopped buying U.S. T-Bills? If so how do we fund the "stimulus package" without kicking off inflation? Would the Fed raise interest rates to make the T-bills more inticing to other investors?

[Altherion]

I don't think selling T-Bills is a problem at the moment. There are precious few places where the wealthy can put a substantial amount of money (I mean amounts which exceed the thresholds of FDIC insurance and its foreign counterparts) and be reasonably confident that it stays put. A bank can look like it is too big to fail today, but if tomorrow the government says "No more bailouts for Wall Street" or decides to make an example and then you're left with pennies on the dollar. This can happen with the US government as well, but if that falls through, then the resulting shakeup will probably be such that it doesn't really matter where you had invested.

[Iskaral Pust]

[quote name='Ser Scot A Ellison' post='1671104' date='Feb 2 2009, 12.22']Okay is it true that China has stopped buying U.S. T-Bills? If so how do we fund the "stimulus package" without kicking off inflation? Would the Fed raise interest rates to make the T-bills more inticing to other investors?[/quote]

There are some fears that the US govt will struggle to sell all these bonds, bills and notes at the recent low interest rates to fund the deficit we have right now, never mind the growth in deficit due to the new stimulus package. This is being reinforced by Germany's difficulty with a recent govt bond auction, by China's declining demand for foreign securities and by the relatively attractive yields in investment grade corporate bonds that have seen a lot of buyers in the past month or two (taking away capital that might otherwise be spent on govt bonds).

As a result, we have already seen long Treasury yields go up by ~60bps in January, reducing the price investors are willing to pay for govt bonds, and increasing the cost to finance the deficit.

Higher interest rates are not inflationary though. They reduce inflation by increasing the cost of credit and therefore reducing the rate of spending on credit. Inflation would be stimulated just by the increase in the money supply associated with this fiscal deficit. Higher interest rates driven by that fiscal debt would be the natural mechanism to rein in that inflation.

The other twist in this tale is that the Fed has stated that they want to keep the 10 year Treasury yield low in order to keep mortgage interest rates low and stimulative (which are generally tied to the 10 year Treasury yield), and that they are willing to buy 10 year Treasury bonds to keep down the yield. This would present some interesting book-keeping whereby the Fed "prints" money to fund govt debt, putting it on an already bloated balance sheet. That's obviously not the same as receiving money from external investors, domestic or foreign, and repaying them with interest. It should weaken the dollar.

[Altherion]

[quote name='Iskaral Pust' post='1671349' date='Feb 2 2009, 21.18']It should weaken the dollar.[/quote]
Which sucks for me, but is great for Ford and GM because if the dollar was weaker, they wouldn't have to [url="http://www.bloomberg.com/apps/news?pid=20601103&sid=aGZGviRlYemQ&refer=us"]raise prices like this[/url].

[The Progressive]

If the bonds won't sell, the Fed could always print more money, like they have been.

[ThinkerX]

The crew at the 'Implode' site and folks elsewhere are of the view that Obama's stimulus package will fail.

[url="http://www.informationarbitrage.com/2009/02/you-the-us-taxpayer-cant-handle-the-truth-wrong.html"]http://www.informationarbitrage.com/2009/0...ruth-wrong.html[/url]

[quote]The Wall Street Journal just came out with a piece outlining a multiple-choice hairball of options which Treasury Secretary Geithner is considering. The sad truth is this: his plan will fail. Why? Excessive complexity. For a plan of this magnitude to work, it needs to be straight-forward, easy to understand, clearly communicated, brutally transparent, and ruthlessly executed. The chance of the Treasury and Congress arriving at a plan that meets these criterion appears to be approaching zero. Further, the plan is still missing a few key components, such as transparency of bank asset values and avoiding the forced requirement to lend money, flying in the face of rational decision-making and market forces.

But wait, it gets even better. Consider this comment from Rep. Brad Miller, a Democrat from North Carolina and a member of the House Financial Services Committee:

"If we had regulators go in an examine the books like we did at Fannie Mae and Freddie Mac a great number of our systemically important financial institutions could be insolvent."

And this is exactly what Mr. Miller and Treasury Secretary Geithner want to avoid; the transparency necessary to figure out exactly where the industry stands, in order that a proper prescriptive can be put in place to begin real healing, not some illusory band-aid that will only set us up for greater suffering down the road. For a member of the House Financial Services Committee to make a comment like this only highlights the disconnect between the politicians and the real problem: dealing with the systemic insolvency that threatens our country. Mr. Miller would have you believe that putting our collective heads in the sand is a better approach. He is just so wrong.

He knows the problem is there, but is unwilling to face into the truth. He thinks we can't handle it. Reality is, we can handle the truth: it's he and his scared-out-of-their-minds Congresspeople that can't handle the truth. We need some different people making the big decisions. They appear too big and too important for our small-minded Congresspeople to make.[/quote]

On a somewhat more disturbing note, we have the insurance companies engaging in the exact same sort of stupidity that led to the collapse of half of wall street a few months back:

[url="http://optionarmageddon.ml-implode.com/2009/02/08/with-allstate-youre-not-in-good-hands/"]http://optionarmageddon.ml-implode.com/200...-in-good-hands/[/url]

[quote]Allstate, the big insurer, last week declared that despite unprecedented trouble in the markets, it remains financially strong.

But tucked deep inside a company report is evidence that Allstate changed its bookkeeping last year in ways that improve its financial appearance.

One accounting change added $347 million. Another delivered a year-end boost of $365 million.

Allstate’s actions illustrate a broader risk to investors, policyholders and people looking for insurance. Insurers have been asking regulators to let them operate with thinner financial cushions or to pad those cushions with assets they could not otherwise count. For anyone trying to assess the companies’ financial strength, the changes can cloud the picture. That could make it harder for people to make sound decisions when buying policies or annuities to protect their families.[/quote]

[quote]The whole point of insurance regulation is to force insurers to keep adequate capital on hand in case they have to pay claims. The insurance business is not unlike the banking business in that companies maximize profit by taking risk with the capital provided by their customers. In banking, depositors fork over their savings to banks for safe-keeping while the banks put the cash to work making loans. With insurance, policy-holders pay premiums to insurers to protect them from loss while the insurers put the cash to work to make a profit in the market.


But the banks and insurers are taking risks with your money. If the bank makes a bunch of bad loans, then your deposits disappear. If an insurance company makes too many crappy investments, they’ll have nothing left over to pay hurricane, car accident or life insurance claims.

Theoretically, banks/insurers should keep reserves on hand for tough times. But while cash in a vault may protect depositors and policy-holders, there’s no return in it for the firm. So they will seek to put as much capital to work as possible.[/quote]

[quote]Like banks who are eating losses on crappy loans made during the housing bubble, insurers are now facing huge losses on investment portfolios chock full of junk. Take a look at Allstate’s tangible leverage ratio. As of Q4 they had $130 billion of tangible assets on the balance sheet [excluding $4.8 billion of goodwill and deferred tax assets]. The company’s tangible common equity was a mere $7.9 billion, for a tangible leverage ratio of 16.5x.** [= $130 / $7.9 = 16.5]. As of Sept 30th, the ratio was 10.1x. That means Allstate’s equity cushion to protect against asset losses declined 60% in only 3 months.

So what are the assets Allstate has on its books that may be subject to continued investment losses? Among them are approximately $20 billion of “mortgage-backed securities…commercial mortgage-backed securities…asset-backed residential mortgage-backed securities…[and] asset-backed collateralized debt obligations.” Toxic trash all of it.

It appears Allstate has already taken steep writedowns on this portfolio of assets, but my bet is that the writedowns are likely to continue as the economy deteriorates.

Here’s my question: are you “in good hands with Allstate” if the company’s capital is fast approaching zero? Clearly not.

But instead of taking stiff measures to rebuild that capital cushion, eliminating the shareholder dividend for instance, Allstate is shopping for sympathetic regulators that will help it hide its deteriorating financial condition[/quote]

[quote]By suddenly changing the way Allstate calculates its regulatory capital, allowing the company to include deferred tax assets, the Illinois insurance regulator is putting all of Allstate’s policy-holders at risk, not just those in Illinois.***

As the Fannie/Freddie episode made abundantly clear, deferred tax assets ARE NOT TANGIBLE CAPITAL. If Allstate suddenly faces huge losses because an earthquake hits San Francisco or because it has to take additional writedowns on toxic assets, it can’t use deferred tax assets to meet its obligations![/quote]

So...it seems a future gargantuan bailout of the insewerance industry as a direct result of their current complete stupidity seems at least likely.

[ThinkerX]

About sums up the stimulus deal, I guess:

[url="http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html"]http://www.washingtonpost.com/wp-dyn/conte...9020100154.html[/url]

[WarGalley]

I thought this was petty amusing: [url="http://thrandur.net/chitchat/two-cows-economics-world-iceland/"]2 Cows economics[/url].

Also, the [url="http://clusterstock.alleyinsider.com/2009/2/aig-implodes-the-two-cows-version"]2 Cows explanation for why AIG needed to be nationalized[/url].

[quote]You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.[/quote]