You Really Can't Make This Stuff Up

The former president is ready to enlist in the Israeli Army. Well, almost. There are conditions, of course. But his heart is in the right place. Really, it is. I mean, you don't think he's just lying through his teeth, do you?

The thing that is so sick about Clinton is that at the moment he says it, he actually believes it to be true.

The Last Line of Defense

Morgan Stanley's chief economist, Steven Roach, has a great column in today's Financial Times. Ordinarily, I would only link to it, but it's so good, I'll quote it in full:

In the end, it all boils down to the American consumer. It always does. Long the bedrock of the US economy, accounting for two-thirds of gross domestic product, America's high-spending households have become the world's consumer of last resort.

That is not all for the good. The excesses of the American consumer will, I believe, go down in history as one of the hallmarks of the Roaring Nineties. Recent statistical revisions reveal a 2001 recession deeper and longer than was previously thought. Less support from the consumer was the main culprit. But US households are still steeped in denial and the imbalances of the 1990s have yet to be fully corrected. The odds are there is more pain to come.

Personal consumption is driven by the combination of income and wealth effects. While empirical evidence suggests that income effects outweigh wealth effects by nearly 10 to 1, US consumers have not been shy about drawing incremental support from asset appreciation during the bull market. More recently, however, with stock markets sagging and residential property values rising, consumers have been tapping the home equity till.

There are structural pressures on consumption, too: a low saving rate, record debt, an ageing population and a lack of retirement security brought about by wider use of defined-contribution pensions.

Taken together, these factors suggest that the US consumer is about to be caught in a vice. Three powerful forces are at work: wealth destruction; a long-overdue US current account adjustment; and the coup de grâce: a negative income shock.

The carnage in the stock market speaks for itself: leading indexes have fallen to mid-1997 levels. Moreover, from 1984 to 2000 the annual return for the average fund investor was just 5.3 per cent, only about a third of the 16.3 per cent annualised return of the Standard & Poor's 500 over that period.

Residential property values have held up a good deal better, enabling consumers to shift their equity-extraction tactics to property. But there is good reason to believe the property cycle is about to turn as well. Courtesy of stronger-than-expected housing starts over the past couple of years, a supply overhang seems to be developing, especially if demand starts to weaken.

A current account adjustment should also put increased pressure on consumers. The massive current account deficit is an unmistakable symptom of a US economy that has long been living beyond its means. Here, too, the excesses of personal consumption growth are the key.

Between 1997 and 2000, real consumption growth averaged 4.6 per cent annually - a full percentage point faster than the 3.6 per cent average gains in real disposable personal income. With goods imports rising to a record 35 per cent of GDP by the end of the 1990s, this growth of excess consumption was the principal force behind the import-led deterioration in the US's foreign trade and current account balances.

Consequently, in my opinion, the coming current account adjustment cannot occur without a significant compression in consumer demand and a concomitant reduction in imports.

An income shock, if it occurred, would be the clincher. The trigger is likely to be another wave of redundancies and cost-cutting as companies at last face up to the seemingly chronic conditions of bloated structures and excess capacity.

US companies, battered by the stock markets, can hardly afford to breathe easy on the earnings front. With payroll costs accounting for 70 per cent of total business expenses, I do not see how another round of cost- cutting can occur without widespread redundancies.

Job cuts seem especially likely in the high-paid managerial ranks, where staffing has become excessive in recent years: managers now make up a record 25 per cent of the white-collar workforce in the US.

The outlook is strikingly reminiscent of the early 1990s. Then, a managerial shake-out kept the national unemployment rate rising for 15 months into a recovery. A decade later, the prospect of another white-collar shake-out conjures up the possibility of a second jobless recovery and below-trend growth in incomes and personal consumption.

It is at this point that politics and economics intersect. In their spare time, consumers are also voters. Elected politicians and appointed policymakers can be counted on to resist strongly any lowering of the US standard of living. Remember how, in early 1997, Washington resisted the initial efforts of Alan Greenspan, chairman of the Federal Reserve, to pop the equity bubble. It can be expected to respond with a similar outcry if the consumer bears the brunt of the long-overdue purging of America's bubble-induced excesses.

The pressure for reflationary economic policies can only intensify. Policymakers may conclude that the American consumer is too big to fail - setting up another in a seemingly unending string of moral hazards. Particularly disconcerting were Mr Greenspan's recent comments to Congress encouraging households to keep spending newly extracted equity from rapidly appreciating property values.

In the end, of course, there are no short cuts. Asset-based consumption growth and the excess leverage it spawns set any economy up for systemic risks and a serious shake-out. That, in turn, holds the potential for a significant reversal in public policy.

The domestic and geopolitical ramifications of a retrenchment by the American consumer would, admittedly, be profound. I worry most about Asia, which remains dependent on US-led external demand. Capitulation by the American consumer would threaten the region with a return to recession; political destabilisation could ensue. China would not be spared, either: its exports to the US surged at an annualised rate of 19 per cent in the first half of this year.

I suspect that the body politic in the US and around the world will do everything in its power to buttress America's last line of defence. Fiscal and monetary restraint could be cast aside, as could the deregulatory thrust of the past 25 years. Shocked? Do not be. In a post-bubble era, the macro usually gets turned inside out.

Kausfiles Slaps NYT

Mickey Kaus takes a couple of good whacks at The New York Times for its sleazy and dishonest journalism. The Cheney headline item is particularly sleazy, since the only "scrutiny" that Cheney is "under" is that of the New York Times. The Dresser acquisition didn't work out. It's not a crime.

Blogging

I'm going to back off the blog here for a while. I may take off the entire month of August. I may completely reconfigure the blog into a kind of on-line column. I'm not sure what I'm going to do. What I do know is that there is too much other work. I'm starting an ideation consulting company. I'm working on a couple of book proposals. I hope to be doing more work with my friends up at West Point. And Fast Company requires a lot of interviews, even though most of them don't get written up in the column.

The one thing I don't want the blog to become is tedious, which I think it is in danger of becoming. I feel Krugman-itis setting in. So I've decided to post lightly and think anew about what one might do with this incredible new medium.

Don't Short The Times

A letter from an equities analyst at one of the major investment firms:

You have a good blog, I'm checking it daily, but this whole thing about shorting NYT is silly-if anything, they are beginning to resemble a tabloid, with mistruths and half-truths blaring from the front page. The dumbing down of their news and pandering to constituencies may in fact increase circulation, even as it angers readers like yourself over the decline in quality. They will become like a more-left wing USA today-look at Gannett. If Sulzberger/Lewis can get their market cap near Gannett, they'd be doing alright.

Cooking Up a Catastrophe

That's what the "sharks" in the Bush Administration are doing, according to Patrick Tyler and Richard Stevenson of The New York Times. If the United States invades Iraq, oil prices will sky-rocket, the domestic (and perhaps the global) economy might crater, deficits will soar, the stock market will tank and all of the Middle East and Central Asia might become one huge conflagration.

Let's go to the text:

Already, the federal budget deficit is expanding, meaning that the bill for a war would lead either to more red ink or to cutbacks in domestic programs. If consumer and investor confidence remains fragile, military action could have substantial psychological effects on the financial markets, retail spending, business investment, travel and other key elements of the economy, officials and experts said.

When Andrew Sullivan first started banging the drum about the New York Times using its news pages as a platform to oppose the invasion of Iraq, I thought he'd had a bit too much sun up there in P-town. But he was right. The paper is letting its politics get in the way of its mission. Yet another reason to short the stock.

Harsh Cuts or Higher Taxes?

According to The New York Times, this is the choice Westchester County (NY) faces. It's not a particularly important story (unless you happen to live in Westchester, in which case you can be sure that your taxes are going up). But it's emblematic of liberal journalism at its worst. Let's go to the text:

The Westchester County budget director, Kathleen M. Carrano, recently laid out some of the options for county officials trying to close a $102-million budget gap in the coming year.

Lay off 402 employees and cut 58 vacancies.

Eliminate 914 day care slots for low-income families.

Close seven parks and four pools.

Raise bus fares by $2 a ticket, and golf fees by $3 a round.

By the end of the exercise, those cutbacks and others accounted for only $65 million in county expenses — leaving another $37 million to go. "We've been through these times before," she said. "They're painful, and they're difficult, and we always come through. But it will be a very different government than before."

Actually, Westchester County government is a complete waste of time and money. It could be eliminated (with essential functions being turned over to the State or out-sourced to private companies) and no one would miss it. Local (town and village) governance could also be consolidated, to cut the administrative cost of police, fire and EMT service. Total savings to Westchester County residents would probably exceed, on an ongoing basis, $125-200 million a year. And that is a conservative estimate, with no cuts in education costs (which are ridiculously high). This more than covers the roughly $102 million shortfall that Ms. Carrano bemoans above.

The whole premise of the story is false.

Nutty Quote Of The Week

From yesterday's New York Times lead editorial. Here we go:

The sharks circling around Mr. Powell include Vice President Dick Cheney; Defense Secretary Donald Rumsfeld and his deputy, Paul Wolfowitz; and the White House political director, Karl Rove. Mr. Rove is especially eager to bend policy to placate the Republican right.

What about Dr. Evil? Or is Dr. Evil Paul Wolfowitz?

No Longer Secret

The New York Times has another border-line story on US military planning for the invasion of Iraq. The question, obviously, is whether such a story should be published. Is it in the national security interests of the United States to have such a story published? (No) Does the publication of such a story give the enemy vital insight into the thinking of US military planners? (Yes) In the event that the US does decide on an "inside/out" strategy, does the publication of this story make the USAF's job more difficult? (Yes)

So why publish such a story?

Enron's Enablers

There were many, but today's Wall Street Journal excellent lead editorial rightly castigates Citi and JPMorgan Chase as the worst offenders.

Yes, it is probably true that what Citi and JP Morgan Chase did was "legal," but it was fundamentally bogus. Markets function in lock-step with transparency. The more transparency there is, the better the market functions. What Citi and JPMorgan Chase did was antithetical to the proper functioning of the markets. And what we will find, as more details of all these corporate scandals become public information, is that Citi and JPMorgan Chase were not the only enablers of Enrons.