Interesting Take on the Economy.

[otterinbham 0]

http://www.timesonline.co.uk/tol/comment/c...icle3872659.ece

I've been reading this guy for five years now. He's almost always spot on. If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

May 5, 2008

Credit crunch fails to produce the feared economic catastrophe

Anatole Kaletsky: Economic View

So the sky did not fall in. While the Chicken Littles of the world economy, led by Gordon Brown, George Soros and Warren Buffett, may still repeat mechanically the IMF’s surprising judgment that the world - especially America - faces its worst financial crisis since the 1930s, their hearts are no longer in it. Mr Brown, after last week’s election woe, can no longer blame the world economy for his political failure. Mr Buffett, having speculated against the dollar for years and declared that credit derivatives are financial weapons of mass destruction, has finally begun to find attractive opportunities to invest his money and told his shareholders last week that the worst of the credit crisis was probably over. Mr Soros, in his forthcoming book, The New Paradigm for Financial Markets, states unequivocally: “We are in the midst of a financial crisis the likes of which has not been seen since the Great Depression.” But after making $3 billion for Quantum Endowment Fund by anticipating last year’s bear markets, he is now hedging his bets, as is only to be expected from the world’s most successful hedge fund manager. “I may well be proven wrong,” he told The New York Times last week, adding that he might yet again turn out to be “the boy who cried wolf”.

The main explanation for all this revisionism is simply the change in facts. The near-unanimity of a few weeks ago that the US was sinking into a deep, prolonged recession has been dispelled by recent data on jobs, GDP, business confidence, industrial orders and consumer spending – all telling a consistent story that although the US economy weakened abruptly last autumn, it is not nearly as weak as at the start of previous recessions, and that there have been no signs of further deterioration since February in the key economic variables apart from house prices.

Moreover, the time of greatest risk of a US recession is almost past, since tax rebates worth more than 1 per cent of disposable income will start landing in US taxpayers’ bank accounts from this week, almost guaranteeing that consumer spending will pick up, at least temporarily, in the year’s second half. And just as the stimulus to consumption from tax cuts runs out, benefits of the Fed’s big cuts in interest rates should start to be felt fully in the first few months of 2009. So, it is increasingly likely that the US economy will not experience even a minor recession, at least as defined in the official statistics, as a result of the credit crunch last year.

Even more important than the relatively benign statistics is the news from the financial markets. Signs that the worst of the banking crisis may be over appeared to be confirmed by rallies in financial markets worldwide last week. Financial markets’ better mood is partly related to stabilisation in US economic statistics. But mainly it is a consequence of radical steps by governments and central banks all over the world since it became clear that private financial markets would not resolve the credit crunch.

As a result of these government interventions, culminating in the Bear Stearns rescue and nationalisation of Northern Rock, one financial market after another has started to return to something nearing normality. Straight after the Bear rescue, there was a narrowing of credit spreads on top-quality securities such as government-backed mortgages in the US. Next, two weeks after liquidity returned to credit markets following the Bear rescue, the yield on US Treasury bonds stopped collapsing and reversed, implying that markets no longer saw need for panic cuts in US interest. In turn, the steepening of the US yield curve that followed the return of more normal conditions to the bond market helped to put a floor under the dollar two weeks ago. Finally – though this is still a more tentative conclusion - dwindling fears of a freefall in the dollar seemed to take some of the wind out of speculation in commodities and oil.

Of course, it is impossible to be sure of the sustainability of improvement in the four markets that have been causing all the trouble - credit, bonds, currencies and commodities. But what seems fairly clear is that the real economy of jobs, profits, investment and consumer spending in America has so far suffered almost entirely as a direct result of weaker housebuilding and construction employment – and not in response to the negative wealth effects and bank-credit contractions in the nightmare scenarios of Wall Street analysts.

To pessimists, this means that the worst is still to come, since the real consumer reaction to falling housing wealth and bank deleveraging has not even started. An alternative view more consistent with economic theory and historic experience was suggested by the Bank of England’s Stability Report last week: “Credit markets are likely to overstate significantly the losses that will ultimately be felt by the financial system and the economy as a whole . . . They will exaggerate to an even greater extent the potential damage to the real economy.”

As noted in that report, the pricing of many bonds and credit derivatives in financial markets already assumes bigger losses from US sub-prime mortgages and other dubious assets than anything implied by plausible worst-case scenarios. This is true of highest-quality credits, with AAA and AA ratings, whose unexpected collapse has done the greatest damage to bank balance sheets. The Bank’s sums suggest that the highest-quality mortgage-backed bonds are now undervalued by 25 per cent (see chart). It now seems that, contrary to the Chicken Little rantings of many analysts in the City and Wall Street, these bonds face almost no risk of serious defaults even in the event of far bigger falls in US housing prices than any that have happened so far.

Indeed, the Bank’s calculations suggest that present pricing of mortgage-related bonds in financial markets has probably overstated the future losses on US sub-prime lending by about double.

None of this means that the credit crunch has been a storm in a teacup, as I originally thought. Changing attitudes to borrowing and lending will have a dramatic impact on the world economy, reducing long-term growth in consumption in economies that have been driven by powerful housing and mortgage cycles, including Britain, Spain and France. As Mr Soros says in his book, global growth can no longer rely on these economies and must depend on consumption and infrastructure investment in China, India and other emerging markets. These are momentous changes, and while they are quite far advanced in America, they have hardly started in Britain and Europe. But if economic news continues to deteriorate for a while - as it almost certainly will in the UK – investors and business should realise that the really important story in the world economy today is not the threat of a sudden collapse in the financial system, but a gradual long-term adjustment in the world economy in favour of emerging markets. This may at times be an uncomfortable process – but the sky will not fall in.

[DKW 86 7,442]

Good stuff otter, I still want a long dinner and a drink with you some day. I swear you are the most interesting poster here most days.

[otterinbham 0]

Why thanks for the kind words...But it's always interesting to see what experts say who don't have a dog in the fight, you know? It seems like most of the columnists in this country right now have a pronounced agenda one way or the other.

[RunInRed 16,492]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

[otterinbham 0]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Sigh. I love how you have to resort to the name calling every time somebody doesn't buy into your oddball, messianic vision of Barack Obama.

Iraq, dumb as it is, is about #4 or #5 down on the list of public priorities at the moment. The prevailing public opinion on Iraq is that we'd rather not be there, but the situation has stabilized. If it were really top of mind, we would be seeing mass demonstrations a la the late 60s and early 70s. As far as gas prices are concerned, it's a commodity that is very high right now. But I don't think that's going to drive the election.

Speaking of gas, I'm fairly sure that Obama will run out of it about mid-October. What Obama supporters don't seem to understand is that a great deal of his popularity stems from the fact that he is tilting at a deeply divisive politician who had a huge advantage going into the primaries. Even among Hillary Clinton supporters (Yes, there are a few), you'll find very few who are actually enthusiastic about her candidacy. Their support is more of a resigned choice, picking the more palatable of two mediocre candidates.

As I said in a previous post, strip away the smooth veneer, and Obama is basically an unseasoned party hack who sounds as if he represents a kinder, gentler Johnson administration. However, the Great Society program was a demonstrable failure, as was Keynsian economics, and people will grow suspicious once they start paying attention to what the guy wants to do if he actually made it into the Oval Office. For if the economy does indeed gain traction in 3Q, then nobody is going to want to quell the momentum by electing a president with a radically different economic agenda.

At least McCain is a seasoned party hack who probably won't jack people's taxes through the roof. People will understand this and turn right come crunch time.

[RunInRed 16,492]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Sigh. I love how you have to resort to the name calling every time somebody doesn't buy into your oddball, messianic vision of Barack Obama.

Iraq, dumb as it is, is about #4 or #5 down on the list of public priorities at the moment. The prevailing public opinion on Iraq is that we'd rather not be there, but the situation has stabilized. If it were really top of mind, we would be seeing mass demonstrations a la the late 60s and early 70s. As far as gas prices are concerned, it's a commodity that is very high right now. But I don't think that's going to drive the election.

Speaking of gas, I'm fairly sure that Obama will run out of it about mid-October. What Obama supporters don't seem to understand is that a great deal of his popularity stems from the fact that he is tilting at a deeply divisive politician who had a huge advantage going into the primaries. Even among Hillary Clinton supporters (Yes, there are a few), you'll find very few who are actually enthusiastic about her candidacy. Their support is more of a resigned choice, picking the more palatable of two mediocre candidates.

As I said in a previous post, strip away the smooth veneer, and Obama is basically an unseasoned party hack who sounds as if he represents a kinder, gentler Johnson administration. However, the Great Society program was a demonstrable failure, as was Keynsian economics, and people will grow suspicious once they start paying attention to what the guy wants to do if he actually made it into the Oval Office. For if the economy does indeed gain traction in 3Q, then nobody is going to want to quell the momentum by electing a president with a radically different economic agenda.

At least McCain is a seasoned party hack who probably won't jack people's taxes through the roof. People will understand this and turn right come crunch time.

I was not name calling but rather playing on the political adage "It's the economy, stupid."

I think you are wrong about voters' priorities - every poll I've seen...has Iraq as the #1 or #2 issue with about 70% of the population not liking this "stabalized" situation you refer to. The other big issue is obviously the economy...but not from the macro terms you think of. People vote with their wallet and that means they view the economy through lense of gas prices, cost of a gallon of milk, etc.

You can say whatever you want to about Obama but this whole "he will raise your taxes" nonsense has been debunked in numerous threads. That is of course, unless you make more than 250k. I think he will settle upon a cap gains tax at about 20% and increase the cap on SS to 250k with a break clause between 106 and 250. Of course, no one ever mentions the middle class tax cuts he has proposed including a 1k earned income credit to offset the payroll tax. Further, no one ever mentions that his proposals are paid for, unlike McCain, who still hasn't told us how he plans to pay for his economic plans, including the latest "gas tax holiday."

[otterinbham 0]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Sigh. I love how you have to resort to the name calling every time somebody doesn't buy into your oddball, messianic vision of Barack Obama.

Iraq, dumb as it is, is about #4 or #5 down on the list of public priorities at the moment. The prevailing public opinion on Iraq is that we'd rather not be there, but the situation has stabilized. If it were really top of mind, we would be seeing mass demonstrations a la the late 60s and early 70s. As far as gas prices are concerned, it's a commodity that is very high right now. But I don't think that's going to drive the election.

Speaking of gas, I'm fairly sure that Obama will run out of it about mid-October. What Obama supporters don't seem to understand is that a great deal of his popularity stems from the fact that he is tilting at a deeply divisive politician who had a huge advantage going into the primaries. Even among Hillary Clinton supporters (Yes, there are a few), you'll find very few who are actually enthusiastic about her candidacy. Their support is more of a resigned choice, picking the more palatable of two mediocre candidates.

As I said in a previous post, strip away the smooth veneer, and Obama is basically an unseasoned party hack who sounds as if he represents a kinder, gentler Johnson administration. However, the Great Society program was a demonstrable failure, as was Keynsian economics, and people will grow suspicious once they start paying attention to what the guy wants to do if he actually made it into the Oval Office. For if the economy does indeed gain traction in 3Q, then nobody is going to want to quell the momentum by electing a president with a radically different economic agenda.

At least McCain is a seasoned party hack who probably won't jack people's taxes through the roof. People will understand this and turn right come crunch time.

I was not name calling but rather playing on the political adage "It's the economy, stupid."

I think you are wrong about voters' priorities - every poll I've seen...has Iraq as the #1 or #2 issue with about 70% of the population not liking this "stabalized" situation you refer to. The other big issue is obviously the economy...but not from the macro terms you think of. People vote with their wallet and that means they view the economy through lense of gas prices, cost of a gallon of milk, etc.

You can say whatever you want to about Obama but this whole "he will raise your taxes" nonsense has been debunked in numerous threads. That is of course, unless you make more than 250k. I think he will settle upon a cap gains tax at about 20% and increase the cap on SS to 250k with a break clause between 106 and 250. Of course, no one ever mentions the middle class tax cuts he has proposed including a 1k earned income credit to offset the payroll tax. Further, no one ever mentions that his proposals are paid for, unlike McCain, who still hasn't told us how he plans to pay for his economic plans, including the latest "gas tax holiday."

If McCain simply says, "I will wield the Veto stamp aggressively, far more than my predecessor," he will probably win in a landslide. For, as I have stated in many a post recently, if Federal spending had just tracked the inflation rate over the past seven years, we would be looking at massive surpluses. That is a vindication of the original economic policy of the Bush administration--before W went completely off the rails and started approving every half-baked program that emerged from the loins of Congress.

Again, increasing capital gains taxes by 33% from their current levels is an enormous jump, one that will have a major impact on corporate profitability and will put a chill on capital transactions and the trade of equities, all to fulfill some nebulous idea of "fairness." Further, since the tax burden of middle class Americans has been markedly lowered since the end of the Clinton administration, why do they need a $1000 tax credit now? After all, if you want to help the middle class, you would do far better by sending out a pamphlet to every household in America titled, "Stop Running Your Household Finances Like A Complete Idiot." For discretionary spending is what's causing the pressure on middle class families today, far more than inflation or the mild economic slowdown we're currently experiencing.

[BamaGrad03 0]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Must be great to be able to change your position at will.

A month ago it was the economy, stupid. Now that the economic indicators agree what what Otter and myself have been saying since Jan...NOOOOOOW it's Iraq and gas prices?

Gas prices that you can in NO way blame on the president?

Hillary and Obama have been preying on (and praying for) perceived economic downturn. The mass media jumped on board because they heard the rallying cry. Every Warren Buffet they polled in the street, and every sob story the ran led us to believe we were going to have to make our own clothes and eat drywall for dinner.

Now that it's not the case...we just "forget" about the economy. Just like the 5 year block of time you've purged from your memory where the dow was on fire, jobs were on fire, consumer spending and GDP were on fire...

[RunInRed 16,492]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Must be great to be able to change your position at will.

A month ago it was the economy, stupid. Now that the economic indicators agree what what Otter and myself have been saying since Jan...NOOOOOOW it's Iraq and gas prices?

Gas prices that you can in NO way blame on the president?

Hillary and Obama have been preying on (and praying for) perceived economic downturn. The mass media jumped on board because they heard the rallying cry. Every Warren Buffet they polled in the street, and every sob story the ran led us to believe we were going to have to make our own clothes and eat drywall for dinner.

Now that it's not the case...we just "forget" about the economy. Just like the 5 year block of time you've purged from your memory where the dow was on fire, jobs were on fire, consumer spending and GDP were on fire...

As I said above, come November, people will vote with their wallets, not with theological macro economic views that sound good but don't solve any problems.

[otterinbham 0]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Must be great to be able to change your position at will.

A month ago it was the economy, stupid. Now that the economic indicators agree what what Otter and myself have been saying since Jan...NOOOOOOW it's Iraq and gas prices?

Gas prices that you can in NO way blame on the president?

Hillary and Obama have been preying on (and praying for) perceived economic downturn. The mass media jumped on board because they heard the rallying cry. Every Warren Buffet they polled in the street, and every sob story the ran led us to believe we were going to have to make our own clothes and eat drywall for dinner.

Now that it's not the case...we just "forget" about the economy. Just like the 5 year block of time you've purged from your memory where the dow was on fire, jobs were on fire, consumer spending and GDP were on fire...

As I said above, come November, people will vote with their wallets, not with theological macro economic views that sound good but don't solve any problems.

In other words, people vote based on how they feel about the economy. Of course, if the economy is moving ahead at a stronger pace, just like the article asserts, then they will be voting with a greater sense of economic optimism than they feel right now--after all the election is six long months away. That means you just made my argument for me.

Now, the second part of your statement is interesting, aside from from your strange statement about "macro economic views that sound good but don't solve any problems." You must be young, because you haven't endured a real recession. By that, I mean a serious recession with double-digit unemployment, double-digit inflation, and actual shrinkage of the GDP of 3-5%.

Instead, what you're seeing is essentially an economic slowdown to a growth rate of approximately .6%. Heck, the national unemployment rate hasn't even climbed much past 5%, a rate that Democratic economists once supposed was impossible to attain. All due to these macroeconomic principles that you say "don't solve any problems." Compared to the wild economic fluctuations we experienced courtesy of halfwits such as Galbraith, $4 for a gallon of gas is nothing much to worry about.

So what you're really saying is that the Democratic Party isn't interested in sound economic principle. It's more interest in just running out and doing a bunch of stuff, wrecking the 28 years of careful financial management that Paul Volcker began and Alan Greenspan continued--all to get temporary traction in the polls. Boy, that's a really convincing argument.

[Tigermike 3,055]

If what he says is true, it could be far rougher sledding for Obama or Clinton come November, chiefly because the economy will be a far better place.

It's Iraq, It's gas prices, stupid.

Must be great to be able to change your position at will.

A month ago it was the economy, stupid. Now that the economic indicators agree what what Otter and myself have been saying since Jan...NOOOOOOW it's Iraq and gas prices?

Gas prices that you can in NO way blame on the president?

Hillary and Obama have been preying on (and praying for) perceived economic downturn. The mass media jumped on board because they heard the rallying cry. Every Warren Buffet they polled in the street, and every sob story the ran led us to believe we were going to have to make our own clothes and eat drywall for dinner.

Now that it's not the case...we just "forget" about the economy. Just like the 5 year block of time you've purged from your memory where the dow was on fire, jobs were on fire, consumer spending and GDP were on fire...

As I said above, come November, people will vote with their wallets, not with theological macro economic views that sound good but don't solve any problems.

In other words, people vote based on how they feel about the economy. Of course, if the economy is moving ahead at a stronger pace, just like the article asserts, then they will be voting with a greater sense of economic optimism than they feel right now--after all the election is six long months away. That means you just made my argument for me.

Now, the second part of your statement is interesting, aside from from your strange statement about "macro economic views that sound good but don't solve any problems." You must be young, because you haven't endured a real recession. By that, I mean a serious recession with double-digit unemployment, double-digit inflation, and actual shrinkage of the GDP of 3-5%.

Instead, what you're seeing is essentially an economic slowdown to a growth rate of approximately .6%. Heck, the national unemployment rate hasn't even climbed much past 5%, a rate that Democratic economists once supposed was impossible to attain. All due to these macroeconomic principles that you say "don't solve any problems." Compared to the wild economic fluctuations we experienced courtesy of halfwits such as Galbraith, $4 for a gallon of gas is nothing much to worry about.

So what you're really saying is that the Democratic Party isn't interested in sound economic principle. It's more interest in just running out and doing a bunch of stuff, wrecking the 28 years of careful financial management that Paul Volcker began and Alan Greenspan continued--all to get temporary traction in the polls. Boy, that's a really convincing argument.

Well said Otter!