Ideal Taxes Association

Ideal Taxes Association

Raymond Richman - Jesse Richman - Howard Richman

Richmans' Trade and Taxes Blog

Boeckh Investment Letter provides realistic look at current state of world economy
Howard Richman, 8/30/2010

Our analysis of the current economic situation parallels that of the August 27 Boeckh Investment Letter (Increasing Risks) J. Anthony Boeckh is the author of the 2010 book, The Great Reflation: How Investors can Profit from the New World of Money.

My father, son and I differ from him, not in our perception of the world, but in the solutions that we advocate. He is suggesting what investors should do to profit or preserve their capital, while we suggest actions that the United States could take to solve the problems. Here is his summary of how mercantilism is sapping U.S. growth at the moment:

Effectively, the surplus countries [e.g., China, Germany, Japan, etc.] are stealing growth from the deficit countries [e.g., the United States, Greece, Portugal, etc.] and not allowing them to adjust to external and internal disequilibrium. In the U.S., this can be seen most clearly by the simultaneous rise in the savings rate, the trade deficit and the deterioration in labor market data. When the natural forces of the adjustment process to economic disequilibrium are blocked, political tension must necessarily increase. In an election year, you can expect vulnerable politicians to act.

Boeckh sees forthcoming action coming from the U.S. Congress. and does not favor such action, which he calls the "third option":

Reducing the Trade Deficits Is Essential for Economic Recovery
Raymond Richman, 8/28/2010

There was bad news on Friday, August 27, with the release of updated figures for economic output in the second quarter of 2010. The Bureau of Economic Analysis correctly presented the data. It reported:

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports [my emphasis] and a sharp deceleration in private inventory investment that were partly offset by an upturn in resistential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

No one. journalist or economist or government official mentioned the sharp acceleration in imports to which the BEA refers and which appears in the first paragraph of the BEA report. The fact appears to be that our leaders, our political and academic elite, are so committed to “free trade” that everyone is afraid to call attention to the disaster in the making, to the deficits that are de-industrializing the U.S. and have cost millions of good-paying jobs.

The reader may be unaware, because it is mentioned so rarely, that exports and imports are part of the Gross Domestic Product. The formula is...

The Housing Bust Redux
Jesse Richman, 8/26/2010

When housing numbers were released on Tuesday and Wednesday for July, the picture they painted of the housing market was pretty bleak. Sales volume tanked, inventory increased. The only surprising aspect of the associated news stories was that they noted economists had predicted substantially smaller declines. If we believe that long-run housing prices are shaped by supply (houses on the market) and demand (income and population growth), the recent drop should come as no surprise.

During the housing bubble demand for housing soared, fueled by unrealistic expectations of continued hyper-growth-stock returns from a traditionally stodgy investment that in the long term keeps up with inflation and little more. Now consumers have learned...

Economists Don't Know How to Recover From the Recession
Raymond Richman, 8/24/2010

In an Op-ed in the Pittsburgh Tribune Review on 8-17-2010 (Obama's Reverse Progres), Kevin Hassett, director of economic policy studies of the American Enterprise Institute and senior economic adviser to Sen. George McCain in the latter’s 2008 election campaign, brings into question whether a Republican majority in the Congress would do any better than Pres. Obama in dealing with this recession. He demonstrates the bankruptcy of economists of both parties in dealing with the recession. He asserts that Pres. Obama’s “massive intervention” to rescue General Motors and Chrysler is anachronistic. Manufacturing is, in his view, “no more valuable than other types of output.” He writes: “Manufacturing has been on a decline as a share of national output for decades, part of the evolution of the U.S. economy.” His notion that a decline of U.S. manufacturing as a share of GDP is “normal” and to be expected is almost universally held among economists. But the rapid rate of decline of manufacturing during recent decades is not normal at all. It is a result of mercantilist practices of some of our trading partners and the failure of Democratic and Republican administrations to pursue policies that would bring our international trade in goods and services into balance.

As Hassett notes, “Manufacturing as a share of U.S. gross domestic product has fallen from about 28 percent in 1950 to about 11 percent in 2009.” But as a share of U.S. household consumption, it has not fallen at all as the following table shows:...

U.S. Growth Slows Due to Trade Deficit -- we were published in the American Thinker this morning
Howard Richman, 8/7/2010

Here's how we begin:

No private sector tire repairman would keep pumping up a flat tire again and again without patching the leak, but that is exactly what our governing class keeps trying. The Obama administration and the Democratic Congress have been pumping the economic tire without patching the trade deficit leak for a year and a half now.

The preliminary data for second quarter GDP, released on Friday (July 30) by the Bureau of Economic Analysis (BEA), show U.S. economic growth slowing from a 3.7% rate in the first quarter to a 2.4% rate in the second quarter. But the details were even worse. A full 1.0% of that 2.4% was due to produced goods that went unsold due to lack of demand. In fact, demand for American products rose at a paltry annual rate of just 1.4%!

The U.S. economy has now been depressed for a full two and a half years, ever since the fourth quarter of 2007. And with the current growth rate amounting to a paltry 1.4%, the near term prospects do not look good at all. The United States is clearly locked in a persistent recession with little prospect for recovery at any time soon.

We then discuss the Obama administration's mistakes and present our Scaled Tariff plan. We conclude:

This plan would be opposed by misinformed progressives who have been claiming that that the Smoot-Hawley tariff made the Great Depression deeper than it would have been. But those who have studied the Great Depression know that this is not true. For example, in her Encyclopedia Britannica entry about the Great Depression, Council of Economic Advisors Chair Christina Romer wrote: "Scholars now believe that these [protectionist] policies may have reduced trade somewhat, but were not a significant cause of the Depression in the large industrial producers."

Despite their bad reputation, tariffs are actually as traditional as apple pie. They were the main source of federal government revenue from our country's founding until Woodrow Wilson enacted the progressive income tax. Their main drawback is that they can be used to protect one or another politically-powerful industry, at the expense of other industries. But the scaled tariff would be an across-the-board tariff. It would not pick winners and losers. It would not only boost production by those Americans who compete with imports, but it would also increase American exports.

Its only drawback is that it would reduce the loans we are receiving from the currency-manipulation governments, resulting in higher U.S. interest rates, making it more expensive for the federal government to borrow. The higher interest rates would encourage Americans to save. And the federal government could reduce interest rates by moving toward a tax system that leaves household savings and undistributed business profits untaxed.

The greatly increased investment opportunities would increase business investment, despite the higher interest rates. The result would be a rapidly expanding private sector and an expanding GDP....

Krugman: G-20 summit will continue the depression
Howard Richman, 6/28/2010

In his blog entry today, Paul Krugman realized, based upon the results of the G-20 meeting, that the world's governments are not going to run budget deficits to pull the world out of the depression. Here is a selection:

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

Krugman has almost figured it out. But he hasn't yet figured out that chronic trade deficit countries cannot afford to run huge budget deficits without risking bankruptcy....

Bush and Obama's Economic Stimulus Attempts
Raymond Richman, 6/28/2010

The problem with the recovery and the reason we have 20 million unemployed is that the President and his economic advisors refuse to acknowledge the principal causes of the recession, the federal government’s policy of encouraging the banks and other lenders to make home loans on the basis of insufficient security and the federal government’s policy of tolerating the enormous trade deficits which have cost millions of good-paying factory jobs, caused wages to stagnate, and worsened the distribution of income.

The response of our economic planners in the Bush Administration was a $170 billion economic stimulus package which took the form of tax rebate checks of $500 per household. It had little or no stimulating effect. Nevertheless, the Obama administration came up with a similar gift to each householder with similar results. The Bush administration under Secretary of the Treasury Henry Paulson did come up with one successful program, the $700 billion fund, known by its initials TARP, the Troubled Asset Relief Program, which saved the entire U.S. financial system from bankruptcy. The public thinks of it erroneously as a bailout. Instead of buying the troubled mortgages and derivatives from the banks, et. al., it lent enormous sums to the banks and insurance companies which urgently needed to raise cash or succumb to bankruptcy. Much of the money TARP lent has been paid back. But it did not create a single job except for new TARP bureaucracy. Unfortunately, the banks still have hundreds of billions of troubled mortgages. If the economy should dip again, TARP will once again have to come to the rescue. ...

Geithner and Summers Make Their Economic Mistakes Transparent
Raymond Richman, 6/25/2010

In a joint op-ed in the Wall Street Journal (6-23-10) entitled “Our Agenda for the G-20”, Secretary of the Treasury Timothy Geithner and Lawrence Summers, Director of the National Economic Council revealed the administration’s economic agenda for economic recovery. The recovery, they write, depends on an expanding global economy: “Stronger growth with solid job creation here in the U.S. depends on an expanding global economy.” One has to ask since when has the economy of the U.S. depended on a expanding global economy? Recent historical evidence suggests that the contrary is true; the growth of the world economy has depended on an expanding U.S. economy and U.S. trade deficits. What the U.S. needs is reasonably balanced trade with the rest of the world. A growing world economy would be helpful so long as it is not one that grows at the expense of the American worker.

World trade and U.S. trade declined substantially as a result of the recession. As the downward plunge ended and trade began to increase, recovering only a portion of their pre-recession level, U.S. exports and imports increased but the latter unfortunately grew faster than exports. In the most recent period for which data is available, January to April, 2010, our trade deficit increased compared to the same period in 2009 from $-118.9 billion to $-155.5 billion. Under World Trade Organization rules, the U.S. has the right impose trade barriers to bring its trade into reasonable balance. We have not exercised this power. Geithner and Summers want the G-20 to do it.

They write the G-20 “must continue to work together to secure the global recovery it did so much to bring about.” They are kidding, right? Except for the Asian countries, where is the global recovery they observed. With 17 million still unemployed or underemployed, the U.S. recovery cannot be said to have been secured. What country are they living in? What are they smoking? At the G-20 meetings in London and Pittsburgh, the members talked a lot but accomplished little or nothing. They did nothing to “ ensure that global demand is both strong and balanced.”...

Congress Is Responsible for This Recession; Not the Banks, Not Wall Street
Raymond Richman, 6/22/2010

A few days ago, in a bid to stem taxpayer losses for bad loans guaranteed by federal housing agencies Fanny Mae and Freddy Mac, Senator Bob Corker (R-Tenn) proposed that borrowers be required to make a 5% down payment in order to qualify. His proposal was rejected 57-42 on a party-line vote.

The Senate and House are investigating the Banks and Wall Street for causing this recession but they should be investigating themselves....

How the False Doctrine of "Free Trade" is Crippling the U.S. Economy.
Raymond Richman, 6/16/2010

It is no secret to our readers that the U.S. has been experiencing enormous growing chronic trade deficits for two decades that converted the U.S. from the world’s leading creditor to the world’s leading debtor. Our political leaders, Republicans and Democrats, and their advisers ignored the awful consequences of the growing trade deficits and they continue to do so. These deficits cost the U.S. millions of well-paying industrial jobs to foreign competition. The workers who lost their jobs were forced to seek employment in other sectors of the economy. They found jobs at lower wages. Their competition for jobs depressed wages generally throughout the economy. The result has been wage stagnation and a worsening of the distribution of income observed in the U.S. during the past two decades.

On this site and in our book, Trading Away Our Future (Ideal Taxes Assn., 2008) we condemned the American economists’ infatuation with free trade, a legacy of Adam Smith’s 1776 criticism of mercantilism. Mercantilist practices – barriers to imports and subsidies to exports – are rightfully to be condemned but we find nothing in the economic literature that justifies free trade as an appropriate response to the mercantilist practices of our trading partners. To be sure, free trade is an appropriate policy between the states of the United States which enjoy a common currency, a common tariff, and the free flow of capital and labor as the U.S. Constitution obliges the states to do. The European Union Treaty of 1992 (Maastricht Treaty) obliges its member states to use a common currency and imposes common tariffs, and allows capital to flow freely among its members. But it lacks any obligation to allow the free flow of labor and makes no provision except budget austerity to balance trade. Thus, Germany experiences chronic trade surpluses while Greece, Portugal, and Spain experience chronic trade deficits. The latter countries are in difficulty because their debt is expressed in euros and they are unable to earn enough euros to service their debt. The U.S. has experienced growing trade deficits for decades and would long ago have defaulted on its debt were it expressed in gold or foreign exchange rather than dollars which it can simply print. (Poor Greece, it cannot print euros). ...

After the Euro, Fluctuating Currencies
Raymond Richman, 6/10/2010

Edmund Conway reported in London’s The Sunday Telegraph June 5, 2010 that, in a survey he conducted of 25 leading “City” (the English equivalent of Wall Street) economists, “12 predicted that the euro would not survive in its current form this Parliamentary term, compared with eight who suspected it would. Five declared themselves undecided.” Our view is that the euro cannot be sustained any more than any system of fixed exchange rates can be sustained. Historically, no countries were able to maintain a fixed rate to gold so the Gold Standard had to give way to the gold exchange standard based on the U.S. dollar, which itself was revalued from $20 per ounce to $35, and then to no standard at all, the current system of relatively flexible exchange rates. We believe that the EU’s attempted Greek bailout may delay the demise of the euro but when and how the euro will be abandoned is uncertain. But it won’t be long. Even a fund twice or three times greater than the three-fourths of a trillion euros contemplated will not save the Euro. It will only bail out the banks that made foolish loans to “sovereign” countries expressed in unsovereign euros. The Royal Bank of Scotland Group issued a statement that the fund, while “Herculean,” might fail to save the euro and could usher in an extended period of market stress and disorder. We agree.

The fund, called The European Financial Stability Facility is being created backed by €440 billion in national guarantees, seeking to halt the spread of Greece’s debt crisis. The fund would sell bonds backed by ECB guarantees and use the money it raises to make loans to euro-area nations in need. The fund is part of a €750 billion aid package designed to combat sovereign debt crises like the one Greece is experiencing. Another 60 billion euros will come from the European Commission -- the EU’s executive arm -- and €250 billion from the International Monetary Fund to which the U.S. is the chief contributor. What business does the U.S. have to bail Europe out of its mistakes? Were it not for the fact that U.S. debt is expressed in U.S. dollars which the U.S. can print at will, the U.S. would long ago been forced into bankruptcy. ...

Bernanke optimistic that stagnation will continue
Howard Richman, 6/8/2010

According to third hand reports of a late June 7 interview, Chairman of the Federal Reserve Ben Bernanke is optimistic that the current high unemployment economic stagnation will continue (i.e., that the U.S. economy will not slip back into a recession):

"My best guess is we'll have a continued recovery [but] it won't feel terrific," he said....
Bernanke quickly noted that there were "caveats" to this forecast. Growth was still not fast enough to bring down the high unemployment rate.

The basis of his optimism is his wishful thinking that consumer spending and business investment will continue to rise, because they now have momentum.

But for consumer spending to continue its momentum, consumers will have to continue to spend an ever greater proportion of their income. They can be encouraged to do so when the stock market is rising or when their house prices are rising, but both appear to be falling at the moment.

And for business spending to continue its momentum, businesses have to be convinced that new investments will be profitable. But with the dollar rising vs. the euro, manufacturers will wonder whether it is wise to invest in anything that competes against European products in U.S. or international markets....

G-20 Foreign Ministers give up on stimulus spending
Howard Richman, 6/6/2010

On Saturday June 5, the G-20 Finance Ministers gave up on their failed plan to exit the Great Recession with stimulus spending. The following is an excerpt from the Reuters analysis by Alan Wheatley (Analysis: G20 doesn't even try to put brave face on debt mess):

South Korea (Reuters) - Finance ministers can usually be relied upon to put the best spin on whatever is happening to the global economy.
Not at this weekend's Group of 20 meeting in Busan....

With Europe signing up for austerity, it is no wonder that pessimists such as U.S. economist Nouriel Roubini see the euro zone heading for stagnation if not recession.

And in the absence of a burst in private sector demand in current account surplus countries such as Germany and China, global economic imbalances could deteriorate again -- especially if a resurgent dollar undercuts the revival in U.S. exports....

US Treasury Secretary Geithner is the only finance minister who hasn't given up on the idea of new stimulus spending. But the trade-surplus governments are all rejecting his request that they spend more. Wheatley reports:...

Employment report shows that the recovery is losing its thrust
Howard Richman, 6/4/2010

On May 26, Ambrose Evans-Pritchard wrote that Larry Summers' call for a new $200bn stimulus was "a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade."

Now we know what Summers was looking at. In all, employment rose by 431,000 jobs in May, but 411,000 of those jobs were temporary census workers, whose jobs will soon disappear.

The graph below of construction employment tells the story of a weakening recovery in the construction sector. After rising in March to 5,612,000 workers and April to 5,625,000 workers, construction employment fell in May to 5,591,000 workers.

Manufacturing employment was the one bright spot. It rose by 29,000 jobs in May, as shown in the following graph:

Dramatic Changes Needed to Recover From This Depression, Not Earmarks
Raymond Richman, 5/29/2010

Pres. Obama’s economic stimulus plan which the president signed on Feb. 17, 2009, known as the American Recovery and Reinvestment Act of 2009 paid out as of 5/21/2010, $398.7 billion or 50.7 percent of the amount appropriated. This, to be sure, is not a great administrative accomplishment. As the following table shows, $162.7 billion or 20.7% consisted officially of tax benefits, 13.6% contract, grants, and loans, and 16.4 % entitlements. These expenditures produced no permanent jobs. Most of the administration’s activities during its first year gave unjustified priority to the Obama health care program and mortgage relief. The current economic crisis requires dramatic changes to create the conditions for economic growth. The stimulus program does not even appear to be designed to create any permanent jobs at all. ...

Evans-Pritchard: Summers call for yet another stimulus package is a tacit admission that the economy is losing thrust
Howard Richman, 5/27/2010

Ambrose Evans Pritchard writes:

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said....

Congress Is Responsible For This Recession; Not the Banks, Not Wall Street
Raymond Richman, 5/25/2010

The Senate and House are investigating the Banks and Wall Street for causing this recession but they should be investigating themselves. Every Congress and every President since James Earl Carter, who signed the original Community Reinvestment Act (CRA) of 1977, bear responsibility for this recession. The act was a government intrusion in private sector banking where it had no right to be. It also involved two government-sponsored enterprises, Fannie Mae and Freddie Mac, which, when created, were stated to be independent of the government but which had to be bailed out as total losses.

The close involvement of the U.S. government in making it very easy to obtain a mortgage led Wall Street and Lombard Street and banks all over the world to believe all our mortgages were government insured. The bipartisan support for the CRA, Fannie Mae, and Freddy Mac was also misleading; it gave the impression that Republicans and Democrats would, when push came to shove, save investors in those government-sponsored mortgages. In any case, the consequence was the housing bubble whose collapse ushered in the most serious financial crisis and economic recession since the Great Depression.

In the sixties, leftist agitators and a few academics claimed that the banks were red-lining black neighborhoods, i.e., they were not making proportionately as many loans to households in those neighborhoods as they were in white neighborhoods. Indeed, fewer loans per inhabitant were being made in such neighborhoods. But the conclusion that this evidenced racial discrimination was spurious. Fewer loans are made to poorer households than richer regardless of the location of their residence. Unfortunately, then as now, a higher percentage of black households were poor. If the federal government wanted poor households who were unable to qualify for mortgages to own houses, all it needed to do was to guarantee them as they did with FHA and GI bill mortgages. No new bureaucracy needed to be created. ...

Michael Pettis predicts Europe will be moving toward a trade surplus
Howard Richman, 5/23/2010

In a May 19 blog posting about the internal deate within China over whether or not to let their currency strengthen v. the dollar, Michael Pettis predicted a huge movement in Europe toward trade surplus. His reasoning is impeccable....

Wishful Thinking on House Prices and the Economy
Howard Richman, 5/20/2010

A nursery rhyme goes, "If wishes were horses, then beggers would ride." The wishful thinking of beggers continues to dominate American policy making circles as was apparent in two predictions made yesterday, one made by housing market experts and the other by the Federal Reserve:

Prediction 1: House Prices will soon be off to the races again

The above graph from the businessinsider.com website shows the Case-Shiller index of inflation-adjusted sale-and-resale prices of the same homes. To its credit, Business Insider is skeptical of the expected rise in house prices shown by the dashed line. It reports:

"Le Tarpe" will not work any better than did TARP
Howard Richman, 5/16/2010

A foolish decision is haunting both North America and Europe. I refer to the decision by the American and European elites to bail-out their big banks without addressing the underlying cause of the financial crisis, the trade deficits. The fact is that trade-deficit countries accumulate debt in return for mercantilist-produced baubles. The result of the bail-outs was an immense transfer of bad debts from banking sectors to governments. The result of the continuing trade deficits is that the underlying debt problem will continue to grow.

In America, the transfer of bad debts from banks to governments was first realized with the $700 billion TARP bill, and was followed up with the Federal Reserve buying $1 trillion of soon-to-be-worthless mortgage-backed securities and the U.S. government subsidizing purchases of used residences.

In Europe, the decision to transfer bad debts from banks to governments is playing out now with the $1 trillion rescue plan known as "Le Tarpe," for the banks that have loaned money to Europe's three most heavily indebted trade-deficit governments. It will continue with the upcoming purchases by the European Central Bank of junk-bonds issued by Greece.

As a result of ignoring Asian and German mercantilism, trade-deficit countries on both continents will be mired in the perpetual depression which, Keynes predicted, comes to countries that permit trade deficits. Specifically, in his magnum opus (The General Theory of Employment Interest and Money) Keynes pointed out:

A favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Just as the Great Depression did not alleviate until policy makers figured out that governments need to maintain a growing money supply, the current stagnation in Europe and North America will not end until American and European policy makers figure out that governments need to maintain relatively balanced trade. Unfortunately, most American economists, including President Obama's advisors, are such free-trade ideologues that they are still impervious to this reality.

But not all American economists are free-trade ideologues. Peter Navarro is one of the first of our premier economists to see where all of this is going. In an excellent May 15 commentary, he laid out a realistic case that the euro may be dead and that gold is probably the best investment at the moment because we are heading toward a "de facto" gold standard. He succinctly explained why the euro bail out will fail:...

Construction Employment has first uptick since June 2007
Howard Richman, 5/9/2010

Construction employment has been declining ever since the house price bubble burst in 2006. The following graph shows the US Construction Employment statistics (on a seasonally-adjusted basis) from Friday's employment report:

US Manufacturing Employment is Rising
Howard Richman, 5/7/2010

The latest employment statistics for April, just released, show U.S. Manufacturing employment continuing to rebound. The following is the graph:

Obama administration is impoverishing the U.S. middle class
Howard Richman, 5/2/2010

On Friday, the BEA reported its preliminary report of U.S. GDP during the first quarter of 2010. One thing that struck me, when looking at the statistics, is that the U.S. trade deficits are coming back strong. The following is the quarterly trade deficit (reported on an annualized basis):

I expect the trade deficit for the first quarter to be revised downward after the March data is reported, because of China's decision to buy lots of commodities that month, instead of running a trade surplus. But, I expect that the U.S. trade deficits will be $50 billion higher when the second quarter statistics are reported.

University of Maryland economist Peter Morici's take on the statisitics (This Recovery is Anti-Middle Class) is that the recovery from the recession is quite weak and that it won't benefit the U.S. middle class. He wrote:...

The Greek and the American Financial Crises -- Similarities and Differences.
Raymond Richman, 4/8/2010

Greece is experiencing a monetary crisis. It is incapable of servicing her debt which is payable in euros. It faces defaulting. No one mentions the true cause of its difficulties, the trade deficits with other euro countries, particularly Germany. It has to pay for its imports in euros. In 2009, Greece’s trade deficit with Germany amounted to €4.81 billion. Other euro countries are having similar difficulties balancing their trade with Germany. In 2009, Italy’s trade deficit with Germany amounted to €11.4 billion; Portugal, €2.62 billion; and Spain, €12 billion. We mention these countries because analysts have suggested that they are beginning to face the same problem that Greece faces, a scarcity of euros.

Greece faces the problem that many countries experienced under the gold standard, a scarcity of legal tender to service their debt. Were the U.S. on the gold standard, it, too, would face a scarcity of gold that would threaten its economic stability.

The problem is that the European countries, with the exception of the United Kingdom, Norway, and Sweden, are on the euro standard. ...

Rogoff predicts a U.S. Debt Crisis
Howard Richman, 3/31/2010

Harvard economics professor Ken Rogoff is predicting that within the next few years, higher interest rates will precipitate a debt crisis in the United States. He predicted this economic future in comments at an economic forum, as reported by Bloomberg.com:...

Morici expects good jobs report on Friday
Howard Richman, 3/30/2010

Peter Morici has been following the numbers for durable goods orders and thinks that they predict a good jobs report on Friday when the Bureau of Labor Statistics releases the employment and unemployment numbers for March. In an article at Seeking Alpha (Breakthrough Jobs Report Expected), he wrote:...

Prof. Ralph Gomory on Thomas Friedman's Innovation Delusion
Raymond Richman, 3/4/2010

What will post-industrial society look like? Why, just like pre-industrial society -- a few rich people and a lot of poor people. Like Brazil. Like India. Like Russia. The U.S. is becoming a post-industrial society. It is heading for bankruptcy, the inevitable result of the huge trade deficits we are running with the rest of the world. In 2008, our trade deficit on goods amounted to more than $800 billion, about equal to Pres. Obama's economic stimulus plan. Our industrial value-added in 2008 was $100,000 per worker. So the trade deficit on goods was the equivalent of 8,000,000 industrial jobs. Were our trade in balance with our imports, we would be experiencing full employment.

As Prof. Ralph Gomory, a mathematician turned economist, Pres. Emeritus of the Sloan Foundation, and former VP of Research and Development for IBM, put it in an opinion piece posted in The Huffington Post on-line entitled Manufacturing and the Limits of Comparative Advantage (7-8-09):

Each year we make up for the year's huge trade deficit, not by shipping gold, but by shipping IOU's: treasury bills which are essentially promises to pay later. As Warren Buffet puts it, "we are selling the nation out from under us." When we come to pay this enormous accumulation later we will then be poor indeed.

Prof. Gomory, who has become my favorite economist, has published another opinion piece in The Huffington Post (3-2-10) entitled “The Innovation Delusion,” this time lambasting Thomas Friedman, the well-known New York Times journalist and author, who believes we do not need to export manufactures – we can export innovation. Prof. Gomory writes:...

How not to export your way out of a recession
Howard Richman, 3/2/2010

Wishful thinking is not working. Many trade deficit countries are hoping that growing exports will get their economies moving, but the trade surplus countries are not cooperating. The US economy is stagnating because of our trade deficit with China. The UK and Sourthern Europe are stagnating because of their trade deficits with Germany.

Bank of England Governor Merwyn King, UK's equivalent of Fed Chairman Ben Bernanke, understands the problem and sees a possible double-dip recession on the horizon as a result. The London Daily Telegraph (Europe at risk of a double-dip recession) reports:

Mr King said [trade] surplus countries around the world are not stimulating enough to offset belt-tightening by deficit states such as the UK, US and Spain, citing the eurozone as a "microcosm" of the problem. "I was struck by the mood at the G7 meeting in Canada, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth in their economy. That can't be true of everybody," he said....

The Costly Obama Stimulus Is Not Working
Raymond Richman, 2/25/2010

A distinguished economist, Prof. Robert J. Barro, Harvard University, in an op-ed in the Wall St. Journal, 2-23-2010, calculated the likely contribution of the Obama stimulus package to the Gross Domestic Product (GDP) over the five year period beginning February, 2009, a year ago, and estimated the effect it would have on the GDP. He estimated an increase in the GDP of $120 billion in 2009, $180 billion in 2010, $60 billion in 2011, minus $330 billion in 2012, and minus $330 billion in 2013. Over the five year period, the sum of the effect on Consumption, Private Investment, and Net Exports is minus $900 billion. He concludes,

Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal. The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake. ...

Bernanke starting to raise interest rates
Howard Richman, 2/12/2010

Bloomberg.com reports (Fed in Talks With Money Market Funds to Help Drain $1 Trillion) that Federal Reserve chairman Ben Bernanke is planning to sell $1 trillion worth of short term US Treasury Bonds to money market funds. The Fed would take the money it gets from selling those bonds out of the monetary base and, in effect, burn it.

There are two things that can be deduced from this story:

Bernanke thinks that inflation will get started soon if he doesn't act.
Short term interest rates will soon go up from their current near-zero rates.

For the last two years (since Bush's stimulus package in February 2008), Bernanke has been, in effect, printing money in order to buy Fannie Mae, Freddie Mac, and US Treasury Bonds. He has been doing so to keep U.S. interest rates low.

Now he appears to be changing course. U.S. interest rates should start rising, and this could have the following effects upon the economy:...

Is the U.S. Economy Growing?
Raymond Richman, 2/5/2010

With great fanfare, government officials and stock market pundits reported that real U.S. Gross Domestic Product in the fourth quarter of 2009 grew $182 billion or 1.4 percent compared with the third quarter. Were this rate to continue for three additional quarters, the rate of increase during the year would be 5.7 percent. Hence the reported annual rate was roughly 5.7%, obtained by multiplying the quarterly growth by 4. The 5.7 percent annual rate assumes that the economy will continue to grow during the next three quarters at 1.4 percent per quarter.

Examining the data casts doubt that the economy will grow at all...

4th Quarter GDP Shows Economy Heading Upward
Howard Richman, 1/29/2010

Real GDP grew at an annual rate of 5.9% according to the January 29 press release from the Bureau of Economic Analysis:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 26, 2010.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.

Back in November, most predictors expected that GDP would grow at less than a 3% rate, according to a November 16 survey published by the Federal Reserve Bank of Philadelphia:

The U.S. economy will grow over each of the next five quarters, according to 41 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters see real GDP growing at an annual rate of 2.7 percent this quarter. On an annual-average over annual-average basis, forecasters see real GDP falling 2.5 percent in 2009 before rebounding in each of the following three years. Real GDP will grow 2.4 percent in 2010, 3.1 percent in 2011, and 3.3 percent in 2012. As the table below shows, these estimates are a bit higher than those the forecasters projected in last quarter's survey.

I was the worst predictor. In a November 23 Seeking Alpha commentary, I predicted that GDP would shrink during the fourth quarter. I gave the following reasons:

Trade. The widely reported statistic that real GDP rose by 3.5% during the fourth quarter was obtained by multiplying the actual increase of 0.87% by four (by assuming that the same rate of increase would continue for the next four quarters). And that was before the September trade deficit data came in much worse than expected. It will be revised downward when the final estimates are reported.
Housing Starts. During the third quarter, first time home buyers moved forward purchases planned for future quarters because they thought that the tax subsidies for first time home buyers would expire. The 0.87% increase in GDP during the third quarter was led by a 5.4% rise in fixed investment in residential structures. But housing starts declined by an "unexpected" 10.8% from September to October. As a result, there will be a decrease in fixed investment in residential structures during the fourth quarter.
Exchange Rates. There is no prospect for further exchange rate fall for the dollar. The dollar-euro exchange rate has stabilized at below $1.50 per euro. The dollar-yen exchange rate has stabilized at above 88 yen per dollar. President Obama just came back from an Asian trip during which he failed to persuade Chinese leaders to stop pegging the dollar-yuan exchange rate. Nonresidential fixed investment in the American economy fell by 0.64% during the third quarter. It has now fallen for five straight quarters and is likely to fall during the fourth quarter of 2009.

How did my specific predictions do?

1. Trade. Indeed, as I predicted, the third quarter statistics were revised downward, largely due to a revision of the trade numbers. That's one of the main reasons that the 3rd Q GDP declined from 3.5% in the initial estimate to 2.2% in the final estimate.

2. Residential Fixed Investment. I predicted that residential investment would fall during the fourth quarter, but it actually increased, albeit at a slower rate than the third quarter. The initial estimate of the third quarter growth was 5.4%, which was eventually revised down to 4.4%. The initial estimate of the fourth quarter growth rate in this statistic was 1.4%. The residential construction surge that began during the third quarter is continuing, but at a much slower rate.

3, Exchange Rates. I was correct that the dollar would not continue to fall against other currencies. The dollar-euro exchange rate has indeed stabilized at below $1.50 per euro, the latest is $1.40 per euro. . The dollar-yen exchange rate has indeed stabilized at above 88 yen per dollar. It is now 90.3 yen per dollar. But despite the lack of improvement in the exchange rate, business fixed investment increased at an annual rate of 0.7% during the fourth quarter, the first increase in many quarters, as shown in the graph below:

A large part of the GDP surge was due to an increase in automobile inventories by car dealers. Car dealers apparently waited until the 2010 models were available during the fourth quarter before they replenished inventory following the sales surge caused by cash for clunkers. This surge will not be sustained.

But don't expect falling GDP this year. The economy has turned the corner. Fixed investment started heading up. The rise in residential fixed investment (1.4% annual rate during the fourth quarter) and in business fixed investment in structures and tools (0.7% annual rate during the fourth quarter) bodes well for the future.

Jobs, Jobs, Jobs - We were published in American Thinker this morning
Howard Richman, 1/15/2010

Here is how we begin:

The economic news for January has been dominated by disappointing employment news released on January 8 by the U.S. Bureau of Labor Statistics. Total non-farm payroll employment edged down by 85,000 in December from November, led by a loss of 57,000 construction jobs and 27,000 manufacturing jobs. Public dissatisfaction with the Obama administration's handling of the economy has been following employment levels down.Here's how we begin:

Follow the following link to read the commentary: http://www.americanthinker.com/2010/01/jobs_jobs_jobs.html

Ambrose Pritchard: America Slides Deeper into Depression
Howard Richman, 1/11/2010

In an analysis that parallels my own, British journalist Ambrose Pritchard wrote a commentary yesterday (January 10) which concluded, based upon the housing market, that the American economy is in a depression. Here are some of the statistics that he cites:

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4m homes to go this year....

It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.

US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. "If the 2008 and 2009 loans go bad, then we're back where we were before – in a nightmare."

The US government has spent hundreds of billions of dollars in an attempt to stabilize home prices above their normal levels. But that huge bet may be about to come up bust, as I predicted at the end of a July 31 2009 commentary (Why House Prices will Resume Their Fall):

The victory of Bernanke and Obama over the forces of economic nature in April and May will be as short-lived as a sand castle built on a beach near the water line while the tide is coming in.

Historians will look back at it as an illustration of the fact that you can't fight the forces of economic nature. It will be paired in the economic textbooks with President Nixon's failed attempt to fight inflation through wage and price controls.

Manufacturing employment continued to decline in December
Howard Richman, 1/8/2010

According to preliminary statistics released by the Bureau of Labor Statistics this morning, manufacturing employment declined from 11,657,000 workers in November to 11,630,000 workers in December, as shown in the above graph. Overall, non-farm employment declined by 85,000, but unemployment remained unchanged at 10%.

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Wikipedia:
[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. �A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.� [Balanced Trade entry]
Journal of Economic Literature:
[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the �ostrich� and �eagles� attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one�s assets; and a program for a strong America....
Atlantic Economic Journal:
In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]