Posts Tagged ‘the clash’

If markets could talk

21 June 2013

The stock market would be telling the Fed something like this:


Sounds crazy, but that’s how present discounted value works. (And thanks to my daughter for the meme.)

This week the Dow fell 3% this after Fed Chair Ben Bernanke’s announcement that eventually the economy would get better and then the Fed would gradually take its foot off the accelerator. That is, the Fed would taper off its quantitative easing (QE; emergency mass purchases of long-term bonds) when unemployment (now 7.6%) fell to 7.0% and then, as announced before, would start raising short-term interest rates back toward normal levels when unemployment fell to 6.5%. He didn’t say this was going to happen soon, and reiterated that the (near-) zero interest rate policy would continue until unemployment falls to 6.5%. Granted, he sounded mildly optimistic that the economy would recovery sooner than expected, but he presented no new data on that score, so it’s an easy prediction to shrug off. Not that the markets did.

The present-discounted-value approach to stock pricing says that a stock is worth its company’s expected future profits in all years to come, divided by a discount factor that is based on the long-term interest rate. The lower the interest rate, the higher the stock’s price should be. The odd thing here is that if the economy picks up, corporate profits should too, which should offset the higher interest rates that Bernanke is hinting at. It may be that corporate profits are already high and are not always easy to predict, whereas long-term interest rates are known now. The 10-year Treasury bond rate rose from 2.2% to 2.5% after Bernanke’s announcement, a 14% increase that is right about in line with the 15% drop in stock prices. (The 10-year Treasury yield is still at a near-historic low, by the way.)

The financial media tend to report any significant-looking drop in stock prices as an economic calamity, overlooking the most basic facts about the stock market, namely that it is volatile and its short-term swings have very little macroeconomic impact. The less we worry about short-term market reaction to the Fed, the better off we’ll be. Jared Bernstein has an excellent piece on the Fed’s announcement, to which I don’t have much to add, only to say that I don’t see much new in the announcement, other than some optimistic predictions and an exit strategy for QE (which had to end sometime).

The only downgrade that matters

22 December 2012

Remember these words: “means of extinguishment.” The full quote is “The creation of debt should always be accompanied with the means of extinguishment,” and it’s from Alexander Hamilton, the father of our national debt. Hamilton believed that the federal government could do the nation a big favor by carrying a debt as long as it had sufficient revenue streams to eventually pay it off; such an arrangement, he said, would give the US “immortal credit,” which could come in very handy whenever we had pressing needs or good public investment opportunities that justified borrowing more money.

This has been on my mind because the (yawn) “fiscal cliff” negotiations, whatever their outcome, are really just the latest round in an endless series of self-destructive battles over whether to honor our own budget commitments by raising the debt ceiling so that we can pay for them. I’ve written about Congress’s debt-ceiling looniness before, and how it would be better not to have such votes at all. Think the proposed budget has too big a deficit? Fine, then don’t vote for it. But to vote for it and then refuse to pay for it is not only cynical and hypocritical, but sows suspicion that the government is a deadbeat.

Standard & Poor’s (S&P) famously downgraded the federal government’s debt in August 2011 (from AAA to AA+), and the other two major bond rating agencies (Moody’s, Fitch) are threatening to do the same if Congress can’t reach some kind of agreement to reduce the debt/GDP ratio in the long term. After the subprime scandal, in which the rating agencies routinely rubber-stamped dodgy subprime mortgage-backed securities as AAA, these agencies have zero credibility, but that doesn’t mean they’re always wrong. The S&P said its downgrade “was pretty much motivated by all of the debate about the raising of the debt ceiling. . . . It involved a level of brinksmanship greater than what we had expected earlier in the year.” Yes — if Congress can’t be counted upon to honor its own commitments, which include paying back the principal and interest on previously issued Treasury bonds, then why should bond buyers regard Treasury bonds as completely safe? The more Congress continues to play these games, the more rational it is to conclude that maybe Treasury bonds are not so safe. (more…)

The ones that never knock

9 October 2011

Stay in school, kids. At least till you’re 25, or maybe for as long as you can. That’s the message of the wildly different unemployment rates for college graduates age 20-24 versus age 25 and over.

The September 2011 unemployment rate for college graduates was 4.2%, which sounds pretty good, even though it’s more than double what it was before the recession. However, that’s for college graduates age 25 and over. I reported this a couple days ago but didn’t have a separate rate for younger college graduates, since that wasn’t in last Friday’s BLS employment report. But the data do exist. The New York Times mentioned today that the jobless rate for college grads under age 25 averaged an eye-popping 9.6% over the past year. Before the recession it was just 3.7%. Which sent me scurrying to The Google.

The latest BLS Current Population Survey shows that the rate was 8.1% as of last month — trending down, but still historically high and only a percentage point less than the overall unemployment rate. And this is just by the official definition of unemployment, which doesn’t include discouraged job-seekers who’ve stopped looking, involuntary part-timers, or college grads working in “high school” (or less) jobs that don’t require a college degree. Evidently it’s a lot easier to keep a “college job” than to land one.

Staying in school past college seems almost necessary, too, considering that median pay for moderately young (age 25 to 34) college grads with bachelor’s degree is almost 10% lower than it was a decade ago.

As bad as it is for young college grads, it’s vastly worse for those with less education. Unemployment rates for 20-24 year-olds by educational attainment:

  • some college, no degree: 12.9%
  • high school diploma or GED: 22.4%
  • no high school diploma: 28.5%

With hordes of unemployed young people, thousands of them engaged in mass protests in Wall Street and other locales, this country is reminding me a lot of Europe in the early 1980s. Which makes a bunch of classic English punk and post-punk songs timely again. I’ll go with this one:

Don’t look to us

12 August 2011

Households, that is.

Household consumption has long been the mainstay of U.S. GDP, and asset-bubble-driven consumption in turn helped drive the expansions of the 1990s and 2000s. But consumption spending has been weak in this so-called recovery, growing at only about 2% (annualized and inflation-adjusted) since its trough in spring 2009, and it fell in each of the last three months for which we have data (see graph). On top of that, today’s consumer sentiment numbers are the worst in three decades. To find worse, you’d have to go back to a month that included recession, double-digit inflation, Americans held hostage in Iran, long gas lines, and the eruption of Mount St. Helen’s (this is starting to sound like a pub trivia quiz . . . the answer is May 1980).

(Graph from

File under “Outraged and paying attention”: From the press release accompanying the consumer sentiment survey data (from Thomson Reuters / University of Michigan):

‘”Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” survey director Richard Curtin said in a statement.

‘The Obama administration received poor ratings from 61 percent of respondents, the worst showing among all prior heads of state. [I could not find a rating for Congress, but in recent polls Congress gets even lower ratings than Obama.]

‘”This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent; it was the realization that the government was unable or unwilling to act,” Curtin added.’

Yes. Imagine if the government had spent this year looking for ways to stimulate the economy rather than contract it through spending cuts. Failing that, imagine if if Obama had forcefully and publicly told the Republicans that it was absolutely unacceptable for them to hold the debt ceiling hostage to their root-canal economics. (It worked for Bill Clinton in 1995-96 with the government shutdown.) At least one branch of government would be seen as more focused on jobs than deficits.

Instead, as Curtin implies, the public rationally concludes that jobs take a back seat to deficit cutting on all major politicians’ agendas. And the attention given to the debt-ceiling debacle has much of the public expecting more of the same in connection with the budget appropriations deadline on Sept. 30, the deadline for the Group of Twelve’s long-term budget-cutting proposal on Nov. 23,  and the expiration of the Bush tax cuts on Jan. 1, 2012. It’s easy to imagine the entire rest of the year devoted to partisan trench warfare, isn’t it? Be glad these guys are on vacation.

P.S. Title inspired by The Clash, of course. Alas, poor London. Feels weird to read about traditional looting for a change instead of the financial variant.

Clashing clunkers

7 August 2009

The federal government’s “cash for clunkers” program has been the hot economic news item the past two weeks.  The program is novel, visible, finding lots of takers, and by far the most popular item in the stimulus package.  It is not without its critics, however, on both the economic and environmental fronts.  Let’s review the debate.

The first national “cash for clunkers” proposal, as far as I know, came from the eminent macro/policy economist Alan Blinder in a NYT column about a year ago. Blinder noted that smaller-scale programs had already been implemented in several states and Canadian provinces.  He touted it as a “public policy trifecta”:  (1) It would help the economy at low cost:  he estimated the cost of a good national program at about $20 billion, cheap in comparison with the then-stimulus of $168 billion (not to mention this year’s $787 billion stimulus).  (2) It would do a lot to reduce exhaust pollution, an estimated 75% of which comes from cars over 12 years old. As for the apparent waste of retiring old cars that still have some life in them, he said they could be refitted with new emissions controls and resold, or their scrap metal could be recycled. (3) It would be progressive in its impact, since it’s mostly poor people that drive those old clunkers.

My former graduate macro professor Willem Buiter had a typically hilarious and typically negative response, sarcastically titled “Please torch my car.”