And Now Deflation
Consumer prices fell by 1.7 percent last month, according to the Bureau of Labor Statistics. That's the steepest drop in 61 years. Why? Because producers and sellers have discovered that consumers have just about stopped buying. The only way producers and sellers can shrink their inventories and pay their bills is to slash their prices low enough to get some consumers to buy. Automakers with acres of unsold cars are giving deep discounts. Retailers with piles of Christmas goods are holding "40-percent-off" sales. Cable-TV operators are cutting monthly fees.
The good news is that all this price cutting is helping average people at a time when wages and benefits, and jobs, are also being cut. The bad news is it's also cutting deep into producer profits, causing them to cut even more jobs and wages. The big danger is it may cause some consumers to delay purchases, thinking they can get a better deal when prices drop further. That's a self-fulfilling prophesy. If more and more consumers take this view, sellers will have to reduce prices further to get them to buy now. That may sound good until you realize it means more layoffs, and more cuts in wages and benefits.
Deflation is more vicious than inflation because it's much harder to reverse deflationary expectations than inflationary ones. Japan's "lost decade" is evidence. The last time America witnessed a fall in consumer prices as large as we have now was in 1947, when wartime mobilization and large-scale government spending were winding down, there was lots of underutilized capacity, and producers and sellers were trying to lure consumers back into the habit of buying. What producers and sellers didn't know was that a whole new generation of returning GI's and baby-booming parents were about to spend like mad.
Now, the situation is quite different. Rational consumers are starting to save whatever they can because they're understandably worried about the future.
The sooner we have a major stimulus package, the better. The danger is that it will be too small.
The good news is that all this price cutting is helping average people at a time when wages and benefits, and jobs, are also being cut. The bad news is it's also cutting deep into producer profits, causing them to cut even more jobs and wages. The big danger is it may cause some consumers to delay purchases, thinking they can get a better deal when prices drop further. That's a self-fulfilling prophesy. If more and more consumers take this view, sellers will have to reduce prices further to get them to buy now. That may sound good until you realize it means more layoffs, and more cuts in wages and benefits.
Deflation is more vicious than inflation because it's much harder to reverse deflationary expectations than inflationary ones. Japan's "lost decade" is evidence. The last time America witnessed a fall in consumer prices as large as we have now was in 1947, when wartime mobilization and large-scale government spending were winding down, there was lots of underutilized capacity, and producers and sellers were trying to lure consumers back into the habit of buying. What producers and sellers didn't know was that a whole new generation of returning GI's and baby-booming parents were about to spend like mad.
Now, the situation is quite different. Rational consumers are starting to save whatever they can because they're understandably worried about the future.
The sooner we have a major stimulus package, the better. The danger is that it will be too small.
posted by Robert Reich | 8:09 AM
76 Comments:
these price drops are not necessarily "cutting deep into producer profits". they cut into the seller's profits who sell at 3 to 15 times their wholesale price from their manufacturers.
they found a year ago lets say that big screen TV can sell for $3000. so they did. didn't matter what they bought the products for from their suppliers.
meanwhile the manufacturers were pushed for their lowest prices at the wholesale level. see cameras and laptops at lower prices? the manufacturers didn't change their wholesale prices. it's the retailer who's dropping his price.
likewise closely held secrets are the real cost of a basic car.
i saw years back the retail price of a john deere 4000 series tractor was $10,000. in manufacturing quantities of 15,000 a year. from that i wondered just why a car costs ME around $20,000 when they make a million cars a year?
middle man profit.
this decline will hurt, but will also flush out the middle men who never saved anything aside during the upswings.
seeing prices drop really just shows how much more we paid all along for the manufacturing efficiency that was mostly developed in USA. ~ then exported overseas.
I know that falling back into our old consuming ways is not the long-term answer. But, we need to buy some time till we can get a more concerted effort underway.
If we want a massive and quick infusion of cash why not this? Each month for three months send every household some number of $50 vouchers. Each voucher expires in 30 days. They can be spent at any retail store or service provider. Change cannot be provided in cash of more than $5 for any transaction that uses a voucher. Retailers will return the vouchers to the fed for cash with their IRS tax ID on the voucher. The fed will not redeem vouchers with the tax ID of any bank, investment firm, or credit card company. (No savings and no debt repayment.) Voucher fraud will be severely punished.
The Fed and Treasury are trying inflate the money supply and prop up asset prices to preserve an illusion of solvency among the banks. Meanwhile, back in the real economy, we've had 4 straight months of deflation in the Producer Price Index...
.....Finished Intermediate Crude
Jul.......1.2%......2.7%.....4.0%
Aug.....-0.9%.....-1.2%.....-10.6%
Sep.....-0.4%.....-1.2%.....-7.9%
Oct.....-2.8%.....-3.9%.....-18.6%
Nov -2.2%.....-4.3%.....-12.5%
http://stats.bls.gov/news.release/ppi.nr0.htm
And a similar trend building in the CPI...
..........CPI-U.....CPI-W.....Core CPI
Jul.........0.8%.......0.9%.......0.3%
Aug.....-0.1%.....-0.2%.......0.2%
Sep.......0.0%.....-0.1%.......0.1%
Oct.....-1.0%.....-1.2%.....-0.1
Nov.....-1.7%.....-2.1%.......0.0% (-0.13% unadj.)
http://www.bls.gov/news.release/cpi.nr0.htm
Over those 4 months, the annualized rate of deflation on the unadjusted PPI data is -19.62% for finished goods, -29.57% for intermediate goods, and -80.46% for crude goods. Obviously those rates are effected by a sharp decline in commodities prices that won't be sustained over the full year. Oil prices fell over $100 per barrel from mid-July to early December.
The dollar has soared since July, making it easier for companies to afford goods in an international market. The US dollar index was in the 72-73 range in July, and was in the high 80s throughout November, representing roughly a 20% increase. So far in December it is down about 8%. Look for the dollar to keep falling as the world loses confidence in US investments.
Seasonally Adjusted Money Supply Growth at Annualized Rates
.......... M1..........M2..........M3 (est.)
Jul.......15.85%.......6.60%.....4.53%
Aug.....-7.67%.....-1.47%.....1.36%
Sep.....65.54%.....16.66%..... 3.71%
Oct.....17.24%.....18.36%.....-3.30%
Nov.....48.44%.......8.71%.....2.67%
M1 is part of M2 and M2 is part of M3.
M1 is money in accounts that is supposedly likely to be spent (like checking accounts), but now people are storing money there out of fear.
M2 adds money in accounts that is being saved (like savings accounts), but now people are hoarding the money they have instead of investing.
The M3 estimate adds money in large time deposits (H.8 release) and institutional money funds (H.6 release).
The Fed and Treasury have stepped up their own borrowing, which has offset tighter credit and continued growth in the money supply. However, boosting the money supply hasn't been effective in increasing consumption because consumers and corporations are tightening their budgets in anticipation of bad economic times ahead. Instead the money chases investments (particularly US treasuries) and builds up in various accounts reflected in the various portions of the money supply.
Money created by the Fed goes first into the banking system. Traditionally, this has encouraged banks to lend more, but may banks have needed the cash on hand to avoid being closed down. In January the banking system as a whole became insolvent. Banks were writing off more losses almost every month and they had to borrow from the Fed to post their required reserve levels.
Month Non-Borrowed Reserves Total Borrowings From Fed
Nov 07
....$42,258,000,000..........$366,000,000
Dec
.......$27,244,000,000.......$15,430,000,000
Jan 08
....-$3,510,000,000.......$45,660,000,000
Feb
.....-$17,353,000,000.......$60,157,000,000
Mar
.....-$50,232,000,000 .......$94,523,000,000
Apr
.....-$91,847,000,000.....$135,410,000,000
May
.....-$111,648,000,000.....$155,780,000,000
Jun
.....-$127,905,000,000.....$171,278,000,000
Jul
.....-$122,316,000,000.....$165,664,000,000
Aug
.....-$123,492,000,000.....$168,078,000,000
Sep
.....-$187,306,000,000.....$290,105,000,000
Oct
.....-$332,797,000,000.....$648,319,000,000
Nov
.....-$88,841,000,000.....$698,786,000,000
12/3/08
.....-$32,219,000,000 $675,885,000,000
http://federalreserve.gov/releases/h3/Current/
In November TARP money was used to purchase Preferred stock in many banks in order to re-capitalize them. While Preferred shares aren't technically debt, the dividends on them cut into profits for common equity holders. While banks are technically more solvent because of TARP, the preferred shares will make them less profitable over time.
Meanwhile, banks have continued to borrow hundreds of billions of dollars from the Fed through a variety of short term credit programs. This has caused reserves and the monetary base to swell, because banks are not inclined to lend out money to poor credit risks in a contracting economy.
On the one hand we have government trying to prop up prices and the economy to avoid further contraction and more losses at banks. On the other hand, we have banks waiting for prices to come down enough to make lending wise again. Because the system is unwilling to take the losses on overinflated asset prices, we delay the economic recovery in job creation and (eventually) consumption.
Economic stimulus is coming next year, as government will increase spending on a wide range of projects. This should create jobs (a good thing), and eventually encourage some private sector lending. The recovery would come about much faster, however, if asset prices were allowed to fall, without the excessive money creation and bailouts. Bankruptcy should be expedited in ways that keep businesses functioning but quickly distribute losses to the appropriate classes of investors. TARP money need only be applied if companies are still insolvent after both equity and bond holders are wiped out.
Once the uncertainty surrounding the solvency of companies is resolved, then lending will resume for private sector production and consumption. Otherwise we just have the Fed and Treasury futilely trying to avoid deflation in the price of goods by inflating asset prices.
Doc:
Your recent posts would seem to imply that consumers can never be "Rational consumers". We appear damned if we do and damned if we don't.
It's almost like playing a chess game where you are white and the black side is invisible. There's no way to know the best move.
steve:
Many of our industries are fraught with middle men, brokers, whatever, who take their share, and it's not usually a small share, out of the middle. The food industry is loaded with them.
As a rule retailers don't operate with euphoric profit margins. Even if they are able to increase margins here and there on certain products, competition and the constant need to run "sales" result in their seldom selling at regular prices.
Contrary to economic theory, in many instances retailers operate on a standard mark up based on their cost of goods. Generally this can result in profit margins between 33 and 50% for regularly priced merchandise.
Specialty stores and specialty items are a little different but in periods of economic downturn they often suffer the biggest decline in traffic. Those kinds of stores may be more likely to price based on supply and demand.
Trust me, running a retail store is not the quick way to riches.
My food prices were up 10% yesterday over one week ago. Reality for many is food, shelter and utilities. The money on Wall Street and the Government spending is not REAL, It 's some twisted illusion to give economists and money managers a job. Can we just hit the reset button??
We know that the CPI numbers have been fudged and faked for decades. Consumers know empirically that inflation has been much more than the official inflation numbers. (And economists have proved it with hard numbers.)
Why should we believe the inflation numbers? Haven't these official indicators lost a lot of their credibility?
Which raises another question: if the numbers are ginned, does ANYONE (including those making government decisions based on the numbers) have a rational basis for decision-making?
Has anyone seen a real drop in their cost of living? (Aside from gasoline at the pump?)
I meant to say "Why should we believe the DEFLATION numbers?"
(I should learn to hit the "preview" button.)
Art A Layman said...
art - i feel for the little retail stores. the honest mom and pop's. i have a serious hobby in pottery and saw a gallery i was in last year go under. a store this year is carrying my pottery and may also go under. hopefully without me loosing my pottery on their shelves on consignment.
but i also worked at a lighting manufacturer and designed 9 products in 9 months, which still sell to a big box home store for 10 times the manufacturers wholesale price.
i also sell a little pottery tool to the pottery "industry" that gets a 2 or 3 time markup.
these stores all get a return on their money in the first few items sold, making what's left on the shelf pretty much already paid for in full.
now not being an accountant, i don't fully follow the accounting ways of defining proifit-loss but still struggle with understanding how a product selling at 10 time the price paid can still be a loss.
the joke we have in manufacturing is "2 percent markup" in retail means you "multiply the price paid by 2".
It would seem obvious that we need a new economic model that isn't based on "consumption" in the form of ever expanding piles of frivolous goods, with its Veblien envy driven psychopathology. The current model we have is based on addictive behavior and as all addictive behavior, leads to destructive effects.
We need to reorient ourselves to reality and sanity.
I don't doubt it. My wife and I are both employed and okay financially, but I'm trying to pile up all the cash I can right now. I've cut my budget big time, cut Christmas spending, and even slowed down on debt reduction.
We have a "boomlet" of 18-21 year olds right now, and the millenials outnumber the boomers. There are plenty of upcoming consumers. We just have to get them JOBS and education. What sense is there in CA cutting education budgets now so that I end up having to send my kid out of state to AZ to go to a university?
Let's get the government stimulus already into education and get University budgets back up there. If the kids don't have jobs right now, they could at least be going to school so they are ready to get the good jobs whenever Obama gets the stimulus going to support new energy jobs, tech jobs, etc.
We think short term instead of planning for the long term future. It's the ENTIRE problem with how America works currently, and it's just dumb.
We need some market and finance reform before we regain trust in the flawed system.
We just learned about another scam involving $50 billion.
Why should we not expect markets to continue to devalue?
As hedge funds unwind (forced selling) and mortgages foreclosures continue on adjustable rates, we see more trouble out here on Main and Side Streets.
No confidence means no spending. Fix Fall Street and send us a simulus and maybe I will consume beyond food and shelter.
Deflation = disturst
gimme a break... my wife will never save.
my kids want what they want and it's an iTouch, despite Apple's horrendous packaging which is terrible for the environment.
this is a good thing too.
steve:
A quick accounting lesson.
If you double your cost to establish your retail price, your profit margin is 50% of the retail sales price. Profit margins are almost always stated in terms of revenues (sales prices).
Share your concerns for the little folks running retail stores. A dying breed. Many of those that were successful, pre-big box stores, earned little more than wages. It's an easy venue to get into, usually driven by personal interest, but a very difficult one to make a decent living from.
You lighting example would fit into my specialty store category. Keep in mind that retail success is generally predicated on volumes of dollar sales. Specialty stores make better profit margins per sale but generally have lower sales volumes, hence the necessity for higher markups.
In factories, direct labor generally is productive for a whole shift, excepting designated indirect periods. In a retail store you staff to anticipated traffic and if the traffic doesn't materialize on any given day you still have to pay for the labor. Granted there is some leeway. On a slow day you can send people home or tell people not to come in, but when you're open for 12 or 15 hours a day you don't always know that a wave might come in next hour. You can get by but you can lose sales if you're short on help.
The big box stores, most especially Walmart, do have the economic clout to exert extreme control over their vendors and get very tight pricing as well as excellent delivery and even get vendors to carry some of their inventory needs. Even at that they often have to build central warehouses in various regions to make sure they have ample supplies of fast moving items. Inventory turns are very important to retailers in determining profitability.
Some of the mainline department stores work with higher margins but they are usually pushing name brand merchandise drawing more of a specialty customer. They do very well if they can get their name brand customer to buy their private brands.
Lastly, a retailer has to serve a locale. Not sure what today's parameters are but a Walmart location might expect to draw from a max 10 mile radius. A producer, besides the ecomomies of scale in manufacturing huge volumes, can easily serve a nationwide customer base and even a world wide one. Big difference in reclaiming labor, material and overhead costs.
How wonderfully refreshing! I am no expert, but I have always wondered how economists could tout growth, GROWTH, G R O W T H forever, as if the planet and its resources were infinite. It is fantastic to hear an economist of Dr. Reich's caliber saying that we can not and SHOULD not consider growth to be the goal of our economic policy.
BUT I HAVE A QUESTION FOR DR. REICH, PLEASE: If money enters the economy only through loans by the Federal Reserve (a private bank, I realize), how can we pay off our public and private debt without economic growth? Is my premise about the origin of money wrong, or am I misunderstanding something else?
How does a stimulus plan accomplish anything long term? Everyone knows it's a one time event... a finite amount of money. So why would a business make long term investments just because the consumer has a few more bucks in their pocket after a one time event?
Steve,
How are orders to producers looking?
How about producer and retailer employment numbers?
How about collections on accounts receivable?
-t
There is no way that we are entering a long term deflationary episode. It cannot happen in the face of the monetary growth onslaught.
even if Americans had the money to keep spending as before, they could do so forever. Yet only the most myopic adherent of free-market capitalism could believe this to be true. The social and environmental costs would soon overwhelm us. Even if climate change were not an imminent threat to the planet, the rest of the world will not allow American consumers to continue to use up a quarter of the planet’s natural resources and generate an even larger share of its toxic wastes and pollutants.
That was from yesterday, where you were providing a clear-cut case for a reduction in spending and mass consumerism. Today, you rail against a lack of consumer spending because it causes a vicious cycle of deflation.
Can't have it both ways: Which is the lesser of the two evils?
“Deflation is more vicious than inflation because it's much harder to reverse deflationary expectations than inflationary ones. Japan's lost decade is evidence.”
J. M. Keynes and many (if not most) economists agree with this premise. And your last to articles astutely point out why, “this time it’s different”.
But I remember the "Japanese miracle". Money kept pouring in from around the world and the Japanese stock-market index (NIKKEI) rose from 6,500 in 1980 to 38,915 in December 1989. At the peak of the bubble in 1990, Japanese real-estate was worth four times the value of all property in the US. The Imperial Palace in Tokyo and the nearby park were valued more than the whole of Canada. Only the super-rich could afford to buy real-estate in Japan in 1990.
http://www.gold-eagle.com/editorials_05/saxena062605.html
Japan had a price bubble and its taken 20 years to correct. Those who bought at the top were hurt just like people who bought at the top in the stock market. But today real-estate prices in Japan are affordable to more people.
Wasn’t 15 years of disinflation better than 15 more years of inflation for poor people in Japan? It would seem like the Rich are the big losers in a deflationary environment.
So, what if our over inflated real-estate market (in some areas) drops 10% more? If it does the poor people now working for Wal-Mart wages might be able to buy a home some day. So what if deflation causes the billionaire’s home to drop from $50 to $35 million?
It’s hard for me to comprehend how deflation is worse than inflation for poor people.
I do agree losing jobs is bad for all people.
So, Job creation is job 1. And job creation has to be more than just creating jobs for construction workers and road crews. Job creation needs to include producing real goods and services we export to China and India. Stuff for Stuff -instead of Lost Jobs for Stuff.
With inflation those with pricing power win and those without lose. The majority of the public has been screaming that the last decade of low CPI has been masking the real inflation rates caused by skyrocketing real-estate cost and decades of double digit increases in health care and college tuition cost.
So why wouldn’t a decade of deflation help most people? We all agree the statistics clearly show that the median wage has not keep pace with even low inflation for the last 20 years. And that’s predominantly due to our trade policies that moved us from a GM union high wage economy to a Wal-Mart non-union low-wage economy.
So, wouldn’t deflation be better than inflation Mr. Keynes?
Here is a web page with a video produced in 1933 which Keynes may have sponsored that explains why. But then again this was probably a make work for Hollywood F.D.R. project.
http://windowtowallstreet.com/1929marketcrash.aspx
dasht said...
dasht - the pottery market is very unusual. it's still running on hand shakes and verbal orders.
all customers pay on time, ahead of their 30 day net, or ahead of the order.
I am small, don't bother with credit checks and sell to both individuals and stores. my main business plan is to sell to stores and let them sell to individuals. I use individual orders to know where I need to find another store local to people.
my price to individuals is the highest around, therefore I know no final customer will pay more than my retail amount. (that makes me a little bit democrat? I set the upper limit). some stores undercut my retail price by 50% which is fine, they still make enough to satisfy themselves. (that makes me a little bit republican?).
I’ve had this little business now for almost 2 years. it's still growing. the pottery market being about 1 million people. I sold 1000 tools last year, 3000 tools this year. last year I reached around 25 stores, 1 in Canada. this year I’m in 66 stores, 3 more in Canada and one in Israel. only 5 stores in this industry have not decided to buy the tool. the market is easily definable unlike other markets.
I’ve mentioned before my day job is engineering, doing design and manufacturing stuff for 30 years.
this little business was my self paced MBA program. I never got an MBA but think I know a few things and just went ahead and launched the silly product to learn what I can. my business plan was to be small, and make maybe enough to cover my property taxes. and it's cheaper than college for me.
this is one of those product ideas we all have. the old "what if" became a new year’s resolution in December 2006. I thought perhaps I could make some money on this product. "prove it" became my goal after a few beers that new year’s eve...
it's been cash flow positive from day one.
I do have other product ideas to launch and will in time now that i know more of how to do this.
I also swear there are others like me who have gone full circle from working for others to saying screw it and trying to do their own thing. I haven't quit the day job yet, but hope to one day. if anything, this is another piece of investment diversity along with the 401K-IRA distribution of funds into different markets.
to me I only need maybe 5 more products to cover my bases in retirement. this product covers property taxes, others are needed to cover the food bill, recreation, medical, etc. I bought solar electric 3 years ago and have my electric bill covered now.
Dr. Reich:
What would you do different looking back to your term as Sec. of Labor to help the American worker and the creation of real jobs in America?
What advise would you give to our new Sec. of Labor?
What responsibility do you think the Government has for ensuring corporate America plays fair regarding taxes and job creation?
The Government subsidies corporate America with roads, fire/police protection, military protection shipping goods, trade policy, etc…
Do you think the Sec. of Labor should support a leadership perspective for guiding our nation to better job opportunities for our citizens?
Anonymous DWP
O.K once again Rob, for the cheap seats.
STOP ALL IMMIGRATION FOR 1 YEAR AND GIVE 1.4 MILLION AMERICANS JOBS!
It's amazing this not would be considered a stimulus. The economy is losing millions of jobs, why add more to the list of losers?
It shows you economists are irrational when it comes to a solution which does not require complex graphs and a power point presentation!
Hmmm, that's not my take on recent deflation. Just listening to NPR, it was only the transportation cost of consumer goods that went down, a direct reflection of the big drop in gasoline prices.
Gas prices went down because with the world economic crisis the market went soft. Furthermore, when the sub-prime mortgage problem in the U.S. started to unwind, investors turned to safe havens for their investments and went into commodities...in particular oil futures (as well futures of corn and other essentials). Then demand went soft because of the recession, there was a major move to unload all these futures, hence the drop in oil prices.
The whole deflation thing was simply erratic speculation around the price of oil. I have heard that a gallon of oil is typically sold about twenty times before it is refined.
Less speculation on oil pricing I see as a good thing. The price has gotten so low that oil producers are going to cut back on production. So we get to conserve a little of one of our vital resources.
Now isn't that a GOOD THING...as Martha would say?!!!
Dave,
I didn't read this:
The big danger is it may cause some consumers to delay purchases, thinking they can get a better deal when prices drop further. That's a self-fulfilling prophesy.
...certainly not this:
Now, the situation is quite different. Rational consumers are starting to save whatever they can because they're understandably worried about the future.
as a swipe against consumers who aren't consuming. The former quote, I took as pure speculation on Dr. Reich's part.
There's no telling how many people are putting off purchases just so they can get a better deal, although it's reasonable to assume that some people are doing that. My hunch is that folks who are using that specific logic in hopes of correctly predicting a drop in prices are few and far between, so they would just add to the consumer spending slump already in progress rather than add to it in any significant way as a separate group of consumers. However, having said that, given the state of the economy, it's probably very likely that a different logic that has the same result is being used: everybody knows that prices generally drop after Christmas, so perhaps more Americans are trying to protect their pocketbooks by holding off on shopping until after the holiday. (My husband suggested this method for the first time ever, and we're not even feeling much economic pain yet.) Also, some may be holding off on purchases due to other tried-and-true holiday-shopping conditioning/experience. For instance, it's usually the case that there are better sales even a couple days before Christmas. I remember buying my sister a nice sweater a few years back for $50 only to see the same sweater priced at buy-one-get-one-free for $29 three days later in the same mall.
I'd add that when I see comments about sales such as those that Dr. Reich mentioned, I'm a little confused. Granted, I'm not a big consumer and don't shop a lot at all, but I haven't seen any of the types of sales that Dr. Reich is talking about. People that I know who are big shoppers have told me that they haven't seen any sales yet. Black Friday was generally a joke for them, and it wasn't because they were expecting deeper price cuts due to the economy - they just didn't see any "good deals."
I think that as Dr. Reich said, most people are behaving rationally. At least since 2000, more and more research has found evidence that ordinary Americans are very anxious about their job security and economic well-being. In this economy, with so many layoffs being announced weekly, that anxiety has to be skyrocketing. People are afraid. They don't trust the banks or the government. Since so many have been feeling the recession for years already, it's probably a shock to the system to see their private struggles play out on the big global screen. There was a survey a couple weeks back about people's depression expectations - if I'm remembering correctly, that survey found that 60% of Americans expected to see a depression. When people fear for their jobs and expect a depression, cutting back on spending is one of the most rational things to do. It makes more sense to do that than spend like there's no tomorrow in the vain hope that such spending just might help someone else keep their job.
One thing I hope that people take away from this experience is that no matter how isolated humans beings think they are from one another, we're all connected...not just as Americans, but as global citizens.
Anonymous,
Interested in knowing which immigrant jobs you think we should take over? And, do we take over their wages, or would have to take over their jobs and quickly unionize?
Sorry to be sarcastic, but blaming immigrants is ridiculous. You might as well say, "let's force all women back into the kitchen so that the unemployed men can take their jobs." Scapegoating gets us nowhere.
Dr. Reich,
How big is big enough? Are you in agreement that a stimulus should equal 5% of our GDP?
"Sorry to be sarcastic, but blaming immigrants is ridiculous."
You don't seem to get it. You're so wrapped up in the notion of seeing the point as racist, you fail to observe the basic facts. Unless you believe in the "job fairy" who magically creates a job for each immigrant, you're blowing smoke out your arse.
1. The economy is LOSING millions of jobs
2. We're still expanding the population base at a rate much faster than the creation of jobs.
You're blinded by the false premise that supply creates its own demand.
Absent a skyrocketing labor market, the best thing would be to PROTECT Americans by not bringing in excess labor.
We're giving away some of the best jobs to easily exploited labor on temp visas. We're undercutting some of the poorest Americans (many of them immigrants) by the USA's sadistic immigration policies.
The bogus BLS statistics which are used to set the immigration quotas further exacerbate the problem.
Deflation is in part a result of lower consumer demand for goods but the real underlying reason is a) commodity bubble imploding, b) strengthening dollar.
Both of these things will quickly reverse so no need to be concerned about inflation. In fact the opposite is the concern. Hyperinflation will be here with a vengeance when the dollar becomes worth less than the paper it's printed on. A 0% Fed rate today seals the deal.
This is not 1929. This is worse. Then we were an exporting powerhouse and a net creditor. Now we are are an importing crack addict living on somebody else's dime.
The fact is, no amount of stimulus can replace the unsustainable consumerism that propped up our economy. A bigger stimulus package and 0% Fed rate only make matters worse.
"Anonymous" is spot on with the jobs thing. If we can remove our PC masks for a moment, perhaps we will see clearly
Deflation (and inflation) are temporary symptoms of an economy that's out of tune because it is distorted by artificially low foreign wages competing against American wages on American soil. All other countries of the world have the common sense to protect their citizens. Ours on the other hand only protects multinationals.
Some say capitalism has failed – that we have finally paying the price for hyper consumerism. But it's not consumerism that's the problem - it’s a combination of things:
1. a lack of good paying jobs, due to
2. outsourcing, and
3. insourcing due to
4. corruption of public servants bought off by
5. multinationals who control the
6. money supply, federal reserve, etc. with a
7. fractional reserve banking system
So what is needed is the following:
1. term limits - one 6 year term for everyone
2. make campaign contributions illegal, all campaigns govt. funded
3. Nationalize the banking system (no more Fed Reserve being private, actually run by China & Saudi Arabia). Require 100% deposits on reserve. This would be policed by all 3 branches of govt. We could still have private lenders, but our economy would not be enslaved to them
4. Close all H-1B programs and other outsourcing / insourcing scams
5. Treat multinationals like the foreign nations they are - slap tariffs on them, etc.
The end result of this would be much higher paying jobs for Americans, slightly higher costs for products (which would put a damper on EXCESS consumerism automatically).
We need to stop blaming ourselves and go after those that REALLY control what's going on in our society - our so-called "public servants" who are really just multinational servants. By allowing for career politicians, we have given incentives for corruption. Don't be duped!
www.american-consensus.org
Republicans and Democrats, most of whom are liberal, have no desire to shut off emigration. They live in an island of insanity where most Americans don't live. Most Americans live in reality land where they, their children will not find decent work or any work at all. Children will continue to migrate wherever in hopes of work.
It is amazing that voters continue to return these political hacks to the congress to continue to screw Americans.
Anonymous,
My response may have been reactionary, but I was not "wrapped up in" anything besides the fact that your argument came across as pretty brash in tone and is easily refuted.
Where do workers generally come from? As in, originally come from? Women having babies. How do we keep track of how many babies women are having? We calculate a fertility rate. The U.S. fertility rate has dropped from 3.1 to 1.9 in the past 30 years.
We need a replacement-level fertility rate of 2.1 just to replace the parents (workers) of babies (future workers) in the polulation. A two-child per woman average is generally considered replacement level: the fertility level at which each couple is replaced in the population by their own children, yielding zero population growth. However, the replacement level must be a little higher than 2 to account for mortality - hence 2.1.
1.9 is less than 2.1. So if we're not even meeting the replacement-level necessary for zero population growth, how is it that our population is growing? Immigrants. First and second generation immigrants have been responsible for roughly 55% of the U.S. population growth over the past 30 years.
That's not to say that comprehensive immigration reform should not be a concern of the new administration, but it is to say that immigrants have been our "population growth fairies," and they have replaced a lot of workers that we just haven't had the capacity to replace.
Spencer, a shortage of workers would lead to inflation. Given that immigrants are the ones growing our population and helping us replenish our work force, it seems they should get some credit for providing a buffer to inflation. According to this short piece on immigration facts, the government has been projecting a shortage of 20 million workers by 2026:
http://www.rapidimmigration.com/usa/1_eng_immigration_facts.html#general
Sure, some immigrants are exploited. (Who isn't?) Especially illegal immigrants. Our economy is in such rough shape that banning immigration for a year would not do much of anything. Hell, even $8.5 trillion - which appears to be the under-reported bailout tab so far - hasn't done anything noticeable yet to even bail Wall Street out. Things are going to get much worse in the coming years. Like most people, I want unemployed people to get back to work as soon as they can. But banning immigration? You have to consider that immigrants are both high-skill and low-skill workers. It's doubtful that even taking their low-skill jobs and giving them to American workers would pay a better wage than unemployment benefits. It just doesn't seem like much of a "stimulus." Plus, any such ban would have to be much longer to make up for the layoffs and further economic carnage that we're yet to see.
That was a thoughtful reply Angry Citizen. But just as our best an brightest got us into this mess based upon 'spurious data and methods', I'd say that your rationale is based upon false statistics and the misguided belief that 'growth' can cure what ails us.
Why not open the borders wide. Allow open immigration to all? Won't ten times the poison cure this problem?
Of course that it ridiculous! So what we must seek is a reasonable number. Screw this notion that we 'need' to replace workers. LET INFLATION RUN RAMPANT. LET THE SALARIES OF THE CEO PLUMMET TO A MERE 100K!
There is no future there is only now!
You are living in a place where only the poor suffer. I see no understanding from your position that you live in 'a country' or that you think you are 'a citizen'.
Please play your parlor games with bogus statistics with your rich chums. There has been no regard for the future or planning over the last ten years.
We need to break the machine in order to fix it!!!
How much of this though is just because of the drop in oil prices?
Anonymous & oliversnit,
You are right again, IMHO. We need a complete overhaul. PUBLIC CONFESSION: I am a sort of recovering "growth guy" who finally figured out the obvious. This cheap labor story can only end one way for America - VERY BADLY. It's a one way transfer of wealth, clean and simple. My third grader understands it.
Angry Citizen,
First off, I'm sorry you are angry. But then again, I'm angry too, perhaps for different reasons (I hope not). Anyway we should read government statistics with a grain of salt. All of the unemployment numbers are bogus and don't even count many who have simply given up looking for work. Unemployment measurements are and always have been underestimated.
You said,"Interested in knowing which immigrant jobs you think we should take over? "
I have an answer for you. These jobs:
http://www.american-consensus.org/topics/insourcing/insourcing.html
and these jobs:
http://www.american-consensus.org/topics/outsourcing/outsourcing.html
I'm going to let out a dirty little secret: THERE IS NO SHORTAGE OF AMERICAN WORKERS. However, there is a shortage of CHEAP American workers for multinationals, and that is the agenda we help promote when we buy their lies. If we want immigrants, then great - MAKE THEM LEGAL CITIZENS AND LET's GO. But that's not what the multinationals want - they want CHEAP LABOR and they are paying congressmen and governors good money to get it! Please, please, please don't be duped!
Finally, something before my time: the last big deflation.
I have a bad feeling about this latest interest cut.
Maybe because it seems that this cut isn't making it to 'we the people'.
tt
In hindsight it is clear that the runup in gas prices was due to speculation and the rundown is due to speculators getting out of the oil commodities market. This is a good thing and gas prices are down where they shouled be and would have been all along if it wasn't for speculation. I wouldn't call this deflation in the conventional sense - just the deflation of the speculation bubble. As housing prices decrease, air is coming out of the housing bubble. I wouldn't call this deflation of the pernicious type either just a resetting of prices to where they would have been if there had been no bubble. Wild gyrations and volatility in the stock market and other markets are due to all the fancy financial instruments and large moneyed interests taking and relinquishing different positions at the speed of light. Not much can be concluded except that, as long as we have derivatives, CDSs, CDOs, tranches and other exotic devices pushed around at light speed by computers and algorithm based software, there will be little rhyme or reason to an understanding of the economic system.
Restoring some sanity to the economic system will hopefully come with the next administration. The banking system has to return to basics. Reregulation has to be serious, and reinstituting the Glass-Steagall act to put a firewall between investment and commercial banking should be a priority. In the long run I think hyperinflation is the main thing to worry about. The several trillion dollar bailout attempts are worsening the problem because they are injecting money into the top of financial system where too much money had pooled in the first place due to Reagonomics which was a massive transfer of wealth from the poor and middle class to the wealthy. Instead money has to be injected at the bottom of the financial system in order to help out struggling poor and middle class people. This would reverse Reaganomics, something bailing out the banking system will only perpetuate.
As for immigration, we have a situation on our southern border that has resulted in more people being killed than have died in Iraq, a situation that is more of an immanent threat to the US than terrorism and that is the drug war in Mexico that is spilling over into the US and yet our government does nothing about it. This is where our military efforts should be placed - literally in defending our southern border. This applies to preventing any illegal contraband or people from coming over it whether that contraband is drugs or terrorist weapons, whether the people are in the drug trade or in the terrorist trade. And yet the Bush administration continues to fiddle while Rome burns. Their military efforts are totally misplaced. Our immigration policy should benefit the middle class not the large corporations. Therefore, H1B visas should be canceled. If we can't get control over our own borders and reserve our own jobs, both high and low tech, for American citizens like every other advanced country does, we're just rapidly becoming a banana republic, one in which policies are set by, for and in the interests of corporations and workers be damned. And by workers I mean everyone who doesn't make their money by manipulating money.
Anonymous,
You really shouldn't assume so much about people. You read a comment of mine and concluded that I am: rich, don't understand poverty or care about suffering, have no concept of country, and don't see myself as a citizen? Because you don't like the statistics that I offered up? And somehow, I am just like the people who got us into this mess? Wow.
If it makes you feel any better to know, I am a graduate student with no job, with $100,000 in student loan debt, and one who probably won't be able to finish my program pursuing a Ph.D. that will maybe allow me to make a decent living, because I'm unwilling to take on any more debt and my program is facing another round of budget cuts/ assistantship cuts due to the economy. I hail from working class roots, have had to work for everything that I ever got in life, and I'm proud of it. Another FYI: I have been contacting all of my representatives for the past 10 years, have been supporting progressive groups, have been educating family and friends, who can't articulate their anger and frustration, about economic inequality and what the consequences are for all of us, and have contacted the Obama transition team several times with policy suggestions for a more equitable economy/country.
I have no "misguided beliefs" about growth. You set out to slam the door on immigrants, and I set out to explain how immigrants have helped to build this country, and to show how the fertility rate is linked to the labor force. Not all government statistics are bogus. They may not be perfect reflections of what's really going on, but there is rarely a perfect measure for anything. People who work with government data sets (and any other data set for that matter)know where the vulnerabilities are. Scholars who work with data are not secret government agents or completely clueless people who have no idea of what they are looking at.
So no, I'm not endorsing "opening the boarders wide." I am endorsing thinking about our problems without falling into the trap of scapegoating others. Every issue that we face has many sides. With immigration, I have not looked to see how the census came up with their projection of - 20 million workers by 2026. I assume it's based on our rapidly aging society, but didn't look into it. I was just passing information along.
And, Spencer, I do look at all data with a critical eye. I'm well aware of the problems with the unemployment rate, measure of poverty, etc. While there may be no shortage of American workers now (I don't recall saying there was), the fact is that the fertility rate in this country have been declining since the 70s and has not been high enough to replace the work force. Immigrants have made up for the difference. There is nothing bogus about that. And, don't worry about me being duped. Also, if you actually read any of my other comments, you'd see that I fully understand the transfer of wealth to the top 1%.
The machine is broken and has been for some time; it's just more visible now to people who have barely even noticed its existence. What matters is what we do with it. Will we blame immigrants, blacks, other minorities, people who quote government statistics, our spouses, friends, neighbors, kids, etc? Or will we actually channel our anger in a direction of positive, progressive reform?
An economy based on buying a bunch of new cheap junk all the time is destined for failure.
At 45, there are few products (quality ones only) that my wife and I really need or want. We keep our cars 10 to 12 years and don't spend large sums of money on vacations and entertainment products.
The model has been broken for awhile. That is why cell phone companies, cable tv providers, and the like nickel and dime people to death trying to squeeze as much money out of them as possible.
As a teacher, I witness large numbers (at least 50%) of middle-school students carrying around cell phones. Many of these students have cell plans with unlimited text, internet, numerous downloaded ringtones, mp3 songs, etc. A large number of these students qualify for free and reduced lunches yet carry cell phone plans that cost in excess of $100 per month.
Many are convinced that this is an absolute necessity in today's environment but the real truth is that most of these kids leave their home on the bus and return on the bus without venturing much beyond the walls of their own home.
The trappings of cheap junk, highly marketed vanity items and entertainment products trumps necessities and common sense in many instances.
The US needs a focused goal. Obama's clean energy plan, infrastructure rebuilding and concentrating on supporting high sciences and medicine are the key to providing something sustainable that we actually need and would benefit our citizens.
Price cutting will not help at all if the banks are not lending. It doesn't matter how low prices go, if people don't have money. If private banks would lend, there would be less of a need for a stimulus package. Loose lending is what got the banks into this mess. Now that they have been given an opportunity to survive, that does not mean that they should tighten their lending parameters. I don't mean how much they lend, but whom they lend to.
Credit scores are a one size fits all mentality. It is so easy for honorable creditors to be denied credit these days. For example, if someone was late only one month on a credit card bill five years ago--it is considered an adverse credit. My point is is that it is very easy for a bank to deny credit to many individuals who in all reality should not be considered a risk. This needs to be addressed with the banks who were given taxpayer money in order to provide stimulus to our economy.
The idea there is a lot of fat cat retailers making boatloads of money is a common misconception. The average business makes 3-5 cents profit on every dollar they take in. Mr. Reich is exactly right that all the discounting becomes a self fulfilling prophesy since in many cases, they are slitting their own throats to do "anything" to get people in the doors. -Bob www.retaildoc.com
Everybody seems anxious to return to a galloping economy. Obviously I would like to see everyone with a decent job that support its family needs. And this is my point: why do we have to rely on an economy of accumulation (for few) and wasteful consumerism for the masses rather than a more sustainable economy of production for use? The answer is obvious: too many interest and propaganda driven "american dreams" which, by the why have nothing to do with a better life but just fulfill the dreams of the greedy. My recommendation: use these tragic events to think another way of life and production or at least start a discussion on that.
Well, the Fed is dropping the interest rate again, to fuel a new bubble.
Last time this occurred, Bush described this as the market getting drunk.
So now I see the wisdom in the uber-wise machinations of Bernanke and Paulson.
They are curing the economic hangover, by binge drinking.
It's just one last blowout, before the next last blowout. Very Wise...
Lower prices are good for consumers. Computers have been going down in price for years, and people still buy them. The only reason homes aren't selling is that zoning regs mandated too many McMansions, and not enough smaller homes for the bottom half.
John Lawrence said... "In hindsight it is clear that the runup in gas prices was due to speculation and the rundown is due to speculators getting out of the oil commodities market."
It's never been clear to me, that there was exactly one and only one factor involved in this event.
Demand was exceeding supply, and driving prices up. Speculators saw an oppurtunity and jumped in. Speculators look for a trend that's already there and try to get in early. They don't look at a market with no potential and throw money down a hole.
As to our Southern Border causing more deaths than Iraq, I don't follow your argument. In Iraq, over a million people had been killed as of two years ago, with over three million refugees losing their homes.
Have over a million people really died on the US Mexico border, in the last five years?
A stimulus package is not going to save the consumer driven GDP nor fill up the malls or sell all the excess housing inventory available now or in the future.
The Democracts have benefited from the economic downturn and 8 years of Bush but by the next election cycle that will have changed and Democrats will take their rightful place along with the Republican party with their centered big tent agenda.
The Clinton economic team light the match for the current problems and Obama is recycling the same group into his adminstration along with Defense and other key positions. At some point the American voter is going to get it that the two party blame game has been nothing more then a power sharing device by the wealthy to strip the people naked and leave them with a tint cup on the sidewalk.
HOW can the alleged $50 billion Ponzi scheme run by Wall Street money manager Bernard Madoff actually be able to happen with the various controls that one would think are in place?
HOW can this fall out, and continued criminal actions of other CEOs be allowed to continue?
we put our money into 401K's and IRA for the past 30 years following the encouragement of the government. yet we see such criminal actions! and NO one goes to jail?!?!?!
following the rules as i have, with no tradtional pension like most companies, what is my future?
Steve, let me take a shot at ansewring:
Your 401k is now a 201k.
Your future is bleak.
We are witnessing depression economics never before seen in the history of mankind.
The poor will bring justice to the rich, if the government doesn't address the injustices.
Anoymous DWP
Wrong, wrong and wrong. We need to focus on honesty, accountability and morality in our life in our work and in our politics. We need to downsize everything we do and invest in a decent national rail system. We need to tear up pavement and plant gardens.We need to downsize everything we do and manage a contraction process, especially of government itself. We need to stop being an Empire and get in touch with being human beings. We need to stop the worship of Mammon, of bigness, of technology, and start devoting attention to humane civilization. We've got a lot of repair work to do in our souls.
Thanks RogerRafter for showing us what the difference between a reaction and a researched, documented and time-consuming (anso, work of love, not profit?) response is...and Spencer who instead uses a different approach: don't be duped, please, I beg you...free puppies to everyone, should you succeed here...
But Spencer has the right package anyhow, but needs to move up to the language that captures it: Transnationals...not multinationals...let's all pretend we are Wagoners and tear down the national boundaries that only facilitate the arbitrage.
calmo's not too laborful response...
Wease:
As you are an accomplished Scotch drinker I am surprised that you are not familiar with the "hair of the dog" cure concept.
Am afraid that John is more correct in his assessment on oil prices. Demand versus supply did not spike by 70% over the previous year nor did demand versus supply decline by 70% over the past few months. Demand has declined but if we assume that oil at $147/barrel was a demand/supply parity price then the recent decline would not find us back at $44/barrel. Many oil experts suggested all along that the true market parity price of oil should never have exceeded $60-$70/barrel. You are sounding like sbvor again. ;)
To all:
Do any of you here get the sense that Dr. Reich uses this blog as a class assignment for his students? Having them review the various responses and then discussing them in class, maybe less to solve problems than to point out the varied issues associated with the problems of any large scale system. Regardless the basis, the blog makes for a fun back and forth.
It is ironic that we consumers are at the heart of our economic success, yet we have the least direct input to it. If we spend too much or demand excessive wages we feed inflation. If we save more and practice wiser spending we feed deflation and economic downturns. If we try and practice the methods of attaining wealth that we see the wealthy employ, we are stupid or greedy.
Buying a home we can't afford is stupid. Speculating on rising home prices and buying homes or multiple homes we don't live in but intend to turn over is greedy. The failing here is neither stupid nor greedy it's merely risk taking, a phenomenon we see happening everday in the halls of Wall Streets around the world. It is naive in that few of us have access to the data, on a day to day basis, that those in the finance world employ to get in and out of invesments. Granted, access to that data apparently didn't help a lot of them know when to get out of their mortgage investments.
With all our influence on the direction of the economy, we consumers are helpless when it comes to correcting its direction. To Angry's point, there are good "rational" reasons that consumers are cutting back on spending. At the same time our "rational" actions are exacerbating the problem. It is the stuff of which spirals are made.
Those awaiting a bottoming of prices for sweaters or homes are being "rationally" "irrational". The problem with economic "rational man" theory is it would appear to be based on good times of economic growth. Perhaps if we taught that "rational" changes with circumstances, our business leaders would be better educated and prepared to deal with economic vagaries. One would be inclined to advise that layoffs should be the actions of last resort rather than first resort.
Instead, the business world, far more influential in their actions, see gloom and lay off more folks, further exacerbating the problem. Some of them are experiencing losses that require cutbacks. Others see declining profits or future losses that make cost cutting seem wise. The conundrum? Lay me off and I can't afford your products or any others. Lay off enough of us and your sales will drastically decline. It becomes a self-fulfilling prophecy.
We get so many, and they know better, espousing this "one" problem or another as the crux. Stop immigration for a year and all will be right with the world, at least in the US. What? Stop frivilous spending and our economy will thrive in the future. Frivilous spending is in the eye of the beholder. Replace our hapless politicians and Vahalla will arise. Lobbyist's money drives every decision made in Washington.
All those students who have cell phones while their parents are on food stamps or free lunch programs can be accused of frivilous, wasteful spending but how many parents can keep in touch with their kids at all times? How many horrid incidents have taken place in our schools or other aggregations of young people where the first notification to law enforcement came from a cell phone? Do kids abuse them? Do they waste foolish time and money playing with them? Is that not the nature of young people? Do we expect that children are to become responsible adults at age 12?
I, for one, don't buy that our currently declining prices have much to do with declining oil and gas prices. No doubt it provides some leeway for businesses to weather the current storm but we all know that the rate of declining prices based on cost decreases is a far lesser slope than rising prices when costs go up. It is much more the result of reduced consumer spending.
Inflation, deflation, unemployment, overemployment (whats' that?), high interest rates, low interest rates, deficits, surpluses, and on and on, ad infinitum, are functions of a very complex interrelated system and there are no "one" causes.
In more normal times when the Fed lowers interest rates, that action does not increase employment directly. Through a variety of interactions in the system, businesses expand or grow via cheaper money and in that process employment increases.
To my mind, the most aggravating influence here, not the "one", but a major factor is globalization, free trade. Our workforce was not forewarned and prepared for the results. Many of our leading economists and politicians did not envision the speed, nor the many downside risks, from globalization. To a great extent, if not a major cause, it is a major factor in curing the dilemma since so many resources are now beyond the control of Americans.
I'm not suggesting that anyone change or alter their postings or their presumptions. Merely that they exhibit an understanding that all the factors mentioned by most on here are influences and real problems with varying degrees of cause and/or effect on the grander scale.
This, of course, is coming from the cheap seats.
Caryl:
Love that spelling.
I was kinda hoping to put off worrying about my soul until finality was more imminent. Not a lot of sense prepping an abstract when there is still some time for it to become unprepped again.
Best to approach immediate problems, such as my investments, and put off longer term issues for a later time.
Just a thought.
Art said, "Am afraid that John is more correct in his assessment on oil prices. Demand versus supply did not spike by 70% over the previous year nor did demand versus supply decline by 70% over the past few months."
As you're an expert, could you please give a mathematical explanation as to how demand is calculated?
I've asked a number of degreed economists this question and they've given me two answers.
1. Economists pull this number out of their nether regions.
2. It's slippery function of supply and demand, calculated in different ways. Essentially price velocity, determines the supply / demand ratio.
I think that #2 is the more accurate way to determine demand. Though, different formulas will give different answers, that can be used in different models. But it assumes that the economic rule of supply and demand is in play, whereby an increase in the ration of demand over supply, leads to rising prices and a decreases leads to dropping prices.
How do you arrive at your numbers?
Could you please post the formula you used to derive your estimate?
caryl, art, all:
yes art, is...."this blog as a class assignment for his students?"
it might as well be. it certainly does invoke some thought and discussion and having had very little formal training i seem to read and learn more here than today's regular media. the LA Times still runs editorials on paris hilton as big news...
and caryl, i never understood why this country never got behind the rail system? it truly makes sense to me. although the scale of USA compared to the rest of the "efficient" rail countries is lop sided. it still is the most cost effective way of moving material. and years back the wife and i road from LA to the grand canyon for christmas week. that was a fun trip! it's a land based cruise ship.
meanwhile ANY trip anywhere skips consideration of rail but shouldn't. except that rail is so forgotten it's a fuss to use. perhaps some focused infusement of money into upgrading rail should happen. especially for short hop trips.
a focused shot gun approach for a jobs program with investment payoff would be good use of any stimulus package. and seeing how rail can touch every state it's a pretty wide pork exposure.
Art, to be clear, please show why supply and demand have absolutely nothing to do with the price of oil.
As I watch production numbers and consumption numbers, I see trends that resemble the supply and demand relationship described in textbooks.
Now bleach blond economists on television, like you, have explained speculators rig the price of oil and that supply and demand aren't factors.
How do these speculators fix oil prices and prevent supply and demand forces from having an effect? Are they like the PPT, and just print money at will to manipulate oil prices?
Wease:
Do you drink all the time?
I have no special formula. Back when sbvor was here with his ranting I did a reasonable amount of research on current demand/supply for oil and future predictions. Most of the research came from his links.
In 2007, and forecasted 2008, demand did exceed supply but only by a small margin. Further out forecasts did not anticipate a much wider gap. The current numbers were based on actual supplies and actual demand. Supply was what was produced and shipped and demand was what was ordered and bought.
We also know that in the past year, US, and worldwide consumption has dropped precipitously but, again, not by levels that would have justified a 70% drop in oil prices. If we follow your predictions of a fast moving decline in oil resource availability, even a steep decline in demand would be reasonably offset by a declining resource.
Keep in mind that commodity markets are called "futures" markets for a reason. Prices on "futures" markets are much less predicated on current activity than on anticipated activity. While some producers will benefit by pricing spot contracts on "futures" prices, the vast majority of oil is purchased on longer term contracts with fixed prices so the "futures" market pricing doesn't have as much impact on current prices. This is partially why Exxon was making such phenomenal profits.
It is a well known fact that "future" oil prices are set by the traders not the producers. The producers enjoy the higher "futures" prices because they come into play when negotiating new contracts, in addition to some spot contracts. In a larger sense the "futures" markets are all about speculation. Traders bet that hog prices, this time next year, will be X. They bring together buyers and sellers to trade contracts at X price. If a blight causes hog production to decline next year, the buyers make out like bandits. If hog production far exceeds that anticipated in X price and demand remains constant, the sellers of the contract make out big. My understanding is that over that year the contracts will change hands frequently as events alter the landscape and the contract prices rise and fall based on more current anticipation. Eventually someone is left holding the contract and either wins or loses. Since the winnings can be bigtime as also the losses, it is recommended that commodity markets are not the place for the faint at heart.
Now I doubt the traders set prices originally off the top of their heads. Chances are they have pretty involved computer models that given a stream of inputs they spit out probable future prices.
I would also bet that producers, oil included, probably get more involved in "futures" markets than anyone lets on.
In reality I would agree that at any given point in time no one can accurately determine demand/supply and the parity price. It is presumed that stable prices suggest that supply is in parity with demand; not unreasonable. My limited knowledge would suggest that economists, seeing rising prices, would believe that demand is increasing or supply is decreasing; less reasonable. Price adjustments often occur due to cost factors in the short term and within a certain range. Demand/supply prices, in realtime, are more a range than a fixed price. As with many things we don't always know the real factors until after the fact and the data is analyzed.
Just recently we saw a slight rise in oil prices in anticipation, ANTICIPATION, that OPEC will reduce production. The assumption is that demand will remain constant and with decreasing supply prices should rise. What will happen to those "futures" prices if demand decreases as well?
We also know that late last year there was significant movement of big money funds into the commodity markets, mainly in oil. More money seeking gains will produce more market volatility. Nothing feeds that volatility more than ever rising "futures" prices. The furor would have been shortlived had oil prices plummeted.
In net, sorry I can't regale you with charts and fancy algorithms, determining demand/supply can be done after the fact based on actual experience. For forecasting it I'd be more inclined to go with your option 1.
No one is suggesting that supply/demand doesn't have an influence. That's more of your black and white mindset.
How do these speculators fix oil prices and prevent supply and demand forces from having an effect?
They don't. They do know that barring a major fiasco, a trend analysis will give them a decent idea of probabilities but unanticipated hiccups can make paupers overnight. There are huge potential gains but also huge potential losses.
Weaseldog,
I am not equipped to provide calculations such as you requested from Art. However, you said this:
Demand was exceeding supply, and driving prices up. Speculators saw an oppurtunity and jumped in. Speculators look for a trend that's already there and try to get in early. They don't look at a market with no potential and throw money down a hole.
The question that must be answered is: was demand exceeding supply? In addition: when did it begin? Without looking at any fancy data on supply/demand, we can all look backwards and recall that we started taking a hit in our pocketbooks at the gas pumps immediately following Hurricane Katrina. Demand was absolutely outpacing supply in the Gulf region at that time. I can recall a gas station attendant here in NY telling me a week or so after the hurricane that their prices were inflated because they weren't receiving their gas deliveries on time due to the crisis in the Gulf region. We all started paying more for gas, thinking that soon, everything would be back on track and gas would go back down.
Enter your comment: Speculators look for a trend that's already there and try to get in early.
They sure jumped in. After awhile, when the pump pain was just too much for folks, we started hearing news reports of people traveling less and working out other modes of transportation due to the cost of gas. That's the same as saying that demand went down right? But the cost didn't go down.
It would seem that if demand was down and cost didn't follow, someone was manipulating the price and keeping it artificially high.
By the summer, oil reached a peak of $147 a barrel. When the financial crisis hit, oil slid to $61/barrel, which would indicate that speculation was accounting for 60% of the price. Such a drastic drop revealed that OPEC had a lack of control in the increasing prices over the past years. Indeed, in September, when OPEC set out to maintain higher prices by cutting production, Saudi Arabia voted against cutting production at the expense of their own revenue. That move by Saudi Arabia suggests that they knew that supply/demand wasn't as big of a factor as oil speculation.
Angry:
Wease is a good guy. Fairly bright too but sometimes he gets his panties in a wad. He drinks Scotch and blows smoke. Maybe I should try that, I could give up cigarettes. He also has a tendency to go so deep in the forest that the trees become a blur.
Weaseldog said:“Art, to be clear, please show why supply and demand have absolutely nothing to do with the price of oil.”
Weaseldog, I believe I’m on the same wavelength with Art on this topic. I’ve been involved with the investment industry for 30 years so let me give one possible response. Arts comments about the futures market is spot on the money.
You are correct in assuming that the primary driver of Oil prices is supply and demand.
And Art is correct in saying “Demand versus supply did not spike by 70% over the previous year nor did demand versus supply decline by 70% over the past few months. Demand has declined but if we assume that oil at $147/barrel was a demand/supply parity price then the recent decline would not find us back at $44/barrel.”
So, how do we reconcile the difference?
Most Business news reporters give a simple answer for the last 12 months dramatic swing. They say, “Speculators drove the price up and hedge fund deleveraging drove the price down.”
Speculators in this context means: Individuals, Mutual Funds, Hedge Funds, Traders, Pension Funds, University Endowments etc. who knew we were in one of the few world wide global booms in history (2002-2007) with skyrocketing demand from emerging markets like China and India. This combined with a declining dollar caused more “Investors/Speculators” to pour money into oil investments and oil futures. So, everyone was going long oil and the flood of money help push prices higher.
Think of Gold, unlike Oil it has limited commercial use but has swung 40% in price in just a few months based upon the flow of Investor/Speculator money flows (not any commercial demand).
Oil spiked this summer because of all the hype about going to war with Iran and the dollar hit a 30 year low. Investors/Speculators began selling everything when it was clear war was not coming and they realized the stock market and economy was in horrible trouble this summer. The selling escalated when to everyones amazment the dollar began climbing in the face of the world wide economic crisis.
So think of the price of oil as a function of Supply and Demand Plus the Velocity of Investor/Speculator money betting prices will rise or fall.
Between 1995-2001 few investors/speculators were interested in oil so the swings in a barrel of oil where much smaller. Between 2004-2007 money poured into the oil and commodities market. The Velocity of money in this sector was the highest in history and it was all betting the price of Oil was going up.
I have access to a ton of research on the Oil and Gas industry. I can assure you the "experts" are usually wrong both at the top and bottom. Computers programs are used for trading and moving massive amounts of money in and out of the market.
Art said, "No one is suggesting that supply/demand doesn't have an influence. That's more of your black and white mindset."
I argued that oil prices aren't set by just one factor, and you told me I was wrong.
Art, you have made a habit, of telling me I'm wrong, then agreeing with me.
What makes you do this?
Frankly it's freaky.
BMW, I argued that speculators weren't the only factor driving oil prices, that supply and demand fundamentals had an influence. He told me flat out that I'm wrong.
Then I asked him to back this up. He argued that I'm wrong, that it isn't just one factor. But I never made this argument. He did.
Art gets confused.
As to supply and demand...
Calculating supply and demand has some perilous problems.
Lazy economists measure demand by what people actuallyu buy.
Say you need 1000 apples. Let's say that 200 apples are available. You buy 200 apples.
An economist will argue that demand was for 200 apples, becuase you didn't buy 1000, becuase no one was selling that many.
So demand is 200 apples, even though, you needed 1000.
You can't buy more oil than is produced. So demand from this perspective can't exceed supply.
So using old fashioned economics from like the 1960s, demand is a function of price acceleration. Economists today don't use such methods, becuase they lead to politically inexpedient answers.
If you want to use Rush Limbaugh statistics, then you can blame specualtors 100%, rather than just giving them partial credit.
If demand didn't exceed suppy, then there would be no trend for these people to try to capitalize on.
Anonymous Anonymous said...
My food prices were up 10% yesterday over one week ago. Reality for many is food, shelter and utilities. The money on Wall Street and the Government spending is not REAL, It 's some twisted illusion to give economists and money managers a job. Can we just hit the reset button??
Tuesday, 16 December, 2008
_________________________________
That is exactly what needs to be done. However, it will never happen. Companies and Investors want their money. They won't take any loss for being stupid, and our government is giving it to them. Blame our government, they are making what was once a simple recession, turn into a huge depression.
If we had anyone who had any balls, they would force the companeis to take the losses on all the debts and help them restructure after they failed. It is what capitalism is folks, and its name is competition. If you screw up it is your own fault, and people must face the consequences. This "too big to fail" argument is pure Bull-crap. All this is, is a way for investors, executives, owners, and government officials to take all the money they can, and wait for the next recovery period to come out even more rich and powerful. Anyone who thinks otherwise needs to read between the lines the media is spewing.
So, who wants to create a business or buy an existing bank that's going under and beg for billions? I would love very much to pay off my increasing debts that were caused by negligent firms.
Also to Dr. Reich:
I am saving all my money to blow on all the goods that will fall off a cliff soon. Myself and about 100 of my other friends and relative are all doing the same, as well as their friends and family. It is way too late to stop the economy from tumbling now. A stimulus package will be used to pay off debts, and will be irrelevant since it won't buy anything other than perhaps food and utilities.
The best our government can do is to stop doing anything and let it all fall now. We have to rebuild or we will never have a future for our families. It sounds harsh and extremely pessimistic, but it is reality, and the sooner our greedy elitists realize they are digging their own graves, the sooner we can go back to living without fear.
Caryl said...
Wrong, wrong and wrong. We need to focus on honesty, accountability and morality in our life in our work and in our politics. We need to downsize everything we do and invest in a decent national rail system. We need to tear up pavement and plant gardens.We need to downsize everything we do and manage a contraction process, especially of government itself. We need to stop being an Empire and get in touch with being human beings. We need to stop the worship of Mammon, of bigness, of technology, and start devoting attention to humane civilization. We've got a lot of repair work to do in our souls.
__________________________________
I respect your opinion, but please no. Just no. You repair your soul, I will keep my capitalist devils soul. We have brains for a reason; to use them! That is all!
Weaseldog:
That figure about more being killed in Mexico than in Iraq applied to US troops being killed only - in the neighborhood of 5000.
Wease:
Besides being super sensitive, not a good trait for anyone so opinionated, you remind me of a guy going through a revolving door oblivious to who is coming in on the other side. It might also be considered strange for you to suggest that anyone is "freaky".
Now, John said: In hindsight it is clear that the runup in gas prices was due to speculation and the rundown is due to speculators getting out of the oil commodities market.
Having followed John on this blog for awhile I fully trusted that he was not suggesting that speculation was the only factor in rising oil prices, simply that it was the major factor.
Then you responded with: It's never been clear to me, that there was exactly one and only one factor involved in this event.
Demand was exceeding supply, and driving prices up. Speculators saw an oppurtunity and jumped in. Speculators look for a trend that's already there and try to get in early. They don't look at a market with no potential and throw money down a hole.
Having followed you for awhile on this blog as well, my sense of your argument was that speculators merely went along for the ride of rising prices created by a demand/supply disparity.
So I said: Am afraid that John is more correct in his assessment on oil prices....
The emphasis is on the word "more".
Then you responded, in your typical openmindedness (read sarcastic): As you're an expert, could you please give a mathematical explanation as to how demand is calculated?...
...How do you arrive at your numbers?
Could you please post the formula you used to derive your estimate?
Then later: BMW, I argued that speculators weren't the only factor driving oil prices, that supply and demand fundamentals had an influence. He told me flat out that I'm wrong.
Then I asked him to back this up. He argued that I'm wrong, that it isn't just one factor. But I never made this argument. He did.
Art gets confused.
You forever have this problem with seeing only black and white and worse, you often don't read what is being said, your defensiveness leads you to read what you decide is being said.
I'm confused? Physician heal thyself!
It is clear to most everyone that your questions were not being asked objectively but rather egocentrically. Were I new to this blog I might have accepted them as objective questions but I know you Wease and objectivity is not one of your strong points. I could have reacted in a more attacking mode but you know how I abhor attacking fellow bloggers. ;)
I am not inclined to rely on "experts" to formulate my thinking on any given subject. Nor am I inclined to ignore them. I, too, am gifted with a degree of egocentricity. I don't know that following a paradigm that they are always wrong buys you much in the way of enlightment. Likely the tipping point for me was when a Saudi oil official made the statement that oil prices beyond $60-$70/barrel could not be justified on a demand/supply basis. For a Saudi official to make this statement seemed contrary to his, and OPEC's, best interests. To me, that adds much validity to his, or anyone's statements.
The examples you proffer are always interesting even as they are limited.
Lazy economists measure demand by what people actuallyu buy.
Say you need 1000 apples. Let's say that 200 apples are available. You buy 200 apples.
An economist will argue that demand was for 200 apples, becuase you didn't buy 1000, becuase no one was selling that many.
So demand is 200 apples, even though, you needed 1000.
I know of no economists, given the knowledge in your example, who would suggest that demand was only for 200 apples. In the real world seldom are the constraints you pose all that well defined. Even with oil, projected demand is a moving target. Further there is the price elasticity of demand that even lazy economists would consider.
Let's say that apples normally sell for $.05 each and you have $50 to satisfy your demand. If the seller knows this and he also knows that no other supply is readily available, he is going to raise his price for apples. He might start by charging $.25 each, taking all your money for 200 apples. At that price your demand may change. You may even decide that Kumquats is a viable substitute and go in search of Kumquats. Faced with that, the seller then negotiates his price for apples to reach that point where your demand equals his supply. Demand is, for most products, elastic, predicated on acceptable substitutions and is generally defined as a demand/supply/price equation. At $.05 each your demand for apples is 1000. At $.25 each your demand will fall to 200 because that's all the money you have. You may desire more apples but if you can't afford them I'm not sure that it would be called demand. There is that willing buyer, willing seller thingy.
Let's further assume that you agree to purchase the 200 apples at $.15 each and an interested bystander is watching the negotiations and decides that in the future you will still want 1000 apples if they are $.05 each but that you are flexible. He then goes out and contracts with another grower for his next crop of apples, say 1000, and since he is taking over the selling expenses and logistics he offers $.025 each to the grower. The grower is happy because he has sold his entire crop with no worry about selling cost or perishability. The "trader" knows that if your future demand remains at 1000 at $.05 each he can sell the entire crop and profit $.025 each. He also knows that if your money supply increases and your desire for apples becomes less elastic he might be able to get at least $.15 or more for each apple. Making even more profit. Rather than take all the apparent risks he may decide to contract with you for the future sale of the crop, 1000 apples, he now owns at an agreed price of $.10 each, still making a huge profit.
Supply, ignoring natural impacts, is well defined in the above example, even though in a growing cycle, more supply can be generated. But what in the above example is real demand? Does it not vary depending on the price? Do the actions of the "trader" not begin to influence the price, perhaps, with more influence that any one seller?
Almost all economists would consider the above and many other factors before they would attempt to quantify projected demand. And any projected demand they calculated would be highly dependent on price and elasticity.
Trying to discern demand absent a reliance on actuals is somewhat of a shot in the dark. In your example demand is a given, again depending of prices, but in the real world, unrequited demand, that for which no orders were extended, cannot be known other than through mathematical models full of assumptions.
You know me as well and when I attack your veracity it is usually far more clear than my initial statement was in this case.
Have another drink. ;)
Wease:
I forgot to give a heads up to BMW for filling in the blanks and adding even more critical info to the discussion. Thanks BMW.
If you truly think that demand must exceed supply before speculators enter the fray it is best that you stay out of the commodities markets.
Certainly I would not rule out price acceleration as a factor either, but if you follow markets you will see that price acceleration or deceleration often bears no resemblance to any sort of reality. It is the thing of which speculators are made.
Fellows:
The best way to understand supply and demand and speculation is to use the life jacket theory. There are 100 passengers and crew on a boat that might be sinking. The captain announced over the PA system that"everyone of you 100 passengers and crew should go to the main salon and pickup a life jacket. There are 102 life jackets, and space in the lifeboats for 102 passengers nad crew." The odds are pretty good that most folks will do as told in an oderly manner. But suppose instead the captain announces "will every one of you 100 passengers and crew go to the main salon and put on a life jacket. We have 99 life jackets and space for 99 passengers and crew in the life boats." Any guess on how orderly folks will go to the main salon and seek out a life jacket?
A 'perceived' mere 1% or 2% surplus or shortage of a commodity with respect to demand is the prime factor in determining the intensity of speculation.
Fox:
Decent analysis. If all investors could only buy long, at current values and not futures, all markets would be much more stable, although boring.
Thank you Art for setting up a strawman argument to contradict me with, then using that strawman to make a long explanatory argument as to why your strawman arguments are wrong.
And thank you for misreading my statement, applying an imaginary meaning to it, arguing against that, then accusing me of poor reading comprehension.
I also would like to thank you for repeatedly accusing me of being a drunkard.
I look forward to more strawman based attacks from you in future threads.
Seve asks
How do these speculators fix oil prices and prevent supply and demand forces from having an effect? Are they like the PPT, and just print money at will to manipulate oil prices?
Don't know what you mean by "PPT", but yes by removing reserve requirements, investment banks were unfortunately able to leverage (create money)essentially at will, inflating asset prices (houses, stock market, oil futures).
Of course once this Ponzi scheme was exposed, we have deleveraging, and the process of money creation is reversed. A very small fall in asset values causes a huge fall in this leveraged money creation, a fact which the money elitists are attempting to offset by having Congress act as their agent to restore this loss in "wealth" by taxpayer financed (future debt) money creation.
Another way to look at it is "stealing as much silverware as possible" before the ship goes down.
Wease:
Despite the fact that you have a tendency to view any argument to your hallowed thoughts a strawman argument, you are beginning to border on paranoia.
Step back, take a deep breath, have another drink and begin again. Maybe writing a program here and there will calm you down.
Deflation is a natural consequence and to be expected in a classic recession, which we are in. This should be no surprise.
What makes both inflation and deflation much worse than it would otherwise be is our corrupt and bankrupt fractional reserve banking system based on fiat currency (no gold standard).
THAT is the real issue that needs to be addressed.
How to help the American and World Economy
The real problem is on the demand side not the supply side. Increased demand will always increase supply.
Every month we track the large number of homes that have gone into foreclosure. What we should be adding up is the number of people who have a foreclosure on their credit rating in the last 3 years. How many millions? The average home foreclosure gives 2 people bad credit. The vast majority of these people would be reliable barrowers but have been removed from the system by the foreclosure on their credit record.
If the federal government passed a law that banks, credit unions and other credit recording/scoring companies can’t use foreclosures, that occurred after 12-31-2005 (or when ever the beginning of the housing bubble burst was), in the calculating of a credit rating or the determination of loan worthiness or interest rate to be applied, then many of those millions of citizens would be able to (based on all their other credit and employment histories) refinance or barrow to do a remodel, buy a car or what ever they need, at the current low rates. That would stimulate all industries, housing, retail, auto, etc. That increase in spending will create private sector jobs and an increase in tax revenues, which would create government jobs.
Thanks for considering my suggestion,
Charly Price
420 Calvary Lane, Nevada City, CA 95959
530-757-9480
charly01@sbcglobal.net
Didn't Japan attempt stimulus programs during their lost decade? Didn't seem to help. But they sure got some shiny roads. Whoopee-doo.
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