Seven years ago today, in response to a very real financial emergency, the Fed embarked upon its zero interest rate policy. With the emergency long over the Fed finally acted by raising the federal funds rate by 25 basis points. Because the rate rise was accompanied by very dovish comments the stock market rallied smartly and the bond market, which had correctly priced in the move, ended the day substantially unchanged.
There are three points to take note of:
1. Monetary policy remains extraordinarily accommodating. My analogy is that on a 65 mph speed limit highway, instead of going 90 mph the car has slowed down to a still excessive 85 mph. Thus today's move is unlikely to slow the economy and in fact with the Fed signalling that the emergency is over, the economy could very well speedup.
2. Markets are way too complacent about inflation. With the core CPI increasing at a 2% rate yoy it won't take much for the Fed's personal consumption deflator to be there as well. Moreover housing costs, health care and other services are reporting inflation rates well above 2%. Once oil prices stabilize and likely reverse their recent decline most of the ingredients will be in place for an upside surprise in the inflation data. Stay tuned!
3. If you closed your eyes and I told you that core inflation was 2%, the unemployment rate was 5%, GDP growth is above 2%, and the stock market is close to an all time high, what would you guess the fed funds rate to be? It would be quite a bit higher than .25%-.5%.
Net Net. Interest rates will surprise on the upside.
Wednesday, December 16, 2015
Saturday, December 5, 2015
My Amazon Review of Eric Rauchway's "The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace"
Too Partisan to be Real History
UC Davis history professor Eric Rauchway
let his rabid partisanship get in the way of some of the real history that is
in his book. His cheer-leading is obvious in the subtitle and that should
clearly warn less biased readers. It is not so much what Rauchway left in, but
rather what he left out and in doing that he did a real disservice to his
readers.
What Rauchway leaves out is as follows:
1.
Although he
rightly blames the operation of the gold standard as one of the predominant causes
of the Great Depression, he fails to discuss how successful it was in spurring growth
in the five decades up to World War I.
2.
He fails to
emphasize the fact that it was the imbalances caused by the financing of World
War I that was the key element in the demise of the gold standard.
3.
He completely ignores
the “forgotten depression’ of 1920-21 where recovery was rapid absent most of
the Keynesian remedies that came later and he ignores the great prosperity of
the 1920s.
4.
He hails
President Roosevelt in his “blowing up” of the World Economic Conference in
1933, but fails to mention that far from being an internationalist, Roosevelt
was an isolationist. The fascists in Europe took note of America’s withdrawal
from the world.
5.
He characterizes
the 1936 Tri-Partite Agreement to stabilize the French Franc as the start of an
anti-Nazi coalition. Wrong! Although France was lost some gold following the
German reoccupation of the Rhineland, the real cause of the Franc’s collapse
was the popular front policies of Leon Blum which scared the living daylights
out of French Capital.
6.
He completely
ignores the fact that after all of the New Deal spending programs and the
Federal Reserve money printing, the economy remained mired in depression as
late as 1939.
7.
He makes way too
a big deal out of the congressional vote to join the IMF. The measure passed
both houses of Congress easily.
8.
Although he notes
that Assistant Treasury Secretary Harry Dexter White, Keynes' negotiating partner at Bretton Woods, was a Soviet spy, he doesn’t
take seriously the Soviet penetration into the highest circles in the New Deal.
9.
In his
glorification of managed currencies he fails to note the debacle that came
after Nixon closed the gold window in 1971. Further if you want a date to start
when the United States economy became “financialized” you can do a lot worse
than 1971. Whatever the real problems of the gold standard, it would certainly
have acted as a very real constraint on what we call “the shadow banking system”.
For readers who want a better
understanding of the Great Depression I would recommend much of the works of
Barry Eichengreen, Ben Bernanke and Peter Temin.
For the full Amazon URL see:
Thursday, December 3, 2015
2016: "Full Employment" with Modest Inflation, UCLA Anderson Forecast, December 2015
With the unemployment rate at 5% reported for
October, the economy is operating at or very close to the
traditional definition of full employment. (See Figure 1).
However, because the employment to population ratio of
59.3% is four percentage points below that recorded prior
to the start of the financial crisis in 2006, for more than a
few Americans the economy does not feel anywhere close
to full employment. (See Figure 2). Nevertheless, employment
growth remains healthy with the economy generating
jobs at a 200,000 a month clip that will bring with it further
declines in the unemployment rate to 4.6% (See Figure 3).
Although GDP growth stalled in the third quarter at
a tepid 2.1% annual rate, a mini-inventory cycle knocked
0.6% off the reported growth rate. The growth in real inventories
declined from $113.5 billion in the second quarter to
a more normal $90.2 billion in the third quarter. (See Figure
4, revised data not reflected in the chart) With the bulk
Figure 1 Unemployment Rate 2007Q1- 2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson
Figure 2 Employment to Population Ratio, 1948 – Oct 2015, Monthly Data, Percent
Sources: U.S Bureau of Labor Statistics via FRED.
the inventory correction behind us, we anticipate that real
GDP will grow at a 2.9% annual rate in the current quarter
and grow at a 3.1% year-over-year pace in 2016, the highest
since 2005. (See Figure 5). The seemingly high 3.8%
growth we are forecasting in the first quarter of 2016 is due
to the temporary end of the “sequester” just agreed to by
Congress that will trigger a surge in federal spending that
quarter. Our preliminary view for 2017 is that growth will
slow to 2.6% as a result of the tightening labor market and
the move towards interest rate normalization. (See below)
Higher Wages and Inflation
The tightening labor market will bring with it the
long-awaited increase in employee compensation. Instead
of increasing at the 2010-2015 average of 2.1% a year,
compensation is forecast to increase at a 3.5% and 4.2% rate
in 2016 and 2017, respectively. (See Figure 6) Anecdotal
evidence coming from the retail, construction, meat packing
and professional services sectors indicate that wages are
already rising well above what the official data is reporting.
Figure 3 Payroll Employment, 2007Q1 -2017Q4F, SAAR
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
Figure 4 Real Change in Inventories, 2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 5 Real GDP Growth, 2007Q1-2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 6 Employee Compensation per Hour, 2005Q1 -2017Q4F
Bureau of Labor Statistics and UCLA Anderson Forecast
Adding to the cost pressures coming from the labor
market, especially in the broadly defined services sector, it
is our expectation that oil prices will begin to rebound in
2016 as domestic output from the very short-lived fracking
wells is cut by about a million barrels a day and the intense
budget pressures on OPEC and Russia lead to some degree of
output restrictions. (See Figure 7) Further, as we have noted
in the past, housing costs are already rising at a 3% pace
coming from the continued tightness in the rental market.
As a result, inflation as measured by the Consumer
Price Index (CPI) will ramp up to 2.1% in 2016 and 3.4%
in 2017. (See Figure 8) Perhaps more important, the core
CPI, which excludes food and energy is forecast to increase
2.3% and 2.6% in 2016 and 2017, respectively. The Fed is
about to get the inflation it has been waiting for.
The Fed to Start Normalizing Interest Rates
Seven years ago this month, in response to the rapidly
metastasizing financial crisis, the Federal Reserve embarked
upon its zero interest rate policy and later adopted three
massive programs of quantitative easing. With the financial
emergency long over, the unemployment rate indicating
near full-employment and the likelihood that inflation will
soon approach its 2% target, we expect the Fed to begin
normalizing interest rates by increasing the Federal Funds
rate this month. Thereafter, we anticipate that the initial pace
towards the normalization of policy will be gradual, but if
we are correct about our outlook for inflation, the Fed will
begin to speed up the process. Thus, we forecast that by the
end of 2016 the federal funds rate will be about 1.5% and it
will approximate 3.25% at the end of 2017. (See Figure 9)
Figure 7 Oil Price, West Texas Intermediate Crude,
2007Q1 – 2017Q4
Sources: Commodity Research Bureau and UCLA Anderson Forecast
Figure 8 Consumer Price Index vs. Core CPI, 2007Q1 - 2017Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
Figure 9 Federal Funds vs. 10-Year U.S. Treasury Bonds,
2007Q1 -2017Q4
Sources: Federal Reserve Board and UCLA Anderson Forecast
The Consumer in the Driver’s Seat
Driven by a strengthening labor market and an improved
balance sheet, the consumer is once again playing
its leading role in the economy. Real consumption spending
is expected to increase by 3.2% this year and again in 2016.
(See Figure 10) Don’t be all that concerned about the negative
headlines affecting such retail stalwarts as Macy’s and
Nordstrom. The fact remains that the retail landscape has
long shifted away from the traditional department stores
to more innovative formats and more importantly, internet
retailing.
Evidence of the robustness of consumer demand is
coming from red hot automobile sales where is now appears
that selling rates on the order of 18 million units might be
the new normal. (See Figure 11) Further, as we noted last
quarter, the new housing market is rapidly improving and we
anticipate that housing starts will exceed 1.4 million units in
both 2016 and 2017 compared to an estimated 1.13 million
units this year. (See Figure 12) Indeed the fourth quarter of
this year is forecast to come in at a 1.23 unit million annual
rate. We also expect the housing baton to be passed from
the white hot multi-family sector to the construction of
single-family homes which remains well below prior levels
of activity. If we are wrong here it will not be due to higher
interest rates, but rather to a shortage of construction workers
that is already hampering the delivery of new homes.
Nonresidential Construction: A Tale of
Two Markets
Investment in nonresidential construction stalled in
2015. (See Figure 13) While growing in most categories,
investment in mines and wells, almost all of it related to
oil and gas drilling, collapsed under the weight of the 60%
decline in oil prices. For example, from the 4Q2014 through
Figure 10 Real Consumption Spending, 2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 11 Light Vehicle Sales, 2007Q1 – 2017Q4,
In Millions of Units
Sources: BEA and UCLA Anderson Forecast
Figure 12 Housing Starts, 2007Q1 -2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
the current quarter of this year, real investment in mines and
wells will have declined from $137 billion to $70 billion, a
decline of nearly 50%. (See Figure 14) On a purely arithmetic
basis this decline whacked 0.4% off 2015 real GDP.
In contrast, commercial construction of office buildings,
shopping centers and warehouses is ramping up in
response to growing demand for modern offices and the
need to improve the retail supply chain. This investment is
being funded by the flood of capital reaching for real estate
yields in a yield starved world. Since the low in the 1Q2011
to the third quarter of 2015, real investment in commercial
construction has increased from $63 billion to $108 billion.
(See Figure 15) Further, because this sector is still just ramping
up, we forecast real commercial construction spending
to be $145 billion in 2017, still well below the $191 billion
recorded in the long ago year of 2000.
Exports Remain the Big Risk
Already weak export growth has gotten weaker in
recent quarters. (See Figure 16) American exporters are
facing the twin challenges of weak foreign economies and a
very strong dollar which is up 18% over the past year. (See
Figure 17) Where earlier in the recovery real exports were
growing at a 12% rate, we will now be lucky to achieve 4%
growth. Because we believe that most of the global weakness
is behind us, we anticipate that the foreign exchange
value of the dollar will soon peak and then gradually decline.
We would note that if we are wrong here and the global
economy continues to weaken and the dollar continues to
strengthen, our forecast of 3% growth in 2016 would be
way over optimistic.
There are two other risks with respect to trade. With
the leading contenders for both parties’ presidential nominations
opposed to the proposed Trans Pacific Partnership there
is a very real possibility that the United States will turn down
its first major trade deal since the 1930s. Although turning
down the deal in the short run would not have an immedi-
Figure 13 Real Investment in Nonresidential Construction,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 14 Real Investment in Mines and Wells,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 15 Real Investment in Commercial Structures,
2007Q1 -2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
ate impact on real GDP, it could nevertheless negatively
impact the stock market and over the longer run seriously
hamper exports as our Asian trading partners make separate
deals among themselves and with China. Second, the
mass migration crisis facing Europe along with the horrific
acts of terrorism in Paris have the potential to break apart
the Eurozone with unknown consequences for the global
economy. Compared to immigration, the Greek crisis was
a walk in the park for the European elite.
Defense Spending on the Rebound
As we have been arguing for over a year, the five year
decline in real defense spending is over. Congress recently
amended its “sequester” program to allow defense spending
to increase. We have modeled in further increases in defense
spending for 2017 to account for the increasingly dangerous
geopolitical environment. In our view this increase will
not be a one-off event, but rather the start of a major trend.
Meantime, we forecast that real defense purchases will
increase by 2.9% and 2.4% in 2016 and 2017, respectively.
(See Figure 18)
Conclusion
Continued job growth along with wage increases
will power consumption in 2016 leading to the first year
of greater than 3% growth in real GDP since 2005. Higher
wages along with a modest rebound in oil prices and higher
housing costs will push the inflation rate above 2% leading
the Federal Reserve to embark on a gradual tightening cycle
that will begin this month. Strength will be evidenced in
housing and commercial construction along with a booming
automobile market. The collapse in oil-related capital
spending will come to an end next year and defense spending
will be increasing after five years of decline.
October, the economy is operating at or very close to the
traditional definition of full employment. (See Figure 1).
However, because the employment to population ratio of
59.3% is four percentage points below that recorded prior
to the start of the financial crisis in 2006, for more than a
few Americans the economy does not feel anywhere close
to full employment. (See Figure 2). Nevertheless, employment
growth remains healthy with the economy generating
jobs at a 200,000 a month clip that will bring with it further
declines in the unemployment rate to 4.6% (See Figure 3).
Although GDP growth stalled in the third quarter at
a tepid 2.1% annual rate, a mini-inventory cycle knocked
0.6% off the reported growth rate. The growth in real inventories
declined from $113.5 billion in the second quarter to
a more normal $90.2 billion in the third quarter. (See Figure
4, revised data not reflected in the chart) With the bulk
Figure 1 Unemployment Rate 2007Q1- 2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson
Figure 2 Employment to Population Ratio, 1948 – Oct 2015, Monthly Data, Percent
Sources: U.S Bureau of Labor Statistics via FRED.
the inventory correction behind us, we anticipate that real
GDP will grow at a 2.9% annual rate in the current quarter
and grow at a 3.1% year-over-year pace in 2016, the highest
since 2005. (See Figure 5). The seemingly high 3.8%
growth we are forecasting in the first quarter of 2016 is due
to the temporary end of the “sequester” just agreed to by
Congress that will trigger a surge in federal spending that
quarter. Our preliminary view for 2017 is that growth will
slow to 2.6% as a result of the tightening labor market and
the move towards interest rate normalization. (See below)
Higher Wages and Inflation
The tightening labor market will bring with it the
long-awaited increase in employee compensation. Instead
of increasing at the 2010-2015 average of 2.1% a year,
compensation is forecast to increase at a 3.5% and 4.2% rate
in 2016 and 2017, respectively. (See Figure 6) Anecdotal
evidence coming from the retail, construction, meat packing
and professional services sectors indicate that wages are
already rising well above what the official data is reporting.
Figure 3 Payroll Employment, 2007Q1 -2017Q4F, SAAR
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
Figure 4 Real Change in Inventories, 2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 5 Real GDP Growth, 2007Q1-2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 6 Employee Compensation per Hour, 2005Q1 -2017Q4F
Bureau of Labor Statistics and UCLA Anderson Forecast
Adding to the cost pressures coming from the labor
market, especially in the broadly defined services sector, it
is our expectation that oil prices will begin to rebound in
2016 as domestic output from the very short-lived fracking
wells is cut by about a million barrels a day and the intense
budget pressures on OPEC and Russia lead to some degree of
output restrictions. (See Figure 7) Further, as we have noted
in the past, housing costs are already rising at a 3% pace
coming from the continued tightness in the rental market.
As a result, inflation as measured by the Consumer
Price Index (CPI) will ramp up to 2.1% in 2016 and 3.4%
in 2017. (See Figure 8) Perhaps more important, the core
CPI, which excludes food and energy is forecast to increase
2.3% and 2.6% in 2016 and 2017, respectively. The Fed is
about to get the inflation it has been waiting for.
The Fed to Start Normalizing Interest Rates
Seven years ago this month, in response to the rapidly
metastasizing financial crisis, the Federal Reserve embarked
upon its zero interest rate policy and later adopted three
massive programs of quantitative easing. With the financial
emergency long over, the unemployment rate indicating
near full-employment and the likelihood that inflation will
soon approach its 2% target, we expect the Fed to begin
normalizing interest rates by increasing the Federal Funds
rate this month. Thereafter, we anticipate that the initial pace
towards the normalization of policy will be gradual, but if
we are correct about our outlook for inflation, the Fed will
begin to speed up the process. Thus, we forecast that by the
end of 2016 the federal funds rate will be about 1.5% and it
will approximate 3.25% at the end of 2017. (See Figure 9)
Figure 7 Oil Price, West Texas Intermediate Crude,
2007Q1 – 2017Q4
Sources: Commodity Research Bureau and UCLA Anderson Forecast
Figure 8 Consumer Price Index vs. Core CPI, 2007Q1 - 2017Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
Figure 9 Federal Funds vs. 10-Year U.S. Treasury Bonds,
2007Q1 -2017Q4
Sources: Federal Reserve Board and UCLA Anderson Forecast
The Consumer in the Driver’s Seat
Driven by a strengthening labor market and an improved
balance sheet, the consumer is once again playing
its leading role in the economy. Real consumption spending
is expected to increase by 3.2% this year and again in 2016.
(See Figure 10) Don’t be all that concerned about the negative
headlines affecting such retail stalwarts as Macy’s and
Nordstrom. The fact remains that the retail landscape has
long shifted away from the traditional department stores
to more innovative formats and more importantly, internet
retailing.
Evidence of the robustness of consumer demand is
coming from red hot automobile sales where is now appears
that selling rates on the order of 18 million units might be
the new normal. (See Figure 11) Further, as we noted last
quarter, the new housing market is rapidly improving and we
anticipate that housing starts will exceed 1.4 million units in
both 2016 and 2017 compared to an estimated 1.13 million
units this year. (See Figure 12) Indeed the fourth quarter of
this year is forecast to come in at a 1.23 unit million annual
rate. We also expect the housing baton to be passed from
the white hot multi-family sector to the construction of
single-family homes which remains well below prior levels
of activity. If we are wrong here it will not be due to higher
interest rates, but rather to a shortage of construction workers
that is already hampering the delivery of new homes.
Nonresidential Construction: A Tale of
Two Markets
Investment in nonresidential construction stalled in
2015. (See Figure 13) While growing in most categories,
investment in mines and wells, almost all of it related to
oil and gas drilling, collapsed under the weight of the 60%
decline in oil prices. For example, from the 4Q2014 through
Figure 10 Real Consumption Spending, 2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 11 Light Vehicle Sales, 2007Q1 – 2017Q4,
In Millions of Units
Sources: BEA and UCLA Anderson Forecast
Figure 12 Housing Starts, 2007Q1 -2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
the current quarter of this year, real investment in mines and
wells will have declined from $137 billion to $70 billion, a
decline of nearly 50%. (See Figure 14) On a purely arithmetic
basis this decline whacked 0.4% off 2015 real GDP.
In contrast, commercial construction of office buildings,
shopping centers and warehouses is ramping up in
response to growing demand for modern offices and the
need to improve the retail supply chain. This investment is
being funded by the flood of capital reaching for real estate
yields in a yield starved world. Since the low in the 1Q2011
to the third quarter of 2015, real investment in commercial
construction has increased from $63 billion to $108 billion.
(See Figure 15) Further, because this sector is still just ramping
up, we forecast real commercial construction spending
to be $145 billion in 2017, still well below the $191 billion
recorded in the long ago year of 2000.
Exports Remain the Big Risk
Already weak export growth has gotten weaker in
recent quarters. (See Figure 16) American exporters are
facing the twin challenges of weak foreign economies and a
very strong dollar which is up 18% over the past year. (See
Figure 17) Where earlier in the recovery real exports were
growing at a 12% rate, we will now be lucky to achieve 4%
growth. Because we believe that most of the global weakness
is behind us, we anticipate that the foreign exchange
value of the dollar will soon peak and then gradually decline.
We would note that if we are wrong here and the global
economy continues to weaken and the dollar continues to
strengthen, our forecast of 3% growth in 2016 would be
way over optimistic.
There are two other risks with respect to trade. With
the leading contenders for both parties’ presidential nominations
opposed to the proposed Trans Pacific Partnership there
is a very real possibility that the United States will turn down
its first major trade deal since the 1930s. Although turning
down the deal in the short run would not have an immedi-
Figure 13 Real Investment in Nonresidential Construction,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 14 Real Investment in Mines and Wells,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 15 Real Investment in Commercial Structures,
2007Q1 -2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
ate impact on real GDP, it could nevertheless negatively
impact the stock market and over the longer run seriously
hamper exports as our Asian trading partners make separate
deals among themselves and with China. Second, the
mass migration crisis facing Europe along with the horrific
acts of terrorism in Paris have the potential to break apart
the Eurozone with unknown consequences for the global
economy. Compared to immigration, the Greek crisis was
a walk in the park for the European elite.
Defense Spending on the Rebound
As we have been arguing for over a year, the five year
decline in real defense spending is over. Congress recently
amended its “sequester” program to allow defense spending
to increase. We have modeled in further increases in defense
spending for 2017 to account for the increasingly dangerous
geopolitical environment. In our view this increase will
not be a one-off event, but rather the start of a major trend.
Meantime, we forecast that real defense purchases will
increase by 2.9% and 2.4% in 2016 and 2017, respectively.
(See Figure 18)
Conclusion
Continued job growth along with wage increases
will power consumption in 2016 leading to the first year
of greater than 3% growth in real GDP since 2005. Higher
wages along with a modest rebound in oil prices and higher
housing costs will push the inflation rate above 2% leading
the Federal Reserve to embark on a gradual tightening cycle
that will begin this month. Strength will be evidenced in
housing and commercial construction along with a booming
automobile market. The collapse in oil-related capital
spending will come to an end next year and defense spending
will be increasing after five years of decline.
Sunday, November 29, 2015
OPEC: Looking into the Abyss
OPEC is in crisis. With Brent crude trading at around $45 a barrel, the price of oil has traded lower and for longer than most analysts anticipated since the oil price collapse that began late last year. The oil price shock has brought the Venezuelan economy to its knees, is threatening Saudi Riyal's peg to the dollar and has put Russian economy into recession. Meantime Saudi Arabia, the Gulf states and Russia are fighting expensive wars in Syria and Lebanon.
Sooner or later something has to give because if nothing comes out of the OPEC meeting scheduled for this Friday, and nothing is expected, there are more than a few analysts who believe that the oil price could fall into the low $30s or perhaps into the $20s. Although OPEC is nowhere near as strong as it once was it still accounts for about 31 million barrels/day of output, approximately 1/3 of global production of about 94 million barrels/day which is about 2 million barrels/day too much. Add in Russia's 11 million barrels/day of output you get to about 45% of global production.
My guess is that the current pain that OPEC and Russia are feeling and the prospect of future pain coming from another break in oil prices is too great. OPEC in concert with Russia will act to reduce output. While there was much press commentary about Syria when Putin met with the Saudi Foreign Minister in Moscow a few weeks ago and again when Putin met with the Ayatollah Khamenei in Tehran last week, there was nary a comment on oil prices. It strains the imagination to think that they did not talk about oil prices. Thus the surprise coming out of the OPEC meeting will be recommended cuts in output with the implicit cooperation of Russia. All it would take would be a 5% drop in the combined output of OPEC and Russia to bring supply and demand into balance.
But you would say I am not taking into account the planned increase in Iranian oil exports. I think that is over-rated because Iranian oil is already finding its way into the market outside of the sanctions regime.
Monday, November 23, 2015
My Amazon Review of Paul Halpern's "Einstein's Dice and Schrodinger's Cat: How Two Great Minds Battled Quantum Randomness to Create a Unified Theory of Physics
Not Physics for Dummies
Physicist Paul Halpern has written and
interesting and difficult book about the lives and theories of two of the greatest
physicists of the 20th century. His discussion about the lives and
philosophies of Einstein and Schrodinger is fascinating. This is especially
true when he discusses Einstein’s deity in the context of Baruch Spinoza which
leads him to believe that science is deterministic and not probabilistic. Hence
Einstein’s aphorism that God does not play dice with the universe. He also goes into great detail about Schrodinger’s
very active sex life with more than a few women all the while being married. He
spends more time on this than Schrodinger’s famous cat that is half dead and
half alive.
At least for me, where he makes it
difficult for the lay reader is his discussion of the science of Einstein and
Schrodinger. Before reading this book I would suggest that the lay reader
become very acquainted with the equivalent of “quantum mechanics for dummies,” “relativity
for dummies,” and “unified field theory” for dummies.” Alas with only one
course of college level physics there were many parts of this book where I was
lost. The book needs clearer examples of the theories and diagrams would be of
great help.
Finally his title is somewhat of a
misnomer. Neither Einstein nor Schrodinger, try as they might, never arrived at
a unified theory of physics. Even today’s standard model which Halpern
acknowledges does not account for the role of gravity while accounting for
electromagnetism and weak and strong forces of nuclear interaction. With that
last sentence I am way over my head.
For the full Amazon URL see:
Saturday, November 21, 2015
My Amazon Review of Roger Lowenstein's "America's Bank: The Epic Struggle to Create the Federal Reserve"
The Making
of the Fed
The “money question” is as old as the
Republic. In “America’s Bank” Roger Lowenstein tells the story as to how the
United States in 1913 brought into being its first central bank since 1837.
Recall that the Second Bank of the United States came to an end when President
Andrew Jackson refused to renew its charter. This triumph of Jacksonian
Democracy would come back to haunt the Democrats who supported the creation of
the Federal Reserve.
To be sure there were panics and crashes
in those intervening years, but absent a central bank the U.S. still grew to
become the largest economy in the world. What triggered the need for a central
bank was the Panic of 1907 which nearly brought the economy to its knees and it
required the rescue of a bankers syndicate led by one James Pierpont Morgan. In
response to the panic, Congress passed the Aldrich-Vreeland Act which
authorized the Secretary of the Treasury to issue emergency currency and it
established a National Monetary Commission to investigate the causes of the
panic and to recommend policy changes. Unlike the 2008 financial crash Congress
acted first with the Dodd-Frank Law and then created a financial inquiry
commission whose work is already forgotten.
It here where we begin to see the
leading players involved in the creation of the Fed. First and foremost is
Rhode Island Senator Nelson Aldrich who chairs the commission, studies European
central banks and becomes convinced of the need for a central bank in the U.S. Next
is Paul Warburg, a German immigrant and scion of the Warburg banking family who
worked for their U.S. affiliate Kuhn Loeb. He is rightfully called by most
historians and Lowenstein as the father of the Federal Reserve as he becomes
the most knowledgeable and tireless advocate for a central bank. It is Warburg and Aldrich who organize the
famous Jekyll Island bankers’ retreat where all of the essential elements of
the Federal Reserve Act are written in secret. Sometimes transparency isn’t
such a good idea.
After the Democrats sweep the 1912
elections Republican Aldrich is moved to the sidelines and the new key players
are President Wilson who deftly works around his party’s Jacksonian traditions
and Representative Carter Glass of Richmond, Virginia, who though a Jacksonian becomes
the leading advocate for a central bank. Glass would later as a Senator, be the
coauthor of the Glass-Steagall Act separating commercial banking from
investment banking. Lowenstein spends a great deal of time dealing with both
Wilson’s and Glass’ maneuverings to bring about passage of the act. He tells a
good story especially in regard to how the U.S., in deference to its Jacksonian
traditions, doesn’t have one central bank but rather a national board with 12
district banks.
I have a few quibbles with this otherwise
wonderful book. First he doesn’t’ really tell us why there is a district bank
in Richmond, Virginia, perhaps it is Carter Glass’ hometown or why there are
two district banks in Missouri. Is it because the Speaker of the House Champ
Clark was from Missouri or was it out of concern with supplying credit to
agriculture in the Midwest? Finally, although he mentions it in passing, he
doesn’t really go into how successful the pre-Fed Aldrich Vreeland Act was in
the summer of 1914 in supplying needed cash to the banking system after the
outbreak of World War 1. Remember although enacted in 1913, the Fed did not
open its doors until December 1914. Friedman and Schwartz note in their “Monetary
History…” that the use of Aldrich-Vreeland money in 1914 did a far better job
in protecting the banking system than what the Fed did in 1930-31.
For the full Amazon URL see:
Friday, November 20, 2015
The French Lion and the American Poodle
It has been five days since the horrific terrorist attacks in Paris. During that interval we have learned much about the character of the President of France and the President of the United States. It is clear that French President Hollande is a decisive leader ready and willing to act to defend his country. In contrast President Obama, of the squishy red-line, appears to be more hostile towards his domestic opponents than ISIS. With his typical debating style he argues he doesn't allow for a middle ground between an all-out intervention and doing nothing.
Perhaps he should talk to his former Secretary of State who is now advocating a no-fly zone and committing considerably more special operations forces. Mrs. Clinton is obviously way more clear eyed than her former boss. For whatever reason President Obama has become the American poodle to the French lion.
Perhaps he should talk to his former Secretary of State who is now advocating a no-fly zone and committing considerably more special operations forces. Mrs. Clinton is obviously way more clear eyed than her former boss. For whatever reason President Obama has become the American poodle to the French lion.
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