Category Archives: Economy

IV An India Hand at the Daily Reckoning: What the Yonghy Bonghy Bo Didn’t Know 11/13/2006 (reprinted)

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From the Daily Reckoning archives — my first encounter with globalisation in India (we used this in the book). My note is down in the middle of the newsletter.
Mon, November 13, 2006 02:24:26 PM

From:

The Daily Reckoning

Subject:

Today’s Daily Reckoning:

Worthless Dollars in a Drafty Shack

The Daily Reckoning

Baltimore, Maryland

Monday, November 13, 2006

———————

*** What’s that? Greenspan isn’t always right?! We are shocked!

*** Toll Brothers CEO worries that there is no recovery in sight for the
U.S. housing market…

*** A special report from India…cars are now competing with people for
the same agricultural commodity…and more!

———————

*** Lila Rajiva sends us this note from Tamil Nadu, India: “Not only are the happenings here varied across industries, they are also
geographically diverse. Chennai prices and infrastructure are looking more
and more attractive next to the skyrocketing real estate and moribund
roads in Bangalore. But far-sighted companies are already looking past
Chennai to smaller towns. There is a lot of potential here, since the
growth that has taken place so far seems concentrated in the larger
cities. Foreigners writing about the country sometimes forget that there
are over a billion people here, and that most of them live in the
countryside and in villages and small towns.

“Small, of course, is a very relative term. A small town in India can have
a couple of hundred thousand people. And it can have wayward dirt roads
and power shortages at the same time as it has cutting-edge technology.

“That’s the case with Vellore. A dusty town ringed around by desolate,
rain-worn hills; and until recently known mainly for its Christian mission
hospital and college. Today, it’s a bustling overcrowded educational hub,
sprouting engineering colleges, the latest electronic gadgets, and a
supermarket. World Bank money has poured in to refurbish the old fort from
which the rebel Hindu prince Shivaji once fought the mighty Mughal Empire.
The Vellore Institute of Technology, which gets 7000 applicants, has been
featured in the Washington Post, and computer support and technical help
abounds. Getting on the net was a cinch. It only took a quick call to a
computer center that charged me a hundred rupees (less than three dollars)
for the cable and the house call.

Continue reading →

Amazon Blog: Do-Gooding Do-Do

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“Those who now speak of decoupling used to talk of globalisation. This is oxymoronic, you can believe in one or the other but not both,” says analyst James Montier.

Montier thinks that the world is bound to go the way of the American economy – down. If you pumped for globalisation and global growth when the going was good, he says, you can’t now argue for decoupling. You can’t now say that the global economy doesn’t depend on what happens here. That would be cognitive dissonance.

Here, I’ll take the part of cognitive dissonance. It’s what makes the world go round.

Mobs, Messiahs, and Markets is chock-full of it.

Critics have called that a terrible thing…..or terrific, depending on where they stand,
But if our detractors rested their case against us only on this, they’d have a non-starter on their hands. Anyone who’s sniffed a grand theory up close knows better.

Why?

Because the real world is a jungle and logic cuts only a very narrow track in it; we’d be foolish to mistake our little wayward path for the woolly thickets our machete didn’t get to.

There is no logical structure that doesn’t rest on a blind spot….there is no sense that does not have a foundation that is nonsense. (That’s from a piece I did on Tom Friedman).

In fact, a bystander watching the way we mangle language could be pardoned for thinking it our original sin. He’d see that we’re fooled not just by our theories, but by words themselves. Their sense and their nonsense.

“Mobs” is a book about words.

On my part, it started from my critical work on language; from studying propaganda and from my popular writing on the subject .

In “Do Gooding Do-Do” and “Developmentally Disabled,“ two pieces used in the book (incorrectly attributed in several places), I took a look at some common words used about economics … and got into trouble with progressive and conservative friends.

What did I say that was so bad?

I said that “free market” language is used a lot to support what’s essentially managed trade. And that “social uplift” language is used the same way.

But how can you not take a position, asked the critics, a la Montier. Isn’t globalisation

A Very Good Thing? Or A Very Bad Thing?

Is it?

Perhaps it’s neither…or both….
Perhaps it’s sometimes one thing..sometimes another.
Perhaps it’s just too complicated for slogans. Sometimes government regulations are the lesser evil. And sometimes the greater. Perhaps you can talk about globalisation….and also talk about decoupling. Perhaps, on most things with any complexity the best response is not the one the mob wants to hear – Yes or No.

The best response is – It Depends.

Reuters piece mentions “Mobs” and herd behavior as a driving force in creating the recession….

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ANALYSIS-Fear of U.S. recession could help drive one

By Joanne Morrison
WASHINGTON, Feb 26 (Reuters) – Fear among U.S. consumers and businesses that the world’s richest economy could go into a recession, or may already be in one, could help push the economy over the edge and bring on an even deeper, longer downturn.
In the final three months of 2007, the economy screeched to a near standstill, dragged down by what many economists say is the worst housing slump since the Great Depression.
As a result, talk of recession has been on the rise among Main Street people as well as economists, the media and a number of high-profile analysts, including former Federal Reserve Chairman Alan Greenspan.
With the housing market showing no sign of reaching bottom and mortgage-related losses mounting at Wall Street firms, many experts wonder if all the talk may add to the tendency of people to dampen their economic activity and spend less.
In economic circles, the concept of self-fulfilling prophecies is not new. It is a facet of what classical economist John Maynard Keynes called the “animal spirits” that dictate consumer behavior and drives economies.
Already there are signs of consumers getting gloomy. The Conference Board said consumer confidence slumped to its lowest level in five years. A Reuters/Zogby poll released last week that found most Americans now expect a recession in the next year.
Consumer caution comes at a tough time for an economy already lumbering under the weight of a housing downturn and a critical time for the government’s plan to boost spending.
Many Americans will soon have extra money in their pockets from tax rebate checks that are a part of an economic stimulus package President George W. Bush recently signed into law.
The $168 billion plan aims to stimulate the consumer spending that accounts for two-thirds of the U.S. economy’s output.
But consumer anxiety could undercut the hoped-for effect. The Reuters-Zogby poll found nearly half plan to use their tax rebates to pay down debt or pad savings.
“I suspect we are entering a period where consumers are much more sensitive that there is a need to save,” said Michael Prebenda, global head of HSBC Direct, which released a study earlier this month showing that four out of five Americans plan to increase the amount they save this year.
“Tough economic times are changing the way Americans manage their finances,” he said.
In one measure of how recession talk might be entering the mainstream, a news search of the word “recession” on Web search engine Google generates more than 97,000 news story links, versus the 300,000 for the economy as a whole. (For comparison, Britney Spears generates 22,000.)
“The power of the pen means that as people read the things that we write, they are forming an impression and their impressions can become a self-fulfilling prophecy,” said Chicago-based economic consultant Carl Tannenbaum.
“While a self-fulfilling prophecy isn’t going to be a cause for the recession, I think it can make it worse and I think it very likely will,” said Stephanie Madon, an associate professor of psychology at Iowa State University who has studied self-fulfilling prophecy behavior.

NOT A NEW THEORY
“One of the things we know people do is that they tend to seek out information that they believe is already true,” Madon said.
Some experts say a collapse in “animal spirits” helped bring on the last recession in 2001 as businesses, worried about what the future would bring, cut back sharply on their investments.
Lila Rajiva, co-author of the book “Mobs, Messiahs, and Markets,” says a herd mentality can drive the economy to unsustainable heights and then exacerbate the lows.
“I think we are already in a recession and it’s the result of a mob mentality in the sense that all kinds of bubbles are driven by a crowd acting like a crowd,” she said.
While Keynes applied his “animal spirits” to business behavior, Harvard professor Jeffrey Frankel, a member of the private-sector panel that dates U.S. recessions, says the idea can be applied to consumers as well.
“There can be an element of self-fulfilling prophecy,” said Frankel. He said, in particular, it could be a channel through which economic downturns are transmitted from one country to another as consumers elsewhere begin to worry.
Other members of the business-cycle dating committee at the National Bureau of Economic Research, who have yet to determine if the U.S. economy has tumbled into recession, play down the role of fear in the latest consumer-spending slowdown.
“A decline in consumption might just be a return to normal, rather than self-fulfilling collapse,” said Robert Hall, the Stanford University professor who chairs the panel. He said softer spending was likely inevitable because consumers had saved so little in recent years.
Another panel member, Northwestern University professor Robert Gordon, also said the current slowdown had roots that lay somewhere other than in the human psyche.
“The currently evolving possible-recession (not clear yet) is being led by a huge decline in residential construction, which is clearly spreading to a credit crunch influencing other types of businesses and consumer spending,” he said in an e-mail.
(Reporting By Joanne Morrison; Editing by Richard Satran)
((joanne.morrison@reuters.com;+1 202 898-8315; Reuters messaging: joanne.morrison@reuters.com@reuters.net))

Empire of deadbeats: have title, keep house….

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Feb. 22 (Bloomberg) — Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002.

That’s when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents’s mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

“If you’re going to take my house away from me, you better own the note,” said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company….”

More at Bloomberg.com

Comment:

Note the following:

The borrower was once the CEO of a company.

Note that his loan was for over a million.

Note that he didn’t make one solitary payment on it.

Does that sound like an impoverished, innocent, hornswoggled victim in need of charity to bail him out?

Sounds more like a speculator who never intended to make good on the loan…..

Econ-job: US food prices to rise sharply…just as more mortgage payments shoot up…(revised)

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According to the Financial Times,

“When William Lapp, of US-based consultancy Advanced Economic Solutions, took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industry and emerging countries.

He added a twist – that rising agricultural raw material prices would translate this year into sharply higher food inflation.

Comment:

Read further down in the Financial Times piece and you will note that the IMF, on the other hand, appears not to believe that the developing world will decouple from the US. If there is no decoupling, it says, then a US recession will cause global growth to slow and push down food prices.

The question boils down to whether you believe what an interventionist economist at the IMF says or what the market (the commodity market) says….

For one answer, read Bill Engdahl’s piece on the financial tsunami coming our way and how complex, Nobel prize-winning economic theories and models are the problem behind, not the solution to, the present crisis.

Why?

Because they are houses built on the sand of specious notions. Notions of a perfectly rational “economic man” and of a perfectly Gaussian “efficient market.”

“As hundreds of thousands of Americans over the coming months find their monthly mortgage payments dramatically reset according to their Adjustable Rate Mortgage terms, another $690 billion in home mortgage debt will become prime candidates for default. That in turn will lead to a snowball effect in terms of job losses, credit card defaults and another wave of securitization crisis in the huge market for securitized credit card debt. The remarkable thing about this crisis is that so much of the sinews of the entire American financial system were tied in to it. There has never been a crisis of this magnitude in American history.

At the end of February the Financial Times of London revealed that US banks had “quietly” borrowed $50 billion in funds from a special new Fed credit facility to ease their cash crisis. Losses at all the major banks from Citigroup to J.P.Morgan Chase to most other major US bank groups continued to mount as the economy sank deeper into a recession that clearly would turn in coming months into a genuine depression. No Presidential candidate had dared utter a serious word about their proposals to deal with what was becoming the greatest financial and economic meltdown in American history.”

More by Bill Engdahl at Oilgeopolitics.net.

Update:

I might have been a bit naive in the piece above. I was rightly curious about the IMF economist’s motives in telling us that food prices would go down in the future, when the grocery shelves say the opposite.

But I was a bit trusting about the first quote.

So here’s a bit of belated digging.

Who is Bill Lapp and this consultancy Advanced Economic Solutions?

Lapp is a former VP of research at Con-Agra. A little googling reveals that just in 2007, ConAgra settled with the SEC over various financial improprieties.

He also seems to show up at Harvard run bashes for agribusinesses, says Hal Hamilton of the Sustainability Institute. And seems to like cheering on Monsanto’s attempts to shove biotech down the mouths of unwilling Europeans as Adam Smith in action….a curiously fundamentalist interpretation of The Wealth of Nations that, as Hamilton points out, would probably have left old Adam speechless.

The website of the Kansas City Board of Agriculture had this:

“Lapp, who has been appointed to his first two-year term, has more than 25 years of experience in analyzing and forecasting economic conditions and commodity markets. He recently formed Advanced Economic Solutions, which provides economic and commodity analysis to agri-business and food companies. Prior to that, he was the vice president of economic research for ConAgra Foods. Lapp currently serves on numerous boards, including the Kansas City Federal Reserve Board’s Center for the Study of Rural America, the Farm Foundation, and the Food and Agriculture Committee of the Omaha Chamber of Commerce. Lapp is a member of USDA National Agricultural Statistics Service Advisory Board and participates on the Harvard Business Industrial Economists’ Round-Table.”

And here we find Bill Lapp saying about what he said up above....only he’s saying it in s 2004.

Since 2002, the value of the dollar has dropped 25% while commodity costs have risen 46%. In fact, according to the CRB Index, commodity costs earlier this year were at their highest level since 1984.

The result was that in the year between April 2003 and April 2004, soymeal prices rose 92%, cheese 90%, soy oil 54% and chicken breast meat 47%, just a few of the more dramatic price jumps.

The good news? April seems to have been the peak for this escalation. Since then, many (though not all) commodities— especially grains and dairy products,but not proteins—have seen price declines, some quite sharp. This is due, Lapp indicated, to a stabilization of the dollar and a slowdown in the Chinese economy. Over this period, cheese prices have fallen 33%, corn 24% and soymeal 23%. However, protein prices remained high through mid-June thanks to continued high demand driven by the low-carb diet fad, along with constrained domestic supplies and a ban on Canadian beef imports.

What about the future? If that could be predicted with certainty, there would be no futures market in commodities. However, the best guess, according to Lapp, is that moderation in price will continue through the end of the year, perhaps extending even to protein after Labor Day and the end of the peak summer season. A continued economic lull in China would also reduce demand from that market, lessening pressure on global supplies.”

Here is Lapp in December on the rate of inflation in US food prices over the next five years:

“During the next five years, food inflation is forecast to increase by an average of 7.5 percent, well above the 2.3 percent average of the past 10 years.

“The US experienced a similar period of rising commodity prices and food inflation in the 1970s. Commodity prices doubled … this ultimately resulted in food inflation from 1972 to 1981 averaging 8.2 percent,” the study said.

Traditionally, the food industry — processors, grocery stores, restaurants, and others — absorbed the cost of higher commodity prices within its operating margins as the rise was temporary given the competitiveness of retailers.

But times are changing, said Lapp, who is a consultant to the food and agricultural industries….”

And here’s Lapp in this piece telling the consumer that he can – and should – pay higher prices.

“Lapp, the former leading economist for ConAgra, told Brownfield bread prices rose over 10% in 2007 and are likely to do at least that again this year. He added other food prices will also head higher as food manufacturers increasingly pass on the costs of high commodities to consumers. The good news, Lapp said, is that most U.S. consumers can afford to pay up, even if they won’t have much choice in the matter.

“I think consumers are more prepared than we realize to accept higher prices on food and I think that’s part of our future,” Lapp predicted. “It’s largely been set in stone for us already.”

Rice price rises in South Asia….

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“As the price of rice climbs across South Asia, farmers and millers in Thailand are sitting on stocks and waiting for it to rise even further, said a top rice exporter in Bangkok.

The exporter, who requested anonymity, told The Straits Times: ‘In my 25 years of trading, I have never seen such a bad position.’ There is a rice shortage in Bangladesh and China too, among other countries, while there is a wheat shortage in Afghanistan.

In local markets in Pakistan, the price of rice has gone up over the past month by more than 60 per cent year on year. India recently contributed to soaring world prices when it imposed a ban on rice exports — relaxed only partially to allow some supplies to Madagascar, Mauritius, the Comoros Islands and cyclone-hit Bangladesh. China has banned rice exports to ensure enough is available for domestic demand.

From Kansas to Kabul, high rice and wheat prices are worrying officials and economists, and beginning to hit consumers — especially tens of millions of poor people — harder than many can remember. In Singapore, while rice importers and supermarkets have no problems getting the staple grain, prices have escalated….”

More at the Independent.

Financial Follies: Gvt’s chief auditor resigns citing looming budget crises

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“David M. Walker, the U.S. comptroller general and head of the Government Accountability Office, announced Friday that he will resign in March to lead a new foundation focused on long-term public policy challenges.

GAO serves as Congress’ chief investigative and audit arm, probing waste and fraud in government programs and detailing the long-term budget problems facing the government. Walker has headed the agency, which has more than 3,100 employees and a budget of nearly $500 million, since November 1998. His 15 year-term was not set to end until 2013.

Walker, 56, has repeatedly warned that the government faces a long-term fiscal crisis as the baby-boom generation retires, driving up spending on Medicare, Medicaid and Social Security.

He will continue to raise the alarm as president and chief executive of the newly established Peter G. Peterson Foundation, set up by the co-founder and senior chairman of The Blackstone Group, who served as Commerce secretary in the Nixon administration. Peterson has pledged to contribute at least $1 billion to the foundation.

“I have been around a very long time, and I have never seen so many simultaneous challenges that I would describe as undeniable, unsustainable and virtually untouchable politically,” Peterson, 81, said in a release announcing the foundation.”

More at Congressional Quarterly.

Housing Bubble Trouble: Global Collapse predicted by Tiger Management head

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“In a recent interview on CNBC with Ron Insana, one of the “old-timer”funds manager, Julian Robertson, predicted “utter global collapse” as a consequence of the bursting of the world-wide property bubble. Often called “Never Been Wrong Robertson”, the former head of Tiger Management (once the largest hedge fund in the world), is extremely worried about the speculative bubble in real estate.”

Read more at Liberty Dollar.

A little Housing Bubblicious….

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The housing bubble – believe it or not – bubbles on, along with die-hard aficionados who are willing to gamble on another surge in prices following the recent rate cut.

Last night, I was talking to an acquaintance, a one-time computer consultant at the World Bank,  just back from the Carolinas to the suburbs of our great capital.

“Expensive?” I asked sympathetically, thinking he was planning on renting a condo. “Yes,” he replied. And then added he was buying….a single family house.

How did that work, I asked. Wasn’t McLean (VA) property some of the most expensive in the country?

“Maybe,” he said. “But McLean’s rolling in money. You buy a shed here and it goes up 25% in a few months.”

I remember someone telling me that. But that was a long time ago….in 2002. This is 6 years later.

McLean is still going up?

Oh yes, he said confidently ( he is as smart as they come).

“I’m going to get myself a loan from a Pennsylvania bank – the rates are better there. Then I’m going to buy a house here. For $700,000. Putting down between 0 and 10%. And sell by the end of the year…before my visa runs out…”

It was like listening to the exploits of Jesse Livermore, or some other titan of speculation.

But fortunately, there was this to bring me down to earth:

“I have been covering the housing bubble in McLean, VA through covering one house located on Great Falls Street. It has been over a year and the house remains unsold. (The last post on that house can be found here.) The house has not been listed in the MLS for months, but remains unsold.

There is a similar-sized house two doors down also for sale, but about $100,000 cheaper since they reduced the price in February. Also, on the corner of the same block is a house that has been for sale for a month or so. The price was reduced once already after the first weekend’s open house and now, it is scheduled to be auctioned this Sunday.

Don’t be fooled by the sign. The owners never lived in this ‘home’. They bought it a couple of months ago and after doing a quick renovation, are now trying to flip it. I am sure that it does not help having the house next to it up for sale, for less. In fact, the neighbor appears to have reduced their price in response to the auction being held next door. Those familiar with the area will agree that an auction in this area has been until now unheard of.

To their credit, it seems that for good or bad, they are very motivated to exit this property. Lets see if they accept an offer, if anyone bothers to give one.”

From Fred Fry.

Capitalist brotherhood – Kiva.org

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“John Christopher, 44, a self-employed information technology consultant from Newton, learned about Kiva through an article in The Economist magazine. He has made loans to 14 businesses in six countries since joining Kiva in July 2006.

“I just like the idea that we’re all equal, no matter where you’re at,” he said. “This is a way to give them the benefits of the capitalistic system we have. And this will mean a long-term improvement to their lifestyle, because it improves their ability to earn a living.”

Though he declined to say how much he and his family have loaned, Christopher said it is much more than the average Kiva lender, which is about $86.

“I just feel that we’re more connected if we’re giving a large chunk of a person’s loan, and we’re more vested in their success as well,” he said. “But we’re not doing anything too crazy. We’ve said, this is how much we’re going to (loan), and when they repay it, we just turn it around and loan it to someone else.”

Christopher said he tries to get his family involved in choosing the businesses to support.

“I started looking at South and Central America because they’re close to us, and Africa, because I think it seems to have the biggest need,” he said. “I just try to find a variety of things, things that just look like a good business idea. The last loan I made, some guy in Africa was going to do a delivery business with a motorcycle. That made sense; it seemed like something a guy could make money at.”

Students from at least one Iowa school have become micro-lenders through Kiva as well. Catherine Mein, a social studies teacher at Ballard Junior-Senior High School in Huxley, learned about Kiva through an article in Smithsonian magazine.

“I actually just gave the magazine to the leader of (the student council service committee), and she got really excited about it,” Mein said. Made up of about 16 students, the student council decided to lend $25 each to three borrowers.

At first, the students printed out profiles of the potential borrowers to discuss them, Mein said. However, “they found that borrowers were being funded so quickly that they just went online and (viewed it using a projector) and everybody took a look at different people and decided that way.”

It’s likely the project will expand to the rest of the school as it’s offered to other teachers, she said. “It’s great; I like the idea of micro-lending, and it’s also introducing them to people in other countries and offering them some assistance.”

Each time a Kiva borrower makes a payment, the lenders with a stake in the business receive an e-mailed update with the percentage repaid. The lenders receive their principal back after the loan is fully repaid.

The interest charged by the participating “field partner” banks that actually extend the loans, which can be 15 to 20 percent or more, accrues to Kiva to keep the organization operating. The transfers are made through PayPal, which waives its fees on the transactions as its contribution to the organization.

Presently, the supply of loans is actually outpacing the demand from potential borrowers, said Fiona Ramsey, a Kiva spokeswoman. For that reason, Kiva has temporarily capped the amount any one lender can extend at one time to $25.

“People have wanted to do something like this for so long,” she said. “There’s such an excitement from the lenders, and (they really like) the idea that you can loan the money again and again. They get so excited about it that they tell people about it. It’s a real credit to the lenders; they’re the ones who are putting this forward.”

Last month, Kiva picked up 49,000 new lenders, including about 4,000 who signed up on Christmas Day, Ramsey said. Lending in January should get a bump from gift-certificate sales. “On Christmas Eve, we sold $259,000 in gift certificates; that must have been a lot of last-minute shoppers,” she said.

Messina, who said he has bought gift certificates for friends, also makes the optional 10 percent donation to Kiva each time he makes a loan. ”

Read more at KIVA.ORG – rated one of the best ideas of 2006.

What’s interesting is the way in which an organization like this refutes the idea of money as something which solidifies privilege. In fact, historically, you could argue that the free market has usually acted more as an equalizer.

(This will seem shocking to anyone who has been brought up on the socialist belief that the free market inevitably tends toward privilege. What they are confusing is a true free market and one in which monopolistic conditions and coercion prevail — usually because of an incestuous relationship between the state and business. Minus the state, I wonder whether that would still be the case)

It was the market which undermined social position, family, tradition and gender as determining factors of success in favor of whatever an individual could bring to the market – whether intelligence or aptitude or drive or talent or looks or emotional intelligence or charm or people skill.

Money converted these individual attributes into economic leverage in society…