The Child's Version of Rising Food Prices

(To be sung to the tune of “Three Blind Mice.”)

Look at the rice.

It has a new price.

Up, never down.

I feel I will drown.

It’s taking all the fun out of life.

Budgets, stress and bankruptcies are rife.

Did you ever see such a sight in your life

As the price of rice?


Rice is the staple of more of the world's population than any other food. Its rising price has led to riots in some nations. Sam's Club and Costco are now limiting bulk sales of rice. What's next? Micky D limiting the number of double cheeseburgers we can get?

A Nursery Rhyme for the Housing Crisis

(To be sung to the tune of “Row, row, row your boat”):

Pay, pay, pay your loan,

Steady as a stream.

Miss a payment and you’ll find

Your house is but a dream.


[To add to the fun, enlist four people with passable voices and sing it as a round.]

Ten Reasons to Keep Your SUV

With the price of gasoline rising every day, and the snide comments you get about a size 22 carbon footprint, you wonder whether to trade in the Behemoth Deluxe that takes up most of your driveway. Here are ten reasons to hold onto it.

10. The SUV is more comfortable to sleep in than a subcompact, which will matter after you lose your house to foreclosure.

9. The SUV can hold more of your things than a subcompact, which will matter after you lose your house to foreclosure.

8. A big SUV still carries the aura of prosperity, which will matter after you lose your house to foreclosure.

7. It’s tough to do Lab rescue with a subcompact, and you’re not ready for a minivan.

6. You can’t take your baby, and your baby’s bouncy seat, playpen and fold-up crib to Grandma’s in a subcompact, and you’re not ready for a minivan.

5. You’re not ready for a minivan.

4. You don’t like self-righteous people to tell you what to do.

3. You don’t like bike riding, car sharing, self-righteous people to tell you what to do.

2. You don’t like bike riding, car sharing, self-righteous people who litter the world with their plastic water bottles and styrofoam food containers to tell you what to do.

1. If you have to give up your SUV, your $20,000 bass boat might be the next sacrifice, and we aren’t going there.

Investors Diversify. Why Not Government Economic Policy?

For at least the last seven years, the federal government's policies for fostering economic growth have revolved around boosting a single asset class: real estate. We all know how that's turning out. Yet administration officials and presidential candidates continue to fixate on real estate. Investors diversify in order to maintain financial health. Why not the federal government's fiscal and monetary policies? For ideas, see http://blogger.uncleleosden.com/2008/04/america-nation-of-bailouts.html.

The Federal Reserve's Gamble with Inflation Policy

The Federal Reserve's policy on inflation appears to be the hope that an economic slowdown will restrain price increases. Yet the Fed is doing everything it can, including the use of kitchen sink policies that it created on the back of an envelope, to prevent a recession. If the Fed is successful in accelerating the economy, it won't get the restraint on inflation that a slowdown presumably would have brought. In such a situation, it may have to raise interest rates rapidly to tamp down inflation. But rapid rate increases could undo the Fed's stimulus, sending the economy into a tailspin.

We have recently gotten some stern lessons about trying to be too clever by half. That's how the big banks in the derivatives markets managed to offload risk and send it on a circular path back to their own balance sheets. The derivatives markets are so complex and opaque that the banks didn't realize the horse they were buying was the same toothless nag they had sold last week.

Inflation is rising worldwide, with oil and food prices leading the way. In some nations, we're seeing a revival of old-fashioned food riots, the developing world's equivalent of a run on the bank. The nations that manufacture the goods sold in American stores are struggling with rising costs and are passing them onto the American consumer. Higher shipping and transportation costs add to the prices of manufactured goods. Foreign central banks are keeping interest rates comparatively high to combat inflation, thus protecting their own currencies at the expense of the dollar. The weakening of the dollar increases the cost of imported goods. This worldwide flurry of price pressures will pop a lot of holes in the dam that the Fed is trying to hold back.

Fundamental to the Fed's inflation policy is the premise that an economic slowdown will reduce purchasing power to the point where it discourages price increases. But let's remember where today's purchasing power comes from. Employment is only part of the picture. For many people, credit is the principal source of purchasing power. Employment can be the beginning point for an extension of credit. But the amount of purchasing power one gets from a credit card may be multiples of one's monthly income. (Compare your monthly aftertax income to the combined lines of credit on your credit cards, and you'll see what we mean.) Even if incomes are constrained by an economic slowdown, price increases can be absorbed by greater use of credit. Many banks are cutting back on the amount of home equity lines of credit. But borrowers can simply turn to their credit cards. Even if these are more costly, the low monthly payments required on credit cards mask and soften the real costs.

Thus, the oceans of credit available to the American consumer allow price increases to stick even as the economy slows. People will reduce big expenditures, such as the next car, a new and fancier refrigerator, or a home remodeling project. But they will, with some grumbling, be able to absorb the increased prices of bread, milk, gasoline, heating oil, natural gas, airline tickets and so on. Easy credit facilitates stagflation. When banks can borrow from the Fed at bargain basement rates and relend to credit card borrowers at rates sometimes approaching 20% or more, they enjoy a nice profit. They won't cut back on their profitable lines of business.

Things are nowhere nearly as bad as the stagflation hell of 1979. But that's not the relevant comparison. The appropriate analogy is to 1973-75, the beginning of the era of stagflation, when the first OPEC oil price hikes were followed by a faltering economy, a falling stock market and increased inflation. The Fed focused on stimulating the economy, keeping interest rates relatively low. The stock market revived, but only temporarily. By believing too much that inflation and recession are mutually exclusive, the Fed wound up having both to contend with. The painful resolution came five long years later, when Paul Volcker replaced Arthur Burns as Fed chairman and decided that the only way to true economic health was to suppress inflation by sharply raising interest rates, knowing that it would throw the economy into a nasty recession. That was the right decision, but it probably resulted in more pain than would have been suffered had his predecessor made the same choice five years earlier.

The Fed's current policy is to believe that we can have it all, even though its restraint on inflation is the slowing economy that it is trying to prevent. This may be plausible to those who believe up to six impossible things before breakfast. But some--call us the skeptics--tend to think that the Fed is rolling the dice for a hard eight (a Las Vegas term for the dice turning up four and four). This play might have a generous payoff. But the chances of winning are low and we, the people, will pay the price if the government is wrong.

A Limerick for the Financial Crisis

There was a chairman named Bernanke,

Who had a problem with bad bankies.

They wanted a bailout

Without any time out

For all their past hanky panky.

America: a Nation of Bailouts?

As Bear Stearns’ counterparties breath sighs of relief, and homeowners targeted for foreclosure holler for federal assistance, we must consider whether we are becoming a nation of bailouts. Every time we have a problem, people turn to the government, and especially the federal government, to solve their problems. For better or for worse, the government is assuming more and more of society’s risks. Many of the bailouts started off as good ideas. Social Security has done much to alleviate poverty in old age. Medicare and Medicaid have prevented numerous needy patients from having to ask for charity at a time when their need was greatest. Federal financial assistance for college educations has allowed many who would otherwise have been left without college and/or graduate level degrees to become well-paid executives, professionals, engineers, educators, scientists, and the like. As burdensome as college debt may be, it’s better than being qualified only to make lattes and grandes.

Some federal subsidies no longer have much logic. Farm price subsidies and federal flood insurance are examples. But it’s too late in the game to suggest that the government step back from its role as national nanny. Every federal subsidy or bailout anywhere becomes a de facto Constitutional right in two nanoseconds. Congress always chooses the pork barrel polka over political courage. And Congress isn’t alone in doing this dance. The Fed joined in with its unilateral, unlegislated, weekend special bailout of the wealthy people who work for Bear Stearns’ counterparties while providing a federal subsidy to the shareholders of J.P. Morgan Chase.

It’s rather expensive for the federal government to bear such risks. Social Security and Medicare are prime exhibits. And the American taxpayer can only look forward to increased burdens. (See the same exhibits.) But this camel’s back can be broken. We must look for ways to ease the burden on the taxpayers, or the entire house of whatever will turn out to be a house of cards.

Taxation is imposed, ultimately, on the wealth of a nation. The wealth of nations is, in turn, based on a nation’s ability to produce goods. You don’t build sustainable national wealth with expensive coffee, fast food, real estate that’s bought and sold like tulip bulbs, and financial intermediation of esoteric and opaque investments. You build national wealth and strength by producing goods. World War II wasn’t won by overly clever Wall Street financial engineering. It was won by, among other things, the enormous manufacturing capacity of the United States in the 1940s. Look at the nations that today are considered economic powerhouses: China, India and Asian Tigers. They got there through production. How, then, to increase America’s ability to produce?

Promote technology--high tech and bio tech. America is a high cost nation and should manufacture high valued added goods. These would be high tech goods. Northern Europe’s economy relies heavily on this idea. America’s overall technological lead would allow it to use such a strategy potentially to even greater advantage. The following steps would help to promote technology.

Increase educational support for math, science and technical students at the grad school, college and community college levels. The advantage in high tech comes from having the best brains. Give these students more outright grants and scholarships; not more debt or cheaper debt. Make it easier for kids to enter these fields. We won’t enhance our manufacturing abilities with more English Lit majors who become lawyers or MBAs in order to get a job. We need engineers, researchers, and skilled machine tool operators.

Increase immigration opportunities for well-educated foreigners who have math, science and technical education and skills. This is an easy way of getting more of the best brains in the world. America offers greater individual liberty and opportunity than just about any other nation. People want to live here. Make it easy for the people would contribute greatly to our economy.

Increase federal funding to maintain and improve transportation systems. America is a big nation and its manufacturing facilities are scattered about from sea to shining sea. Manufacturing prowess in a big nation requires efficient transportation.

Provide tax incentives to businesses that invest in production of goods—not production of services (we don’t want to use federal dollars to encourage more dogwalking services or coffee shops selling $5 lattes). We need more plants and factories that produce goods.

Review Defense Department activities and files for technologies that can safely be released to the private sector. The Internet originated from a Defense Department project. So did the GPS system. Look where they are today. Sure, foreigners as well as Americans benefit from the Internet and GPS. But America has benefited the most. The Defense Department’s technologies were funded by the taxpayers and ultimately belong to the taxpayers. Anything that need not be kept secret for national security purposes should be made available to the public.

Sure, all this costs money. But it's better to spend some money to expand the economic pie than to squabble over a pie that will probably shrink as we rely on foreigners to fund our consumption with a depreciating dollar while we pretend that the next Fed-induced asset bubble is making us wealthy.

For more on economics and the state of the economy, please check out the American Economics Blog Carnival at http://struckintraffic.blogspot.com/2008/05/american-economics-blog-carnival-may-15.html.

The American Love Affair with the Car, 2008

Prayer of the Financial Speculator

As I approach the seventh chapter of the Book of Bankruptcy,
I repent of my greed, envy and pride.
Help me to the path of righteousness.
Give me the strength to continue through the financial wilderness.
Grant me just one more asset bubble.
Guideth the Fed to lower interest rates anew.
Resurrect real estate prices and my access to leverage.
Deliver unto me gullible investors to re-capitalize my hedge fund,
And greater fools than me to trade with.
Make my cup runneth over one more time,
And I will dwell in my house in the Hamptons,
Forever. Amen.

The Joy of Saving

The Federal Reserve has bailed out Bear Stearns. The Treasury Department has proposed the re-organization of the financial regulatory structure. The capital markets are receiving a lot of government attention. But what about American households? Many of them have tattered balance sheets. That's why so many people took out no/low downpayment, adjustable rate, interest only, option ARM, maybe we can repay them (but maybe not) mortgages. If their household balance sheets had been stronger, they could have gotten plain vanilla 30-year fixed rate mortgages. There'd be many fewer defaults and foreclosures, and Wall Street might not have needed a bailout. But is anyone in the federal government trying to strengthen household balance sheets? Is it sensible to tax interest on savings at ordinary income levels? Is it sensible to give borrowers a deduction for mortgage interest costs no matter how stupid the mortgage? Savings create a comparatively stable deposit base for banks, and banks desperately need stability now. Stupid mortgages created mammoth risks for banks that seem to persistently emerge in whack-a-mole fashion every fiscal quarter. The Fed can't keep sticking its thumb in the holes in the dikes because new holes are always bursting out like horror movie corpses popping up from graves. Some attention to the underlying problems is usually a better way to deal with a crisis than mad scrambles that create moral hazard. For more on this point, go to http://blogger.uncleleosden.com/2007/11/passbook-savings-cure-for-banking-and.html.