Author Archives: Norm Leahy

by Norm Leahy

The Richmond Fed has released its Fifth District Surveys of manufacturing and service sector activity and the outlook for both is rather bleak. Output is falling, as are employment and wages. But what’s showing signs of growth? Inflation.

From the manufacturing report, we get this somber news:

District manufacturers reported that raw materials prices increased at an average annual rate of 4.16 percent in August — up somewhat from their 3.41 forecast in July. Finished goods prices rose at a 1.46 percent pace — also somewhat above July’s reading of 1.18 percent.

Looking forward, respondents expected that the prices they pay will advance at a 4.54 percent pace, somewhat higher than July’s reading of 4.35 percent. Additionally, contacts looked for finished goods prices to increase at a 3.35 percent annual rate, also slightly above last month’s expected rate of 2.97 percent.

And from the service sector survey:

Price change in August sped up slightly, with overall service sector price acceleration at an annualized 1.03 percent rate in August; last month’s rate was 0.79 percent. Retail price growth moved ahead at a 1.66 percent clip, following July’s 0.75 percent pace. At services firms, the pace edged up to 0.93 percent compared to 0.86 percent a month ago. For the six months ahead, survey respondents looked for price change of 1.48 percent; in July, their outlook was for 1.34 percent. Separately, retail merchants looked for prices to increase at a 2.08 percent rate during the next six months, while non-retail services providers expected a 1.39 percent pace. A month ago, retailers expected a 1.20 percent rate of increase and services providers anticipated price acceleration of 1.40 percent.

Some observers, like Harvard’s Ken Rogoff, believe inflation is the one tool that could right the national economy:

…the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery.

Savers have already taken a sustained hit from falling interest rates and, with the Federal Reserve’s explicit policy of maintaining a zero interest rate target through mid-2013, they have little hope for relief. So why not add to their misery with a bit of inflation? And as for debtors…well. We’ve gone out of our way to keep them whole, to little effect. So let’s redouble our efforts.

The Richmond Fed’s surveys, though, indicate that inflation is already here and retailers and manufacturers see it getting worse. Which means we may imbibe Mr. Rogoff’s elixir no matter what.

And for history buffs, what do you call rising inflation and weak economic growth? If you answered “stagflation,” the monster everyone assumed had been slain in the early 1980s, you win…but in the long run, we all lose.

by Norm Leahy

There has been and will be a great deal of finger pointing in the wake of the S&P downgrade of the federal government’s debt. But there’s an old saying, or maybe it was just a Dire Straits lyric — when you point your finger ’cause your plan fell through, you got three more fingers pointin’ back at you. That applies quite nicely to the debt debate.

Republicans who scream that it’s all the Democrats fault for spending like mad hatters ignore or explain-away the spending excesses of the Bush years. Democrats who wail and gnash their teeth at Republicans who refused to raise taxes forget that under their watch, federal deficits and debt have piled up far faster than they did during the entire Bush tenure.

This back-and-forth, as cathartic as it is for some, solves nothing. The debt deal that managed to pass congress was their best effort — and the markets and ratings agencies have said it wasn’t good enough. But it was all that could have been expected given the political divide in government, some will charge. Perhaps. But what is the source of that divide?

You and me. Or at least the you and me who vote. We put people in power who do what we want them to do, whether it’s fight like crazed bobcats against taxes or mount furious charges to expand the size of government. There are precious few Edmund Burkes in Washington, voting their consciences and beliefs over the needs and wants of their constituents. What we are left with, then, are reflections of ourselves. And its not a pretty sight.

Back in 2007, I wrote a piece for the old Bacon’s Rebellion e-zine about irrational voters, a concept George Mason University Prof. Bryan Caplan advanced in his book of the same name. He discussed how our inherent biases lead us to believe things that simply aren’t true. and when we take those biases into the voting booth, “…socially injurious policies win by popular demand.”

Sift through the stinking mass that is the federal debt, and you’ll find receipts for all sorts of ill-considered ideas, policies and programs. And each of them was put there because we, through our representatives, demanded it.

It’s sales tax holiday time, again, in Virginia. Yes, it’s a special time of year when the state generously lifts its sales tax on certain items, in this case, school supplies, to encourage consumers to get out there and spend.

I’ve written more times than I care to recall about how such holidays are poor policy. But this item in the Fredericksburg paper so neatly captures the muddled thinking behind the holidays, it demands a response. The nut graph runs like this:

The idea of a sales-tax holiday for back-to-school shopping began in New York 15 years ago. And what a boon it is for parents! The days of sending kids back to school with a new lunchbox and a couple of sharpened pencils are long gone. Today’s parents shop from lists that include everything from folders, packs of notebook paper, and boxes of crayons, pens, and pencils to hand sanitizer and tissues. The average consumer spends over $600 outfitting their kids for school, according to the National Retail Federation’s Back-to-School survey. That’s daunting for many families. So 13 states, including Virginia, now help by relaxing retail sales tax rules for a few days.

Unpacking the inanities in this paragraph is difficult. But I’ll focus on the rare use of an exclamation mark in the piece.

Is the back-to-school sales tax holiday a genuine “boon” for parents? Hardly. What the sales tax holiday implies is that the list of supplies required and suggested for returning students has gotten out of hand. I’ve seen the list from my son’s school. It borders on the ridiculous, and includes a list not only of personal supplies, but “shared use” items (all-purpose cleaner? Really?).

But sales tax holidays are also an admission that the state’s overall sales tax is out of whack. As the Tax Foundation has long noted, and does so again here :

Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

Exactly. But don’t look for the resident political class to provide such year-round relief any time soon. Providing tax relief to everyone, every day, on every item they purchase, offers only one unique opportunity to issue a self-congratulatory press release. Virginia pols, with three, regularly-scheduled tax holidays, have created the political gift that keeps on giving.

More specifically, the Texas congressman and GOP presidential hopeful has introduced legislation that would cancel the $1.6 trillion in Treasury debt held by the Federal Reserve:

Paul has argued for the last few weeks that the idea represents a quick way to make the growing fiscal crisis more manageable. Under his bill, H.R. 2768, the $1.6 trillion that the Treasury owes to the Federal Reserve would disappear.

The Federal Reserve began buying Treasury bonds in earnest late last year as part of its effort to keep long-term interest rates down. But Paul has argued that Fed purchases of Treasury debt represent a debt that the government owes to itself, and one that also leads to an unwanted and inflationary increase in the money supply.

Paul has also said the Fed is allowing the federal government to continue a spending binge it otherwise would not be able to afford, and is forcing the Fed to print money to keep up.

The Fed carries Treasury notes on its books as assets that it could turn around and sell at some future point. How the bond market would react to such a move isn’t clear to me — one could argue that cancelling debt like this could be read as making the U.S. government an enormous credit risk. That would give the bond vigilantes a fat target (and hold on to your shorts if they get started…they may be all you have left once the posse has left town). And as for our overseas lenders…well. They wouldn’t take such a move lightly, would they?

There’s a degree of logic to Paul’s move in that what the Federal Reserve has been doing is monetizing the nation’s debt, which is just another word for default. Cancelling the debt, then, would be like ripping the bandage off a wound: it’ll hurt like hell, but airing-out that wound will help it heal. But how well a patient can heal when reduced to a diet of gruel and sand is unclear…

And while we’re considering cancelling debts the government owes to itself, how about those IOUs in the Social Security Trust Fund? During the depths of the debt ceiling tussle, the President as much as admitted that the Trust Fund is neither trustworthy nor funded. Using Dr. Paul’s formula, cancelling that debt might also force the government to end the Ponzi scheme (so long as we first pass legislation requiring all seniors, and not a few bankers, foreign and domestic, to be disarmed or, better yet, jailed).

The possibilities are as endless as the consequences.

Which is why this bill isn’t likely to go anywhere, except into a list of Paul talking points and campaign brochures.

(Cross-posted at Score Radio Network)

The great debt deal, which will save the Republic from… something… increasingly resembles a sad joke. Your morning chart, courtesy of Tad DeHaven, offers a sobering look at what the political class and its pilot fish consider a win on spending:

Somewhere, Pyrrhus of Epirus is smiling.

Now here’s another chart to ponder: It plots the price of gold versus hikes in the federal debt ceiling limit since 1994:

There are any number of reasons why gold has risen over the last 17 years — wars, uncertainty, demand, etc. The barbaric relic’s rise, though, does seem to fit neatly with the debt ceiling’s rise. Notice the long, flat period during the late 1990s for both gold and the debt? Those were the salad days, when the feds were running near or in the black. Not surprisingly, those were also the days of divided government, hyper-partisanship and the Clinton impeachment. And a tech bubble.

Oh Pets.com, how could you have gone so wrong?

It all falls apart during the Bush years, particularly in his second term, and becomes almost parabolic during the Obama years… which also coincide with the fed’s furious currency debasement.

Is it all a coincidence? Possibly. But this is the sort of chart that should make you wonder just how long the era of fiat currencies will last. Coupled with the first graph, it makes me wonder if that moment has already arrived.

(Cross-posted at Score Radio Network)

by Norm Leahy

The news readers on the financial networks this morning were almost giddy. The political class has reached a debt ceiling deal! The futures are up! Now we can get back to the serious business of letting fund managers talk their books!

This mindless cheerleading will go on for most of the day, or at least until the closing bell. But for those of us who look upon almost anything that oozes out of DC with contempt, there are a few hard facts to know about this “deal.” Fortunately, Cato’s Chris Edwards, again, does the dirty but essential work:

Spending isn’t being cut at all. The “cuts” in the deal are only cuts from the CBO “baseline,” which is a Washington construct of ever-rising spending. And even these “cuts” from the baseline include $156 billion of interest savings, which are imaginary because the underlying cuts are imaginary.

No program or agency terminations are identified in the deal. None of the vast armada of federal subsidies are targeted for elimination. Old folks will continue to gorge themselves on inflated benefits paid for by young families and future generations. None of Senator Tom Coburn’s or Senator Rand Paul’s specific cuts were included.

The federal government will still run a deficit of $1 trillion next year. This deal will “cut” the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent.

There are those, including many folks I respect, who will call even such lilliputian cuts as these a victory. And they have something of a point: for the last decade, the political class has cut nothing, so even the most modest of cuts, even if they are chained to the ever-rising baseline budget, are at least rhetorically significant. And even more, these pin-pricks have been achieved despite a Democrat-controlled Senate and a Democratic President, both of which were counting on, and campaigning for, higher taxes as part of any deal.

Fair enough.

But there’s an old, colorful saying: “Don’t piss on my boots and tell me it’s raining.” This deal is not a solution. Entitlements, war spending, even grants for cowboy poets…they will continue unabated. And far sooner than almost anyone is willing to admit, the bills will come due and the shambling fiscal wreck that is the United States will find itself unable to pay.

Over the weekend on “The Score” radio show, Jim Bacon and I discussed the debt ceiling follies and what might really be required to set the nation on a sound fiscal course. You can listen to that wonky goodness here.