Robert Reich Hates the Fed

Robert Reich has a post today lamenting the power of the Fed. Of course, he dislikes the power of the Fed for different reasons than I but at least he finally understands that they are the problem:

Chinese authoritarian capitalism, on display this week in Beijing, has me thinking about America’s democratic capitalism and how we practice it.

Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn't exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.

In Robert Reich's world the solution to inflation is more inflation. How that works, I'm not sure. He might be right that if the Fed lowered rates more and cranked up the printing press, that wages would rise. Of course, prices would also rise, so I'm not sure how that is supposed to help the working man/woman.

He's right that the Fed has too much power, but he offers no solution. You can't make the Fed more responsive to politicians. Can you ever imagine Congress urging the Fed to raise interest rates? The only answer to limiting the Fed's power is to adopt a gold standard and Reich will never advocate that. A gold standard would drastically limit government spending and since he sees every problem as an excuse for more government, a gold standard is not possible.

Retail Sales

Retail sales, which account for about one-third of gross domestic product, have weakened further in July, as most of the tax rebate checks have been distributed and used. Retail sales dropped 0.1% in July, slightly ahead of expectations. Excluding a 2.4% decline in automobile purchases, sales were up 0.4%, the slowest since February. Excluding gas purchases, and that number falls to -0.2%. Economists were expecting a 0.3% decline in total sales and a 0.5% gain ex-auto.

In the past year, retail sales are up 2.6%. Excluding gasoline, sales are up just 0.2%. The figures are not adjusted for price changes.

Report Details

Sales at furniture stores rose 1%, the biggest gain in 18 months.

Sales at electronics and appliance stores rose 0.8%.

Sales at hardware and garden stores rose 0.3%.

The higher cost of gasoline was evident not only in the 0.8% rise in sales at gas stations, but also in the 1.1% increase at non-store retailers, such as catalogs and online stores.

Sales at the malls were soft in July. Sales at general merchandise stores rose 0.3%, including a 0.1% increase at department stores. Sales at clothing stores rose 0.2%.

Sales at bars and restaurants fell 0.2%. Sales at food stores rose 0.4%. Sales at health and personal care stores were flat.

See Full Report.

The View from Here

Last week, Wall Street lost it's most erudite spokesman when Michael Metz, the longtime market strategist at Oppenheimer & Co., passed away. Mr. Metz was best known as a bear on Wall Street, especially during the internet bubble, but for those of us who had the privilege of Mike's counsel as Oppenheimer employees, he was much more than a perma bear. I spent 10 years at Oppenheimer & Co. and while I valued his market observations, the thing I remember the most is that he was a true gentleman. Despite the abuse he took on CNBC from the cheerleaders during the internet bubble, Metz never responded in kind. He was always polite. He took his revenge by being quietly right.

I remember distinctly when it was announced that he was stepping down from the strategist post. Oppenheimer was owned by CIBC at the time and while Mike never complained about it, I always believed he was eased off the public stage for being too bearish. I also remember thinking at the time that if the last bear was being silenced, the top had to be near. Of course, Metz was right about the internet bubble, as he was about so many things. CIBC sold the firm soon after at a fire sale price to Bud Lowenthal at Fahnestock, proving once again that they had little concept of the value of Mr. Metz or the firm. It's been a while, but my recollection is that Mr. Lowenthal restored Metz to his old position as strategist, the first of what proved many good business decisions.

I will miss reading Mr. Metz' market commentaries. They were always wide ranging, interesting and thought provoking, although it was always a good idea to keep a dictionary at hand during the reading.

Michael Metz was a throwback to an earlier time on Wall Street when it was more important to be conservative with client's assets than to jump on the bandwagon of the latest fad. The view from here is that he can't be replaced and is already sorely missed. May he rest in peace.

Initial Jobless Claims

The number of people filing for first time unemployment benefits held steady at recession levels in the week ending August 2nd, according to the US Department of Labor. Claims jumped 7,000, to 455,000, after an upwardly-revised gain of 45,000 last week. Economists were expecting 430,000 new claims for the week. Today's reading is the highest reading in six years.

A large portion of [the recent gains] is due to the extension of unemployment insurance benefits, and thus does not necessarily suggest a severe loosening in the labor market.

Having witnessed extremely volatile measurements in the past few weeks, it is wise to consider the four-week moving average of initial claims, which smooths out one-time factors such as bad weather or holidays. The four-week moving average was also higher, by 26,750 in the latest week, to 419,500.

Initial claims running consistently atop the 350,000 mark would signal some weakening in the labor market. Claims above 400,000 are seen by many as a signal of recession.

See Full Report.

FOMC Statement

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Defending Obama on Trade

Susan Ariel Aaronson, an Associate Research Professor of International Affairs at George Washington University, tries to defend Barack Obama on trade with an article at Voxeu.org:

Around the world, the press has portrayed the 2008 US presidential election as a choice between freer trader John McCain and “protectionist” Barack Obama. That traditional paradigm has helped the media simplify the differences between the two men. However, such these labels do not accurately describe either candidate. And it does not fully portray the candidate, Mr Obama, who has the more optimistic vision of trade.

Her argument is that although he wants to include "global governance" issues such as labor and environmental rules in trade agreements that Obama is really in favor of free trade. Of course, that assumes that agreements can be reached on these other items, which I find highly doubtful. The US should not be dictating labor and environmental standards to other countries. While it sounds good to say we are trying to protect workers in these countries the reality is that adhering to our standards will mean that many of these workers won't have jobs at all. Given that choice, my guess is that these foreign workers would tell Obama to mind his own business.

Free trade does not require any negotiation. A true free trade agreement would need to be no longer than one sentence.

Personal Spending

Despite a better-than-expected gain in nominal spending, real personal spending decreased 0.2% for the month of June. Nominal spending increased by 0.6%, above the 0.5% expected by economists. But the increase was mainly due to a sudden spike in prices, as inflation increased 0.8% for the month. Adjusted for inflation, real consumer spending was down, by 0.2 percentage points. The spike in inflation was the worst for a month since 1981- 27 years.

Real spending on durable goods fell 1.6%, the biggest drop in a year, while real spending on nondurable goods slipped 0.4%. Real spending on services rose 0.2%.

Nominal personal incomes grew 0.1% in June, way ahead of expectations. Economists were expecting a 0.1% decrease.

The impact of the tax rebates on personal incomes was reduced in June: After getting $48.1 billion from the government in May, individuals received $27.9 billion.

See Full Report.

The Effects of Raising the Minimum Wage

The employment report today showed that the biggest jump in unemployment was in the 16-24 age group, up 0.8%. This group has lost 550,000 jobs in the last three months and the unemployment rate is up 2.4% during that time. The unemployment rate for those over age 25 is up by 0.5% during the same time.

Is it possible that raising the minimum wage had something to do with the rise in youth unemployment? Certainly the economic slowdown has had an effect on these workers and seperating out the part that is due to the rise in the minimum wage is probably impossible, but it seems logical that it has had an effect. I don't care if someone has a study that claims that raising the minimum wage has no effect on employment, common sense says it must have an effect. Businesses only have so much revenue to go around. Given a choice between hiring another slacker teenager and reducing owner profit or not hiring the slacker teenager, I think I know what choice the owner will make.

Obama's $1000 Rebate Plan

Forcing big oil companies to take a reasonable share of their record breaking windfall profits and use it to help struggling families with direct relief worth $500 for an individual and $1,000 for a married couple. The relief would be delivered as quickly as possible to help families cope with the rising price of gasoline, food and other necessities.

The rebates would be fully paid for with five years of a windfall profits tax on record oil company profits. This relief would be a down payment on Obama’s long-term plan to provide middle-class families with at least $1000 per year in permanent tax relief.

What happens if the Oil companies don't have "windfall" profits for all of those five years? How do we define "windfall"? Is it a windfall when Angelina Jolie makes $20 million for a film? Can we take some from her too? What about Google? Their profit margins are much higher than Exxon Mobil's. Can we take some of their profits too? Just asking....

The key word in the above paragraph is "Forcing". All taxes are ultimately about force. The government takes from one group and gives to another. So Obama wants to take money from oil company shareholders and distribute it to other citizens. Why do those who didn't take the risk of owning oil company shares deserve to reap the benefits of ownership? Is it possible that would have an effect on the desire to own oil company stocks? Will that have an effect on the returns of pension funds who invest on behalf of the same Americans who receive the windfall tax proceeds? Is it possible that oil companies will just pass through the tax to consumers? If they do, who benefits from this other than Barack Obama? Has anyone on Obama's economic team thought about this?

Stupid is as stupid does....

Dividends Paid by the Taxpayer

Larry Lindsay makes a fine point in his editorial today in the WSJ, Hank Paulson's Fannie Gamble, that I hadn't thought of:

First, Congress rejected a proposal that Fannie and Freddie be barred from paying dividends if they are receiving injections of capital from the federal government. This idea would seem to be the first lesson in a course on Government Bailout 101. The government shouldn't be shoveling taxpayer money in the front door while the company is shoveling dividends to shareholders out the back door.

Freddie Mac paid $1.6 billion in dividends last year while Fannie Mae paid $2.5 billion. Both have dividend yields that are many times higher than the norm. Congress chose to protect the shareholders at the expense of the taxpayer.

Our politicians really drove a hard bargain with Fannie and Freddie. No one in the boardroom or executive suite got canned. Shareholders keep getting their dividends. And they keep all the upside. If they fail we just get the bill. Is it any wonder that politicians don't work in the private sector? No investment banker would last long making a deal like this. Just another example of politicians looking out for themselves rather than us.

Willful Blindness

Nancy Peolosi recently said that she didn't want to drill for more oil in the US because she was "trying to save the planet". Charles Krauthammer points out that not drilling here is only good for the parts of the environment that Pelosi can see:

Does Pelosi imagine that with so much of America declared off-limits, the planet is less injured as drilling shifts to Kazakhstan and Venezuela and Equatorial Guinea? That Russia will be more environmentally scrupulous than we in drilling in its Arctic?

The net environmental effect of Pelosi's no-drilling willfulness is negative. Outsourcing U.S. oil production does nothing to lessen worldwide environmental despoliation. It simply exports it to more corrupt, less efficient, more unstable parts of the world -- thereby increasing net planetary damage.

That's something that seems obvious to me but apparently not to Pelosi. I live in Miami and Cuba, Venezueal and China will be drilling off our coast. Would I rather it be an American company with a better track record on the environment? You bet.

US Non-Farm Payrolls

Nonfarm payrolls in the US fell for the 7th straight month, as 51,000 more jobs were lost in July. Although negative, the consensus tabbed July for 70,000 job losses, so the report is somewhat bullish. The unemployment rate, in contrast, surged ahead of expectations,to a 5.7% annual rate. Economists were anticipating a number between 5.5 and 5.6%. The unemployment rate is at a 4-year high, and its meteoric rise of 0.7% in the past three months is the fastest increase in the past 26 years.

Manufacturing employment fell by 35,000 in July, bringing losses over the past 12 months to 383,000. Over the month, job losses were widespread with notable declines in transportation equipment (-8,000), wood products (-4,000), and textile mills (-3,000). Machinery added 6,000 jobs over the month.

Employment in construction was down by 22,000 in July. Construction has shed 57,000 jobs since its September 2006 employment peak, with nearly three-quarters of the decline occurring since October 2007. Nearly all of the July employment
decrease came among specialty trade contractors (-20,000), with both the residential and nonresidential components contributing to the decline.

Within professional and business services, employment services lost 34,000 jobs in July, with nearly all of the decline in temporary help services (-29,000). Since January 2008, employment in temporary help services has declined by 185,000. Computer systems design and related services added 7,000 jobs in July.

Wholesale trade employment decreased by 17,000 over the month, with declines in both the durable and nondurable components. Since its peak in November 2007, wholesale trade has lost 57,000 jobs.

Year to date, US payroll employment has fallen by 463,000.

See Full Report.

2nd Qtr US GDP Report

According to the Bureau of Economic Analysis, US gross domestic product - the output of goods and services produced by labor and property located in the United States - accelerated in the latest quarter, to a 1.9% annualized pace. The number, reported by the Commerce Department, was slightly below expectations, as economists had expected a number closer to 2.3%.

The increase in real GDP in the second quarter primarily reflected positive contributions from exports, personal consumption expenditures, nonresidential structures, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, residential fixed investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased.

Consumer spending was supported by the largest increase in disposable personal income in six years, thanks largely to about $80 billion in tax-rebate checks from Washington.

Real personal consumption expenditures increased 1.5 percent in the second quarter, compared with an increase of 0.9 percent in the first. Durable goods decreased 3.0 percent, compared with a decrease of 4.3 percent. Nondurable goods increased 4.0 percent, in contrast to a decrease of 0.4 percent. Services increased 1.1 percent, compared with an increase of 2.4 percent.

Annual revisions in the report also showed that the economy contracted in the fourth quarter of 2007, falling 0.2%. It was the the first drop in real gross domestic product since the recession of 2001. The economy grew at a revised 0.9% annual rate in the first quarter.

See Full Report.

Initial Jobless Claims

The number of people filing for first time unemployment benefits rose sharply in the week ending July 26th, according to the US Department of Labor. Claims jumped 44,000, to 448,000, way above expectations. Economists were expecting 398,000 new claims for the week. Today's reading is the highest reading since April 2003.

Having witnessed extremely volatile measurements in the past few weeks, it is wise to consider the four-week moving average of initial claims, which smooths out one-time factors such as bad weather or holidays. The four-week moving average was also higher, by 11,000 in the latest week, to 393,000.

Initial claims running consistently atop the 350,000 mark would signal some weakening in the labor market. Claims above 400,000 are seen by many as a signal of recession.

See Full Report.

I’m Mad as Hell and…..I guess I’ll Have to Stay that Way

In 1976, Howard Beale, a character in the movie Network, urged Americans to get up, go to their windows, open them and yell out, “I’m mad as hell and I’m not going to take this anymore!” The preamble to Beale’s speech chronicles the problems of the 1970s: inflation, a falling dollar, unemployment, environmental degradation and crime. Here we are over 30 years later and we’re living another Howard Beale moment. Unfortunately, based on the solutions offered by our political leaders, I guess I’ll have to stay that way. What I don’t have to do is remain quiet about it.

There are real problems that face our country now and our political leaders cannot be trusted to provide the only solutions. Most do not have the guts to say what needs to be said for fear of alienating some group of supporters. And many do not have the integrity to stand on principle and advocate unpopular but necessary policies. Too often, politicians tow the line of special interest groups and campaign contributors instead of doing what is right for the country. It is high time that politicians were held responsible for the damage done by policies that benefit the few at the expense of the many.

In this election year, the greatest concern for most Americans is the economy and there is good reason for that. Unemployment, foreclosures and prices are all rising. The stock market, home prices and the dollar are all falling. Economic growth is still positive but well below potential. The situation is not as bad as during the 70s, but they are moving in that direction. And Americans are rightly worried.

At whom should we direct our anger? That is the question that is not being asked by enough Americans and not being answered to anyone’s satisfaction. Politicians and others are manipulating public opinion through the media by offering seemingly made-to-order villains such as Angelo Mozillo, Exxon-Mobil and the amorphous but always reviled “speculator.” Americans with little understanding of economics are easily misled by propaganda that indicts the market on charges of perfidy while sanctifying politicians who cast themselves as champions of the downtrodden. The true villains remain hidden away from public view.

Complicating the task of unmasking those villains is the resilience of the US economy. Keep in mind, the country’s economic growth has been weak but we have yet to register a negative quarter. Second-quarter growth will probably be reported at around 3% and you can bet there will be a line of politicians eager to take credit. Most economists expect the second half of the year to be weaker but if oil prices keep falling they may be as wrong about the second half as they were about the first.

The underlying problems, however, will not have been solved no matter what the performance of the economy is over the next few quarters or years.

In a recent market commentary, Bill Gross called access to credit “the mother’s milk of capitalism.” That sentiment, echoed by our politicians and policy makers, is the source of our problems. It is not credit but capital that is the lifeblood of capitalism and the US doesn’t accumulate enough capital to support the growth that we’ve become accustomed to. The savings rate has ticked somewhat higher over the last few months, but for years we’ve saved too little and spent too much. To make up for that difference we’ve depended on other countries, such as China, which now owns over $1 trillion of US debt. Middle Eastern countries own even more of us.

In their efforts to revive the credit markets, the Federal Reserve and their political enablers may have averted an economic crisis in the short-term, but the long-term implications have yet to be reckoned. Bear Stearns, Fannie Mae and Freddie Mac – deemed too big to fail – were given access to the public purse rather than face the consequences of excessive leverage. Now the acceptable cure for excessive private indebtedness is more public indebtedness. Private players will reap the benefits if these transactions turn out profitable while the public will pay the price if they don’t.

Large financial institutions were encouraged to take on too much leverage and take too many risks by a Federal Reserve that held interest rates at artificially low levels for far too long. Rather than allow these companies to suffer the consequences of their actions our leaders are working overtime to ensure they continue to take imprudent risks in the future. The Fed has allowed overleveraged institutions to borrow funds at attractive rates with dubious collateral. Savers are punished with low interest rates while speculative players are encouraged to find new avenues for their speculation. Oil prices would seem to indicate they’ve found a new outlet for their speculative impulses.

The same is true of individuals who borrowed too much to buy homes they couldn’t afford. I feel for the people who face foreclosure but why should those of us who were prudent be forced to bail out those who weren’t? The recently passed housing bill will allow both lenders and borrowers to forgo the consequences of their actions. And again, if everything works out the lenders and borrowers will benefit while failure is assigned to the taxpayer. It would be better for the foreclosures to proceed and former homeowners to become renters again. The real estate market would face a further increase in inventory but prices could finally fall to market clearing levels. That would make housing affordable for those who have saved and acted prudently.


Over the last 50 years (at least) but especially during the last 30 years, every economic problem has been buried under another layer of credit and government intervention. The Federal Reserve and Congress have worked together to promote an economic environment where failure is deemed a threat to the “system” and all economic ills are “solved” by reducing the cost of credit. The result is plain for all to see. The US has moved from creditor to debtor nation. Debtors are bailed out through the tax code while savers are consigned to a prison of low interest rates. It is no surprise that we must import capital to cover our debts when we encourage debt and discourage saving.

The long-term problems facing our economy will not be solved painlessly, nor will they be solved by providing more of the same policies that got us to this point in the first place. While the Federal Reserve sits at the center of our problems the institution itself is not at fault. They have been given an impossible dual mission to maintain economic growth and to limit inflation. Having control only over the money supply, it is beyond the capabilities of the Fed to create growth. Inflation and credit expansion do not add anything to the amount of resources available or the capital stock. The Fed cannot create universal prosperity by creating more money. Inflation consumes precious capital by misdirecting resources into non economic investments. If you have any doubts about that, think of all the empty houses sitting around the country which attracted so much investment over the last decade. The capital devoted to housing was diverted from more productive uses and is now being destroyed as banks are forced to write off bad loans.

The villains in this story are the inhabitants of our political institutions. They seek to buy our votes with our own money and when they find that is not enough, they turn to the Federal Reserve and the banking system to create more. Rather than raise taxes to pay for the goodies they promise or the wars they deem necessary, they depend on debt and inflation. They do not create jobs, but destroy them. They do not create equality but exacerbate the divide between the haves and have nots and manipulate the divide to accrue more power. They do not create capital but rather destroy it. They are not special but mere mortals susceptible to the same failings as all people. They are self interested actors acting on a stage of their own design in a play written for their own benefit.

It seems evident that the housing bubble that is the source of the current economic malaise was caused by Federal Reserve policy. Does it not seem perverse to turn to the same institution for a remedy? How can they be expected to prescribe a remedy when they obviously don’t understand the malady?

It would seem more logical to proscribe the manipulation of interest rates for any purpose other than to achieve price stability. While a gold standard or some other real asset backed currency would be preferable and less susceptible to political manipulation, setting a single goal for the Fed is preferable to the current situation. Higher interest rates are obviously needed to reduce the inflation evident to everyone except the government statisticians. Higher interest rates would also encourage saving and discourage further debt accumulation.

It also seems evident that the government budget deficit is a result of excessive spending rather than a lack of taxation. Tax revenue has been remarkably stable as a percentage of GDP for many years, ranging between 18% and 21% regardless of tax rates. Right now it stands at 19%. Furthermore, other countries, such as Hong Kong, are able to collect nearly the exact same percentage of revenue with much lower tax rates. Hong Kong has income tax rates, personal and corporate, of less than 20% and generates a budget surplus while spending over 15% of GDP on government services. Hong Kong also doesn’t tax capital gains or dividends. We do not need higher taxes to generate the revenue needed for essential government services. We do need to decide what is essential.

In particular, it is illogical to raise taxes on capital when the basic problem we face is a lack of capital. If anything, taxes on capital should be further reduced to encourage accumulation of the capital needed to fund our growth. As for income taxes, it is time for Americans to assess the wisdom of taxing the very thing we wish to generate. If it is logical to tax cigarettes to discourage smoking, what is the logic for taxing income? A consumption tax coupled with repeal of the income tax would realign incentives toward a more rational economy based on thrift and savings rather than conspicuous consumption.

It is time for the citizens of these United States to take back our Republic from the thieves and parasites that occupy the seats of power. Power in this country was intended to reside in the people and the states. A class of citizens numbering less than 600 now hold that power in Washington, D.C. and we have no one to blame but ourselves. It is time to get angry.

The Truth About Drilling in ANWR

The argument those opposed to opening ANWR and other areas to oil exploration use is that it won't have an impact on today's prices because the oil won't come to market for years. Of course, that argument seems silly since any plan they offer for alternatives also will require years to produce results, but even absent that argument, it is highly likely that opening these lands to drilling in the future will change prices today:

Now what happens if we are at an initial equilibrium, and then all of a sudden the US government relaxes the prohibitions on ANWR drilling? If oil traders really believe the policy shift is permanent, and that up to a million extra barrels will be hitting the market in a decade, then this will obviously reduce the expected world price of oil starting at that time. Consequently, any oil producers who had previously settled on a production rate with "excess capacity" — i.e., where they could have produced and sold more barrels today, but decided not to for reasons of profit — will re-evaluate their decision.

Without specifics we have no idea how much the new information will change their output plans, but surely they will pump more in the present than they had previously decided.

If we step back and survey the big picture, what would happen is that the market in a sense would be transferring some of those future ANWR barrels to the present. It's true, the market doesn't have recourse to time machines. But physical barrels of oil that would have otherwise sat underground in 2008, 2009, and so on, will now be brought to the surface and sold, because they have been displaced by the barrels currently buried in Alaska that will be brought to the surface and sold in 2018, 2019, and so on.

It is even possible that the mere threat of opening these areas to drilling has an effect on today's prices:

If this seems too theoretical and farfetched, consider this: In May, the Saudis officially rebuffed President Bush's request for them to increase their output. Yet one month later, they reversed their position. What changed in the interim?

Obviously I don't know for sure what motivates oil barons, but the political mood in the United States shifted in between those two announcements. All of a sudden, opening up ANWR and offshore areas for drilling was "on the table." The mere possibility of an extra million or more competing barrels per day may have been enough to reverse the Saudis' stance.

Markets are wonderful things when they are allowed to work.

Will Speculators Get Credit for Driving Down Oil Prices?

A lot of economically illiterate people have blamed speculators for driving up oil prices. Will they now thank speculators for driving prices down?

Crude Oil Long Change Short Change
Large Speculator 198,019 -11,994 201,659 14,028
Commercial Hedger 641,265 -28,870 626,528 -60,219
Small Trader 55,452 -39,045 66,549 -33,718

Speculators can go short as well as long. If they weren't in the crude oil market right now, prices would be higher. Commercial hedgers are actually net long oil and as you can see, they are much bigger than the speculators who are net short.

I have no expectation that Congress will lay off the speculators though. If they admit that this was all just a witch hunt, they'll have to actually do something in an election year. And we can't have that.

Scientific Consensus on Global Warming? Maybe Not...

The number of scientist questioning the thesis that CO2 is the cause of global warming continues to grow. Considering the economic consequences of the plans for reducing CO2 emissions, it is time we had a serious debate about this. Up until now, the debate has been one sided and anyone who dared to question the Al Gore led consensus was ridiculed or worse. Now the consensus is starting to crack as more evidence becomes available.

I DEVOTED six years to carbon accounting, building models for the Australian Greenhouse Office. I am the rocket scientist who wrote the carbon accounting model (FullCAM) that measures Australia's compliance with the Kyoto Protocol, in the land use change and forestry sector.

FullCAM models carbon flows in plants, mulch, debris, soils and agricultural products, using inputs such as climate data, plant physiology and satellite data. I've been following the global warming debate closely for years.

When I started that job in 1999 the evidence that carbon emissions caused global warming seemed pretty good: CO2 is a greenhouse gas, the old ice core data, no other suspects.

The evidence was not conclusive, but why wait until we were certain when it appeared we needed to act quickly? Soon government and the scientific community were working together and lots of science research jobs were created. We scientists had political support, the ear of government, big budgets, and we felt fairly important and useful (well, I did anyway). It was great. We were working to save the planet.

But since 1999 new evidence has seriously weakened the case that carbon emissions are the main cause of global warming, and by 2007 the evidence was pretty conclusive that carbon played only a minor role and was not the main cause of the recent global warming. As Lord Keynes famously said, "When the facts change, I change my mind. What do you do, sir?"

There has not been a public debate about the causes of global warming and most of the public and our decision makers are not aware of the most basic salient facts:

1. The greenhouse signature is missing. We have been looking and measuring for years, and cannot find it.

2. There is no evidence to support the idea that carbon emissions cause significant global warming. None. There is plenty of evidence that global warming has occurred, and theory suggests that carbon emissions should raise temperatures (though by how much is hotly disputed) but there are no observations by anyone that implicate carbon emissions as a significant cause of the recent global warming.

3. The satellites that measure the world's temperature all say that the warming trend ended in 2001, and that the temperature has dropped about 0.6C in the past year (to the temperature of 1980).

4. The new ice cores show that in the past six global warmings over the past half a million years, the temperature rises occurred on average 800 years before the accompanying rise in atmospheric carbon. Which says something important about which was cause and which was effect.

......


The world has spent $50 billion on global warming since 1990, and we have not found any actual evidence that carbon emissions cause global warming. Evidence consists of observations made by someone at some time that supports the idea that carbon emissions cause global warming. Computer models and theoretical calculations are not evidence, they are just theory.

Al Gore and others who believe that man is the cause of global warming are right that this is the most important issue facing us today, but not for the reasons they believe. It's important because if we get this wrong and spend even more than the $50billion we've already spent to solve a problem that doesn't exist, we will have to forgo more important issues. There is no free lunch and there are always tradeoffs in economics. If we spend money to reduce the effects of global warming, that is money we can't spend on other things.

Wesbury - 3% Growth in the 2nd Quarter

As I pointed out in my last market update, despite all the bad news out there, the economy is not in recession and the 2nd quarter was likely much better than expected. We'll find out next week, but in the meantime, here's what Brian Wesbury has to say:

Late next week the government will release initial estimates of real economic activity in the second quarter. Not long ago, in early April, when the quarter was just beginning, the consensus forecast for Q2 2008 real GDP growth was 0.0%, with as many economists predicting contraction as were predicting growth.

Now, three months later, the consensus is up to 2.2%. And no surprise - we are forecasting a 3% growth rate, more bullish than almost any other economist. Yes, it is true that the home building and autos sectors have been hammered. But, it is not true that this weakness has spread. Outside those sectors, the economy is not just healthy but downright strong, reflecting relatively low tax rates and loose monetary policy......


Many say it feels like a recession and predict negative growth. Then the data arrive, and show growth. The pessimists then say it doesn’t matter because it’s “old” news. After all, the quarter is already over and the evidence of recession will be clear by next quarter, they say.

Eventually, those forecasting recession are going to run out of time. The clock is already ticking and the economy remains resilient. Construction and auto related layoffs account for more than all the job losses in the past year. Initial unemployment claims remain below 400,000 and the financial sector appears to be bottoming.

I have said consistently since the credit problems started last year that this would not produce a recession and so far, I've been right. It's been extremely frustrating to be right about the economy and watch the stock market take a dive, but eventually the stock market will respond to the positive economic data.

Odds of Recession

Futures markets are not infallible, but they are remarkably accurate at predicting future events. Prediction markets are now available from a variety of sources, including InTrade. Here's the current contract on the likelihood of a recession in 2008:



Stock market investors may be worried about the economy but apparently no one is betting directly on that outcome. If you're convinced of the doom and gloom that pervades much of the press, I suggest you go and make a bet at InTrade.