News What is wrong with the US economy? Part 2

[mgb_phys]

US (and UK when they mattered) industry have a much more short-term view. When the dollar was strong and SE asia crashed a few years ago they went on a buying spree, so Ford owned Volvo, Land Rover, Jaguar, Mazda. GM owned part of Subaru and others.
But this seems to have been purely a stock investment - there is no engineering cross over.

Volkswagon bought Skoda ( a joke eastern european company ) and Seat ( a bargain basement Spanish maker ) and combined the engineering. So you can buy pretty much the same car as a super expensive Audi, moderately expensive VW, affordable Skoda or super cheap Seat. Instead GM have a dozen brands which all compete with each other.

When Ford do the same they simply stick a Jaguar badge on an underperforming sedan and ruin the image of the entire brand, The British Rover did worse by putting the MG sports car badge on a terrible 20year sub-compact design and tried to compete with the Golf GTI.

 

[Astronuc]

But this seems to have been purely a stock investment - there is no engineering cross over.

Hence where they are now. It looks like they were doing a simple business transaction, not a technology transfer, which to me seems to be a great opportunity lost. I much prefer European and Japanese design and engineering - and I've owned VW, Volvo (although the 242 had problems ), and Honda.

Meanwhile -

Foreclosures soar 76% to record 1.35 million
http://money.cnn.com/2008/12/05/news/economy/mortgage_delinquencies/index.htm

Foreclosure rate hits nearly 3% in the third quarter, while another 7% of borrowers fell behind on their mortgages.

NEW YORK (CNNMoney.com) -- A record 1.35 million homes were in foreclosure in the third quarter, driving the foreclosure rate up to 2.97%, the Mortgage Bankers Association said Friday.

That's a 76% increase from a year ago, according to the group's National Delinquency Survey.

At the same time, the number of homeowners falling behind on their mortgages rose to a record 6.99%, up from 5.59% a year ago, the association said.

This means that one in 10 borrowers in America are either delinquent or in foreclosure.

Many of those troubled borrowers are in California and Florida, which have among the highest delinquency rates in the nation.

. . . .

Where will investment bankers go?
The industry is being hit hard by layoffs. To survive the restructuring, bankers will need to be highly flexible.
http://money.cnn.com/2008/12/04/news/economy/investment.bankers.fortune/index.htm

To find investment banking work, job hunters might have to be open to relocating to areas where the industry is still hot, like Hong Kong, Shanghai, Dubai, or Mumbai, he said.

How long will the recession last?
Longer than past downturns, and Wall Street's meltdown will slow the recovery.
http://money.cnn.com/2008/12/03/news/economy/karydakis.recession.fortune/index.htm

Through the end of next would make it 24 months.

On the other hand, the government could 'borrow' more money and spend it on infrastructure -

Obama banking on large-scale public works project
http://news.yahoo.com/s/ap/20081206/ap_on_el_pr/obama_economy

But then when that work is completed - then what? More infrastructure projects?
I think the investment should be made in sustainable and renewable energy development and conservation/efficiency.

 

[edward]

I think that's a lot of Detroit's problem.
If you base your business on 'buy american' you have no need to produce products that really compete. You very rarely see American cars outside the USA, car buyers in Germany are not queueing up to get their hands on a buick!

GM doesn't market Buicks in Germany. Yet GM does sell cars in Germany and most all of Europe.

http://www.gm.com/europe/gm-europe/germany/

 

[mgb_phys]

GM doesn't market Buicks in Germany.

That must be how Mercedes, BMW and Audi manage to stay in business then

 

[Art]

November was a bad month for employment figures,

US job losses surge in November

US employers axed 533,000 jobs in November, the biggest monthly cut since 1974, the US Labor Department said.

In a dramatic indication of the worsening economic situation, the US jobless rate rose to a 15-year high of 6.7% from 6.5% in October.

Since these latest numbers were compiled, further jobs losses have been announced, including big cuts at AT&T.

Recent figures have fuelled fears that the world's biggest economy is set for a deep, long downturn.

http://news.bbc.co.uk/2/hi/business/7767326.stm

With 1.55m jobs lost in the past 6 months that already nearly equals the total number of jobs lost during the entire 2001 downturn.

Stimulus packages may alleviate some of the short term pain but the underlying problems still remain. The banks will not know how much trouble they are in until house prices stabilize and so until then it is likely the credit squeeze will continue as banks fear throwing good money after bad. However even if the banks loosen their purse strings one wonders is it a good idea to encourage people to increase personal debt when the current levels of debt are already unsustainable?

IMO a long term fix requires a major shift of focus in the economy away from service industries to manufacturing industries to gain export led growth rather than domestic consumer led growth.

Recent US economic policy is reminiscent of the economic policies of the native American Indians who sold Manhattan island for strings of beads with the US gov't now playing the role of the Indians and the Chinese playing the part of the smooth talking salespeople. Americans have become addicted to cheap Chinese imports and to finance their addiction they are hocking the family silver. As the Chinese convert the monies they receive for their baubles back into hard US assets the future revenue streams from those assets benefit China not the US which ultimately affects national security.

 

[turbo]

Ernest Schyder can't spell "rein", but apparently the story is real. Dow is closing 200 plants - twenty of them permanently - laying off 5000 full-time employees, and shedding 6000 contract positions.

NEW YORK – Dow Chemical Co. said Monday it will slash 5,000 full-time jobs — about 11 percent of its total work force — close 20 plants and sell several businesses to reign in costs amid the economic recession.
The company, one of the largest chemical makers in the world, expects the moves to save about $700 million per year by 2010. Dow also will temporarily idle 180 plants and prune 6,000 contractors from its payroll.

http://news.yahoo.com/s/ap/20081208/ap_on_bi_ge/dow_chemical_job_cuts;_ylt=Am9GD7MCzXbFSdLEBL2thN2s0NUE

 

[cronxeh]

I think it is time to start buying Gold and Platinum bullions

 

[turbo]

I think it is time to start buying Gold and Platinum bullions

Only if you want to lose money. They time to hedge with precious metals was while they were relatively affordable. If you buy at the height of their attractiveness, you will lose money when investments that pay interest, dividends, etc start turning around.

 

[OmCheeto]

Only if you want to lose money. They time to hedge with precious metals was while they were relatively affordable. If you buy at the height of their attractiveness, you will lose money when investments that pay interest, dividends, etc start turning around.

My http://www.kitco.com/charts/historicalsilver.html" have dropped almost in half since July.

Though it's value looks like where it should be. Everything seems to have been way overvalued in the last couple of years. We should delete all the graphs between Jan '06 and Dec '08. This downturn might not look so bad. Except for all the unemployment, housing crash, lack of sales, lack of capital, etc., etc., of course.

 

[Astronuc]

Many people have stopped buying products, so the manufacturers have stopped buying raw materials, and so demand for commodities has dropped.

Buying gold/silver/platinum is not a good idea because the global economy is experiencing slight deflation.

The question is - have people stopped buying out of caution or have they stopped buying because they simply don't have the money (some whom may have borrowed beyond their ability to repay the credit). If it's more of the latter (which is indicated by 10% of mortgages either in foreclosure or default), then the recession will linger for some time.

 

[cronxeh]

Many people have stopped buying products, so the manufacturers have stopped buying raw materials, and so demand for commodities has dropped.

Buying gold/silver/platinum is not a good idea because the global economy is experiencing slight deflation.

The question is - have people stopped buying out of caution or have they stopped buying because they simply don't have the money (some whom may have borrowed beyond their ability to repay the credit). If it's more of the latter (which is indicated by 10% of mortgages either in foreclosure or default), then the recession will linger for some time.

Up until 1971 we had a real dollar backed by Gold. Nixon eliminated the gold standard and today we have a Fiat dollar. Who is buying those treasuries? Japan and China. Why would they finance our mortgages with their money if we would turn around and squander it on likes of GM and Chrysler

 

[mgb_phys]

Up until 1971 we had a real dollar backed by Gold. Nixon eliminated the gold standard and today we have a Fiat dollar.

Presumably it's cheaper to print dollars than invade the countries with the gold mines.

Why would they finance our mortgages with their money if we would turn around and squander it on likes of GM and Chrysler

Because they need dollars to buy oil. Price oil in euros and nobody needs to prop up american debt.

 

[mheslep]

Yet unemployment rate is 6.7%, which is down. Discouraged workers, i.e. those given up, are not counted, so the unemployment (for whatever reason) rate is actually much higher.

...Do you think we are near the peak at 6.7%, or do you think it'll get higher?

?? Unemployment rate is up from 6.5%.
How is that useful? Can you compare that number to, say, a rate calculated the same way in 2001 or 1991?

In any case, 533,000 is a big, big number. It may be a reaction to the stock market turmoil, but it points to a likelihood that the recession will be pretty significant. The previous two months were revised up as well.

For perspective, compare the US rate to the perennial unemployment rate in Europe ~10% or so; its been at that level for decades.
http://www.indexmundi.com/g/g.aspx?v=74&c=gm&l=en
http://www.indexmundi.com/g/g.aspx?v=74&c=fr&l=en

 

[Astronuc]

For perspective, compare the US rate to the perennial unemployment rate in Europe ~10% or so; its been at that level for decades.
http://www.indexmundi.com/g/g.aspx?v=74&c=gm&l=en
http://www.indexmundi.com/g/g.aspx?v=74&c=fr&l=en

But are they measured on the same basis. The US statistics technically exclude anyone who is unemployed but not actively looking for a job. It may be that the Europeans consider categories of unemployed that the US disregards.


I was looking at poverty statistics in places like India and Pakistan, and they use something like $1/day or $1.25/day, so the povery rates are something like 1/4 of the population. However, if one considers the poverty thresholds from the EU or US, those rates would sky rocket to more than 3/4 of the populations.

 

[mgb_phys]

The european figures may include more people if they have more available unemployment benefits. Generally the official numbers count the people they are paying - and of course goverments try and reduce the headline number and the amount paid out.

It's also very unevenly spread - 15 years after unification 'East' Germany's unemployment rate is still twice as high as the west's.

 

[mheslep]

But are they measured on the same basis. The US statistics technically exclude anyone who is unemployed but not actively looking for a job. It may be that the Europeans consider categories of unemployed that the US disregards.
...

Yes, all OECD unemployment counts must be 1. not working, 2. currently available for work, 3. seeking. This is agreed to at statistical conferences.
http://stats.oecd.org/mei/default.asp?lang=e&subject=10

See "Standardized unmployment rates"
http://www.oecd.org/dataoecd/3/10/18630152.pdf

 

[edward]

There are thousand of unemployed people who are actively seeking employment, yet may not counted under the current system.

Last month, the number of college graduates who were working fell by 282,000, while only 2,000 more college graduates were classified as unemployed. Why this gap? Laid off college workers, who are unaccustomed to unemployment, may feel a stigma if they report themselves as actively looking for work, so they are uncounted among the unemployed. Additionally, many nonworking college graduates may retire or return to school in response to weak job prospects.

http://economix.blogs.nytimes.com/2008/12/08/the-job-market-for-college-graduates/

 

[kronon]

If you have time and the inclination this might be of interest.

In my opinion it overlooks the initial spark: the political policies, the repeal of Glass-Steagall, loosening of the regulatory reigns, perestroika...but the subsequent upheaval which all that made possible is well documented here.

http://www.princeton.edu/~markus/research/papers/liquidity_credit_crunch_WP.pdf

 

[Astronuc]

Workers Pay for Debacle at Tribune
http://dealbook.blogs.nytimes.com/2008/12/09/workers-pay-for-debacle-at-tribune/

Workers Pay for Debacle at Tribune

By ANDREW ROSS SORKIN

Sam Zell acknowledged from the start that his deal for the Tribune Company was flawed.

“I’m here to tell you that the transaction from hell is done,” Mr. Zell said last December when he sealed his $8.2 billion takeover of the publisher of The Chicago Tribune and The Los Angeles Times.

But just how hellish this deal was, particularly for Tribune employees, became painfully clear on Monday when the 161-year-old company filed for bankruptcy.
. . . .

Advertising is in a free fall, and every newspaper is suffering. But Mr. Zell literally mortgaged the future of Tribune’s employees to pursue what one analyst, Jack Newman, at the time called “a childhood fantasy.”

Mr. Zell financed much of his deal’s $13 billion of debt by borrowing against part of the future of his employees’ pension plan and taking a huge tax advantage. Tribune employees ended up with equity, and now they will probably be left with very little. (The good news: any pension money put aside before the deal remains for the employees.)
. . . .
Granted, Mr. Zell, 67, put up some money. He invested $315 million in the form of subordinated debt in exchange for a warrant to buy 40 percent of Tribune in the future for $500 million. It is unclear how much he’ll lose, but one thing is clear: when creditors get in line, he gets to stand ahead of the employees.

Mr. Zell isn’t the only one responsible for this debacle. With one of the grand old names of American journalism now confronting an uncertain future, it is worth remembering all the people who mismanaged the company before hand and helped orchestrate this ill-fated deal — and made a lot of money in the process. They include members of the Tribune board, the company’s management and the bankers who walked away with millions of dollars for financing and advising on a transaction that many of them knew, or should have known, could end in ruin.

It was Tribune’s board that sold the company to Mr. Zell — and allowed him to use the employee’s pension plan to do so. Despite early resistance, Dennis J. FitzSimons, then the company’s chief executive, backed the plan. He was paid about $17.7 million in severance and other payments. The sale also bought all the shares he owned — $23.8 million worth.
. . . .
Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and $37 million, respectively. But those banks played both sides of the deal: they also lent Mr. Zell the money to buy the company. For that, they shared an additional $47 million pot of fees with several other banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing the deal, for which it was paid a $7.5 million fee (plus an additional $2.5 million advisory fee).
. . . .

I have nothing against capitalism as long as it is based on ethical and moral standards, e.g. honesty and fairness. I do have a problem when malfeasant individuals make knowingly bad (very risky) deals with other peoples' money while taking huge payments/profits in advance without assuming any risk. Basically that is stealing as well as fraud, IMO, and it seems there was a lot of that going on over the last decade or so.

 

[Jimmy Snyder]

I have nothing against capitalism as long as it is based on ethical and moral standards, e.g. honesty and fairness.

And what if it isn't so based? Communism?

 

[misgfool]

Workers Pay for Debacle at Tribune
http://dealbook.blogs.nytimes.com/2008/12/09/workers-pay-for-debacle-at-tribune/


I have nothing against capitalism as long as it is based on ethical and moral standards, e.g. honesty and fairness. I do have a problem when malfeasant individuals make knowingly bad (very risky) deals with other peoples' money while taking huge payments/profits in advance without assuming any risk. Basically that is stealing as well as fraud, IMO, and it seems there was a lot of that going on over the last decade or so.

How about giving financial responsibility to management and making retroactive legislation. It is always possible to make an example out of these guys.

 

[mheslep]

If you have time and the inclination this might be of interest.

In my opinion it overlooks the initial spark: the political policies, the repeal of Glass-Steagall, loosening of the regulatory reigns, perestroika...

Which political policies and more importantly HOW did they create the 'spark'? How did the 'repealed of Glass-Steagall' contribute? The loosening of which regulatory reigns, and HOW did this contribute?

 

[edward]

"Originally Posted by Astronuc"

I have nothing against capitalism as long as it is based on ethical and moral standards, e.g. honesty and fairness.

And what if it isn't so based? Communism?

You seem to insinuate that capatalism without honesty, ethical and moral standards would be Communism.

 

[mgb_phys]

I have nothing against capitalism as long as it is based on ethical and moral standards, e.g. honesty and fairness.

I suppose capitalism is one of those economic theories that works in theory but not in practice ;-)

 

[kronon]

mheslep; banks don't just suddenly start lending recklessly out of the blue. They are constrained by a set of strict regulations. And since the early 90's those regulations have gradually been loosened.

The key enactment in law was the repeal of the Glass-Steagall act, which, after some political wrangling, eventually unlocked the way for banking subsidiaries to hold mortgage-related assets. (see here for a treasury white paper http://www.occ.treas.gov/ftp/workpaper/wp2000-5.pdf)

Other areas of regulation were also simulataneously loosened: risk weighting schemes of capital requirements (the whole of Basel II) and reserve requirements.

All this meant banks were now free to lend more, so they did.

And what was unleashed we all know.

Without government sanction this could not have happened in the first place. They mold the constraints within which banks operate.

The question I personally find most intersting is what was the thinking behind loosening the regulations? was it just a political philosphy of free capital markets? or what?

 

[Jimmy Snyder]

You seem to insinuate that capatalism without honesty, ethical and moral standards would be Communism.

I hate it when I have to explain 'em. Astronuc said "he had nothing against capitalism as long as it is based on ethical and moral standards". What he wrote after that indicated to me that he did not think capitalism was so based. Ergo, he has something against capitalism. If you have something against capitalism, then presumably, there is some thing in the world that is better than capitalism. Communism?

 

[edward]

Which political policies and more importantly HOW did they create the 'spark'? How did the 'repealed of Glass-Steagall' contribute? The loosening of which regulatory reigns, and HOW did this contribute?

Here is a good read on the repeal of Glass-Steagall from PBS:

After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

 

[edward]

I hate it when I have to explain 'em. Astronuc said "he had nothing against capitalism as long as it is based on ethical and moral standards". What he wrote after that indicated to me that he did not think capitalism was so based. Ergo, he has something against capitalism. If you have something against capitalism, then presumably, there is some thing in the world that is better than capitalism. Communism?

OK so now you are calling Astronuc a communist

 

[Jimmy Snyder]

OK so now you are calling Astronuc a communist

Syndicalism?

 

[BobG]

I hate it when I have to explain 'em. Astronuc said "he had nothing against capitalism as long as it is based on ethical and moral standards". What he wrote after that indicated to me that he did not think capitalism was so based. Ergo, he has something against capitalism. If you have something against capitalism, then presumably, there is some thing in the world that is better than capitalism. Communism?

It was an obscure comment. My interpretation was that: if he considered capitalism based on ethical and moral standards the #1 option, what was option #2, option #3, etc.

A slightly more interesting matrix weighing which has a bigger impact - the type of economy or corruption? (you could easily have a communist system based on bribery and corruption)