Corona Virus: The New Normal

 This past week

Sunday - Point Lookout Vineyard with Pete and Tess
Tuesday - Hike with Pete
Wednesday - Ben and Joanna over for cocktail hour
Thursday - Beers at Southern Appalachian with Bob, Diane and Ben
Friday - Music at Appalachian Ridge with Mina
Saturday - Dinner at Sol Y Luna with Phil and JoLyn
Sunday - Hosted dinner with Bob and Diane

What we haven't done; played bridge, eaten at a restaurant indoors, no gym, no church, no indoor gatherings at all.

Don't see anything changing in the near term.

Corona Virus: A Macro look

 We are now 5 1/2 months into the pandemic.  A few thoughts on the macro trends.

1)  The Pandemic itself.

The initial surge was in the North East.  The response was late and inadequate to the crisis.  The number of new known cases was averaging 30,000 day but the actual number was much higher.  Much of the country went into various levels of stay at home orders, closing businesses and restrictions on gatherings.  What was missing was a nation-wide order to wear masks and social distancing.  The pandemic eased from April through the middle of June. 

Then states began to re-open businesses and ease restrictions.  States that did not experience an initial surge and loosened restrictions were soon hit with surges, specifically AZ, FL, TX and CA.  The number of new known cases soon surged and eclipsed the numbers from the north east.  But the number of deaths did not jump nearly as high.  The general thesis was that younger folks were catching the virus but those folks with elevated risk where avoiding the virus.  

I expected that as soon as cases surged folks would quickly and voluntarily change their behavior.  Well is wasn't so quick.   For the next month. mid-June to mid-July cases continued to surge. Deaths also increased dramatically but did not get back to the levels of April and May.  Deaths which had declined to 500 day rose to 1000 day (rolling average).  As I write this deaths are slowly declining.  

The conclusions are that the virus is highly contagious is precautions are not taken.  However the virus seems not to be as deadly as once feared especially in the general population.  Treatments also seem to have progressed.

It now seems that closing the economy was not the optimum public approach.  Restrictions on businesses were and are still needed but closing the economy was probably unwarranted.  At the same time there should have been more restrictions in certain areas - especially senior citizen housing.  And a national policy on wearing face masks and socially distancing should have been enacted in March.   

Testing policy is still a mess.  Most folks should not be tested.  Only those who are vulnerable or who interact with the public need to be tested.  There are far too many cases for contact tracing.

2)  The North Carolina experience

NC is unusual.  Stay at home orders and business closures were ordered in mid-March well before we had any significant outbreaks statewide.  That meant that like other southern states we had a high number of Susceptibles and a low number of Recovered.  But unlike the other southern states we re-opened slowly and carefully.  We are still in "phase 2" which is now scheduled to end on Sept 11.

As a result NC is well below average in cases and deaths per capita.  But at the same time we haven't seen much change in the numbers in the last 4  months.   Basically unlike the rest of the country we aren't seeing any improvement.

2)  The economy

Unemployment surged to 20% and then quickly rebounded.  It is now at 10% and looking "sticky".  Airlines, hotels, restaurants, etc. won't recover for a long time.  The number of people out of work will also impact overall demand; consumer spending and business investment will also suffer.  State and local governments will also have to retrench due to decreases in tax revenue.

Congress passed a massive CARES Act in May.   Most of the provisions have now elapsed.  A second fiscal recovery plan is needed but Congress is stale-mated now.

3) The stock market

Partially due to the massive government fiscal and monetary policies the market recovered from the March debacle.

What we (may have) learned.

 The stock market is not the economy.

 The stock market index does not represent the stocks in the index.  It stock market index measures the success of Apple, Amazon, Microsoft, Google, Facebook and Netflix.  According to one source 292 members of the S&P 500 still are down year to date (YTD).

And the economy is not the only measure of how well the country is doing.

Some additional observations about the economy.

 The stock market is being propped up by near-zero interest rates.   Current acronym for buying stocks TINA – There Is No Alternative”.  

 The bankruptcies will hit small business and very few large, public corporations.

The market has not priced in any bad news regarding either a worsening of the pandemic or a failure of Congress to support the economy.  The overall market looks risky to me.

On a special note Tesla looks like the biggest equity bubble since the dot com bubble. It split and the split shares are selling at $500/share.  I expect this stock to drop by 50% or more.  But like most bubbles it is hard to predict the timing.  

Corona Virus: Four Months In

On March 10 I went to the FCUCC Book Club and the gym.  By the end of that week we had a stay at home order.   So it has now been 4 months living under covid restrictions.

This has lasted much, much longer than I expected.  I thought by now we'd be going our to restaurants and entertaining.  Not yet.

And, we've been fine.

We have been out to eat once - on the patio of Sol Y Luna.  Other than that it's been takeout.

We have been out to listen to music a few times at Southern Appalachian Brewery, Point Lookout and St. Paul's. 

As far as my list I am still reading my backlog of Economist and Foreign Affairs but the rest of my list has been completed.

Corona Virus: NC Phase 3

North Carolina was scheduled to begin Phase 3 on June 26.  Phase 3 would reopen business like bars, gyms, bowling alleys, etc. to open.  Other businesses and gatherings to be able to increase capacity.

Since Phase 2 the pandemic cases and deaths have been largely steady - perhaps a small rise.  The percentage of positive cases also remains steady at 10% and it should be decreasing over time.  So Cooper delayed Phase 3 and also mandated wearing masks in public spaces.

I thought he might implement a Phase 2 1/2.  He did not. 

I thought he would be criticized by the right.  He was.

I thought this might hurt him politically but then surges in TX, FL and AZ have shown that a rapid reopening is a big mistake. 

Corona Virus: June 6

Well we are definitely in a new stage.

On May 22, NC moved to stage 2.   Since then the number of nee cases has increased.  There is some noise over new deaths.  NY Times shows an increase.   NC dashboard shows a decrease.

I've been to two restaurants both times outdoors.  Karel went shopping on Main Street.  The demonstrations over police violence has pushed news about the corona virus "below the fold".  Stock market is surging.  Unemployment for May was surprisingly good.

Re tracking.  I wrote last time that I switched to tracking deaths not cases.  I have finally deciphered the fallacy of "Herd Immunity".  It doesn't apply once the reproductive rate < 1 and country-wide we are just about there.

Still missing from the "New Normal" are returning to the gym - which should happen no later then the end of June, playing bridge and going to church.  The last two are more doubtful.

The level of concern in my circle is mostly consistent.  Folks are not worried but they are taking precautions.  There are a few that are much more worried - even scared.

As for my projects
- yard work complete
- lecture series complete
- Spong lecture series complete
- India pictures uploaded and copied but not categorized
- Finished 12 of the 14 volumes of Civil War

Corona Virus: May 19

I just finished updating my stats.  I now think that the "new cases" data is not a reliable source of information.  I have started switching my graphs to 14 day moving averages of deaths.   Things overall haven't changed.  States are reopening businesses and there have not been widespread spikes in deaths.  Curve is on the slight decline but there is no reason to expect the pandemic to be over anytime soon.

I expect NC Gov Cooper to go to Phase 2 on May 22 in accordance with his preliminary schedule.  I also think it will be fine.  I don't think reopening will have much of an impact.  Those at risk will continue to stay home and be cautious.

Let's see how many downtown restaurants we lose.  I suspect French Broad Café and the new breakfast place will not reopen.  Maybe Renzo's.  The over-under is 3.

As far as the end there are some early positive indicators for both a vaccine and a treatment.  I think the treatment is more important than the vaccine.  First, it is more targeted.  You only need to apply it to folks who test positive and are getting sick enough to ask for health care.  Second, I think it may be approved sooner.

Phases of New Normal
- Return to Planet Fitness
- All parks and trails open
- Indoor social gatherings
- Go to a restaurant
- Play bridge
- Pandemic moves off the front page of the NY Times


As far as my day to day status, I have:
- Finished the yard project
- On volume 8, that is about half way, on Shelby Foote's Civil War
- 2/3 done on the Modern Political Traditions
- Episode 8 of The Last Dance
- Finished season 2 of This is Us
- Making less progress on Sherlock Holmds
- Still way behind on back issues of the Economist and Foreign Affairs

Corona Virus: May 2

Not much new.  Henderson County continues to see outbreaks at senior housing.  I am beginning to think we made the wrong decision re testing when it was (and probably still is) limited.  What we could have done was that if someone was symptomatic and had none of the risk factors they should not have been tested.  They should have been told to assume they were positive and act accordingly.

Instead we should have pro-actively tested all of the staff in senior housing along with random testing of the seniors.

For most folks who are positive there is no reason to get any health care.  Most will recover with or without seeing a doctor or going to a hospital.  Some will die with or without health care.

Data points

- Overall US cases remain flat.  No sign of either a spike or the downhill slope.  Doesn't look like we are any where near stressing health care capacity (see above).

- NC continues to be under stay at home orders.  Number of cases continue to increase linearly (not exponentially).

- GA relaxed stay at home orders and there trend line is down.  That is if you believe their numbers.

- HVL had a spike this week

I did some bargain hunting last week.  Purchased F.  Risky but seems like there is more upside than downside.  My other buy of SBUX has worked at well.

Daily life

- Yard work
- Walks at Kellogg
- Watch 2 hours of TV at night (This is Us and Little Fires Everywhere)
- Reading The Civil War
- Using the stationary bike while watching The Last Dance
- Listening to the 2008 Spong lecture
- Listening to Bloomberg Surveillance podcast
- Watching the great courses lecture on Modern Political Tradition
- Reading Sherlock Holmes to Karel at bed time.
- Trying to catch up on the Economist.

Corona Virus: April 23

Earlier this week our neighboring states of TN, SC and GA announced they would ease "stay-at-home" orders.  This led to a long email thread where someone I know predicted doom and gloom, the end of the world as we know it.

I remain solidly in the middle.  Every day there are new data some positive, some negative.

Another 4 million joined the ranks of the unemployed.

The stock market moved sideways.

Congress is debating the fourth rescue package.

I'll stick with my prediction that we start easing here in WNC in mid-May, and with another prediction with much less conviction that we've seen the stock market bottom.

I'm bargain hunting tomorrow.

Corona Virus: Part 3

The date for easing restrictions here in North Carolina is coming into focus.  I am predicting May 15th.  I am assuming that over the next two weeks the we continue to see declines in the number of new cases, number of hospitalizations, and number of infected.  

We need additional data on the number of hospitalizations,  capacity of health care system and data on test kits.  How many test kits will be needed vs. availability.  Very little data on these as of today.

There is growing pressure to ease restrictions earlier.  If that happens we plan to maintain our stay-at-home until May 15th regardless.

I have goals for our isolation time:

- finish Shelby Foote's The Civil War.  Just started the fourth volume.
- finish the Great Course on Modern Political Theory
- finish the Spong lecture
- catch up on back issues of the Economist
- catch up on back issues of Foreign Affairs
- complete all spring yard work; all leaves mulched, all limbs collected and burned
- maintain weight at 160 or less

Corona Virus: Part 2

I am now getting a sense of the framework for the conditions that must be satisficed to end the stay-at-home orders.

Three assumptions:
a) No effective treatment is discovered
b) Stay-at-home orders will be ended either at the state or local level - not national.
c) Even after stay-at-home orders are ended there still will be restrictions and limitations.

1)  The health system must be able to handle new cases with normal resources, i.e. a non-emergency basis.  For example, the health system must be able to handle non-emergency surgeries, normal cases loads, etc. without the need of staff working overtime.

2) The state or locality must have the resources for "test and trace".  Anyone who is symptomatic must have access to a test.  The state or locality must have a system in place to identify and notify those who have a high probability of being in contact with anyone who has tested positive.

Corona Virus: April 10

I will try to capture my thoughts on a regular basis.  I'm curious to see how my perspective changes as the pandemic evolves.  I regularly follow the economic and financial market news so I want to see how my understanding of that evolves as well.

Seems to me the best way to start is to think about the various models.  In economics as well as in markets experts are called upon to make predictions about economic factors like GDP, unemployment, inflation, etc.  In financial markets the predictions are about the equity markets, interest rates, corporate profits, stock multiples, etc.

The pandemic models try to predict both number of folks infected and number of deaths.

What all these models have in common is that they are usually represented as a cartesian graph where the X-axis is time.

The dependency seems to be; the health care/pandemic model which will determine the economic model which in turn will determine the financial market model.   The unknown is all of these cases is the X-axis.  My current understanding is that the longer the pandemic model stretches out the greater the impact to the economy and hence the market.  The best case scenario is that the stay-at-home orders begin to ease in early May.  This is based on the expectation that the pandemic will peak in the US within a week - say by April 15th.

What remains undetermined is that are the other conditions that need to be satisfied before work can resume.   I am making the assumption that no treatment is found in April.

Here's the current status:
- number of new cases is 30,000/day
- number of deaths is over 1,000/day

I would think that we would need to see the numbers reduced to something like <1000 new cases and < 100 deaths with many states at zero for both.

The second condition would be the availability of mass testing capability.

A few words about the economy.  Over the last 3 weeks 15,000,000 people have filed for unemployment.  Current estimates are that we will get to 15% unemployment rate by end of April.  The other current assumption is that a return to work will be gradual.  Some industries especially travel and leisure may remain at low level of employment for months.  No one knows how consumer behavior will change once the stay-at-home order is rescinded.  Putting people back to work impacts the supply side but the consumer demand side is unknown and unpredictable.

All this leads to is market uncertainty.  I am looking at opportunities to increase my equity holdings and scale back my bond holdings but right now there are too many unknowns.  The biggest unknown is the X-axis.

Part 1: Personal Finance

If your goal is simply financial security or financial abundance in retirement the most important thing is not how you invest your savings. 

The main idea is to spend less than you make while you are working.  Once you make that a habit then the rest is easy. You do not need to know much about investments to achieve financial security. 

If you spend less than you make you allocate your savings according to the following priorities.

1. Pay down all credit card, installment credit.  Home mortgages are okay.  Car payments should be avoided but they are also okay.  Lease payments are no good. 
2. Put aside some money for a rainy day fund.  If you are starting out it can be as little as $1000.  The rainy day fund should be liquid - meaning bank account, money market or a bank CD.
3. If you have a 401K save at least up to your companies match.  In fact if your company has a match this might move up to #2 in priority.
4. If you've achieved 1 through 3 then you can either add to your rainy day fund.  The amount you add depends on your job security.  If you're confident in your job situation enough money to cover 3 months of unemployment should be sufficient.
5. If you get this far you now should add to your 401K to the max allowed even if there is no match form your company.
6. If you still have surplus then invest in a non-retirement account. Open up a brokerage account at Vanguard or a discount broker.  I'll cover how to invest in the next post.

That's about it.  As long as you spend less than you make you'll be adding to your savings each month.  

Recap and restart

It's been a long time since the last post.  Time to restart a new set of posts on personal finance, markets, investments and economics.  But before I begin I need to do a short recap.

The last post was about the Fiscal Cliff of 2012.  Pres. Obama was finally able to get the GOP to increase taxes on the wealthy.  The Bush tax cuts on the wealthiest families did expire. 

Over the next 4 years there was little fiscal policy to help the economy.  The Fed kept interest rates at 0 until Dec 2015 and then raised it a mere 25 basis points.  The inertia of the fiscal policies including the 2012 changes were enough to keep both the economy as a whole and the labor market in particular on a path to steady improvement.  But Dec 2016 the unemployment rate was 4.6 and wages were growing.

Obama was content not to avoid the big mistakes.  With the help of the Senate Dems the GOP was prevented from screwing things up.   Obamacare started to kick in and as predicted by some was actually a boon to the labor market.  Folks now were in a better position to change jobs.

In addition the energy market improved dramatically.  The combination of increased US production, a slow down in the global economy and conservation and alternate energy policies all lead to the price of oil/gas tumbling in 2015/2016.

By the end of Obama's second term:
- stock market up
- unemployment down
- wages up
- interest rates low
- inflation under 2%
- gas prices about 2.50 gallon

My hope is that now that the GOP 'controls' the federal government they don't screw things up.  There is hope that the GOP will remain divided between the fiscal hawks and traditional conservatives and Trump who is neither.

Fiscal Cliff - part 2

The year end deadline only produced 3 of my optimistic outcomes.

1. Increase marginal tax rates for the wealthy
2. End payroll tax holiday
3. Fund extended unemployment

The good news is that the tax revenues were increased without any reduction in spending.  The bad news is that the debt ceiling was not increased.

There now are two more deadlines and it is not clear where the bargaining leverage is.

One the spending side especially with respect to the sequester across the board cuts that were part of the 2011 budget deal I think Pres. Obama has the leverage.  He does not need to accept any spending cuts that will specifically hurt the economy or the working and middle classes.  He can negotiate for a balanced set of spending cuts and/or additional revenue through closing tax loopholes for the wealthy and for large corporations.   I don't see that he needs to put Medicare, Medicaid or SSN on the table for this next round.  I believe the target debt reduction for the sequestering cuts is 600 billion over 10 years.  That should be achievable without touching the "entitlement" programs.

The debt ceiling is another matter.  Not sure who has the leverage here.  Pres. Obama is correct that in that Congress should pass a "clean" debt ceiling extension.  If he allows Congress to negotiate terms for this it will not only hurt the economy it will hurt the office of the Presidency.  I think Presidents in their second term begin to think more and more about their personal legacy and about protecting the integrity of the office.

Will big business pressure the GOP to pass a clean bill?

Will the Democrats negotiate with the GOP to pass a debt ceiling bill along with some concessions?

Will the GOP not pass a clean bill and force a government shut down?

Anything but a clean bill is very bad for the economy.  Some of the other outcomes could be disastrous for the world economy.  
 

Hopeful prediction on the fiscal cliff

Here's an optimistic prediction

1. Raise Income Tax rates on those making more than $250,000 in taxable income
2. Eliminate or reduce Payroll Tax Holiday
3. Reduce defense spending
4. Reduce discretionary domestic spending (these last two in equal parts)
5. Raise the debt ceiling
6. Eliminate or reduce extended unemployment benefits
7. Agree on a framework for broader, longer term fiscal remedies which would include
• reduction on tax "spending" (special deductions or loopholes),
• further reduction on defense spending
• Medicare and Medicaid program cuts

Points 1-6 would deal with the tactical issues related to the expiration of the Bush era tax cuts and automatic sequestering.

Point 7 would be some loose agreement in principle to deal with the longer term fiscal issue.

If this is accomplished the economy will continue to grow albeit slowly in 2013.  Contrary to Speaker Boehner's ideas raising taxes on the wealthy in order to do lower the debt and fund some critical spending will create jobs.

Gini coefficient

I just finished reading a special report in the Economist on the trajectory of wealth and income distribution on a global basis.  The data show that the US has become more and more unequal primarily at the top 1% and the top 0.01%.  The US social safety net ensures the poor haven't lost as much ground as the lower middle class.  Those folks without a good education are steadily losing ground.   The broad trends of globalization and automation are key drivers behind this trend.  I have discussed these here before.

In addition to those broad trends that impact all low skilled workers in the developed world, in the US we have two additional factors, one social factor and one government policy.   The social factor is that more and more working class children live in one parent households and with that comes a slew of educational and development disadvantages. The government policy issue is that the US spends much less on the poor  as a percentage of  GDP - especially in education - than most development nations.

One of the conclusions of the Economist is that as income and wealth inequalities become too extreme than the nation's overall growth and prosperity will suffer.  Ironically this essentially is in agreement with the socialist perspective.

So this all reinforces my thesis that the government policy that promotes even modest  wealth and income "redistribution" will be a  job creation policy.  

The Presidential election debates had little substance.  But it seems to me that Gov. Romney ran on  decreasing income tax rates across the board while Pres. Obama has now run two victorious national campaigns on the policy of increasing tax rates for those making more than $250,000 or more in taxable income.

Let's see if Pres. Obama holds firm.  I don't think it will make much difference but at least it would be a step in the right direction.

Income inequality and jobs

Once again it's been a few months since I last posted. As expected the macro-economic situation has changed very little in that time. At the outset of the financial crisis I predicted that the job recovery would be very slow and that an unemployment rate over 8% may last a decade.

Nothing has happened in the last four years to change my view on that. Yesterday we had the US jobs report for July. More jobs were added again but once again not enough. Unemployment went up a tick to 8.3%. Even if job growth rises to 250,000 jobs per month, the unemployment rate could still be 8% or more. There are plenty of sources that describe how the official unemployment rate is misleadingly low so I won't go into that here.

This post is about how income and wealth inequality eventually result in economic stagnation and unemployment. My primary source is The Great Financial Crisis: Causes and Consequences. Unlike many of the books written about the bubble and meltdown this book focused less on the proximate causes and much more on a long term view. 

Here's that view.

Over the long term capital (wealth) will become more and concentrated.  The growth of the middle class in the US after WWII and subsequently in the other industrialized nations was an aberration.  This historical anomaly lead to economic growth in all of these countries.  Starting around 1980 the situation began to revert to its historical norm - which is concentration of wealth which leads to stagnation.

The data is somewhat misleading because of the bubbles and one time conditions.  In the late 80's and early 90's there was a peace dividend as the cold was ended.  The dividend was physological as well as fiscal.  This was followed in the next 15 years by two bubbles in the US that temporarily produced unstainable GDP growth and unstainable employment levels. After the financial crisis and "recovery" we are back on our path to long term stagnation.

The reason that concentration of wealth and income leads to stagnation is straight-forward.  Wealthy individuals spend less of their income and save and invest more of it.  If there are no investment opportunities in industrial or commercial investments then capital flows to financial assets or even bubbles.  We know how that story ended last time.  Low and middle income workers on the other hand spend more of their income which leads to more economic activity and possibly more jobs.  Remember though that globalization and automation still play a drag on job formation.

The evidence that there is a surplus of capital is all around.  Investments in money market or savings accounts pay less interest than the currently modest inflation rate.  Capital in these asset classes are 100% guaranteed to lose purchasing power.  10 Year US Treasuries are yielding less than 1.5%.  Unless there is a deflationary cycle the massive investments in US Treasuries will also lose purchasing power over the life of the investment.

Why then has capital not flowed into commercial and industrial assets?  Businesses invest capital for only one reason - maintain or grow income.  Investments can do this in two ways, increase revenue or decrease costs.  In a slow growth and low inflationary cycle it is hard to increase revenue by simply raising prices. The other option is to sell more goods and services.  But once again we get back to low overall demand due to sluggish consumer spending.  The second investment opportunity is to lower costs.   These opportunities do not depend on demand; innovation, application of new technology, or simply moving production to lower labor costs are all effective ways to invest.  Unfortunately the cost-saving investments may lead to more unemployment not less.

Additionally the large US corporations have generated so much cash that many do not need outside capital for their investments.  Instead they are contributors to the excess capital conditions we have today.  They form part of the Giant Pool of Money and contribute to the concentration of capital into fewer hands.

So here we are and here we will stay.

As long as politicians, pundits and policy makers insist that higher taxes on high income individuals will cost jobs here we will stay.  As long as politicians, pundits and policy makers propose government austerity here we will stay.

I am not sure there is a solution.  The best try would be to significantly increase taxes on high income individuals, increase taxes on the upper middle class, eliminate tax loopholes, allow corporations to treat dividends as a business expense and at the some time tax personal interest and dividend as wages - including the payroll taxes of Social Security and Medicare.  The government then has to use that additional revenue to actually create jobs by the most direct and cost-effective means - hire people.

Right now we need more public sector jobs - teachers, fireman, librarians, construction and maintenance workers, and yes - regulators.

Greece: How to leave the Euro

The giant credit bubble spilled over to Greece with the help of Goldman Sachs and a whole host of commercial banks in Europe. Greece was able to borrow way more than they will be able to repay. The private lenders have taken a hair cut already which is fair since they made the bad lending decisions. However the austerity program forced on Greece by the IMF and the EEU has, of course, led to a recession. The drastic cuts in government spending caused the recession as predicted by Keynesian economics.

So Greece will still be unable to pay down its existing debt or to borrow more money.

The typical long term solution is to devalue the currency. Imports become more expensive. Consumers suffer an immediate hit on their standard of living. Usually you would expect a steep decline in the units of imported goods especially any discretionary consumer goods. On the other hand exports become cheaper. For Greece, olive oil, wine, cheese become cheaper in the world markets which can increase demand and help grow all export industries. Tourism is an a sense a service industry export and for Greece a significant one. Presumably services purchased as part of the tourism industtry - hotels, restaurants, events, guides, transportation become cheaper for the foreigner visitor. After devaluation Greece could become a very, very popular destination.

The problemis of course that Greece does not have its own currency.

So how does it get there.

All bank deposits need to be converted from Euros to drachmas. All goods and services are prices in drachmas. Day One - it is a one-to-one conversion. After one month - Euro currency is no longer accepted. After a few months the drachma is devalued so that one drachma equals 0.7 Euros. All bank deposits and all Drachma in currency now have lost 25% of their purchasing power. The Greek government is now able to issue new bonds in Drachma and have the central bank buy them - essentially printing money. Inflation would probably be in double digits but now the economy is growing again. Through economic growth, slow reduction in government spending and inflation Greece will be able to balance its budget and pay down its debt.

Greece will simply default on their existing Euro bonds.

This is the scenario worked out over time by many other countries. The savers and investors take a big hit. The bond holders take a hit. Consumers take a hit. Private borrowers may get a break.

The unique challenges for Greece is that bank deposits can be moved to other countries. Why would anyone leave their Euro deposits in a Greek bank and subject themselves to this devaluation. No one will. That's why when this is done it has to be done "overnight" even if "ovrrnight" means a one week bank holiday to allow the banks to fix their bank deposit accouting and payment systems.

The run on Greek banks has already started. With the massive withdrawals already undeway most Greek banks are insolvent. The government will likely need to nationalize the banks for some time.

Bubble and Meltdown - Jobs again

I haven't added to this thread in awhile but nothing much has changed so I can pick up where I left off. We are back in an election cycle so the conversation about policy is pretty much over. For the next 11 months the conversation will be about politics and personality not policy.

Much of the political discourse on jobs and the economy is not focused on what is actually happening.

1) US jobs are being lost due to automation and globalization. Nothing can stop this trend.
2) The largest percentage of US GDP is consumer spending. It is about 70% and it is growing very, very slowly.
3) Businesses do not need tax breaks to create jobs they need demand for their products and services.
4) The biggest uncertainty that businesses faces is not tax policy or the health care insurance reform. The biggest uncertainty is whether there will be demand for their products and services. On the global basis the biggest threat to demand is the Euro crisis. European governments are adopting "fiscal reforms" and "austerity budgets" that will likely result in a recession in Europe in 2012.
5) US consumer spending can only increase on a sustainable basis when personal income increases. The credit bubble allowed consumer spending to increase but spending more than you earn is not sustainable.
6) Accumulation of wealth and income in the US hampers job growth.
7) The conversation about the POTUS "managing the economy" or "creating jobs" is surrealistic. The federal government is powerless to do either one.

So what it the way forward?

A slow recovery. Eventually consumer spending will increase as people who work continue to first pay down their debt and then slowly increase spending. I expect unemployment to be over 8% for years and years.

The US fiscal problem will eventually be sorted out by:
- increasing taxes especially on the affluent
- inflation
- massive cuts on defense spending
- reducing health care costs by expanding on the health care reforms already passed
- economic growth

This will all take time.

Bubble and Meltdown - Jobs, Jobs, Jobs

I have been meaning to write this for sometime. One of the most underreported aspects of the American economy is the loss of jobs and the decrease in middle class wealth and income. These are long term issues that preceded the bubble and still exist today.

Let's start with the loss of jobs. The reasons are obvious. Technology and globalization. It would be possible to write an entire book about how technology in the long term eliminates jobs. Some argue that technology increases productivity and therefore wealth and income and it has from time to time and in some parts of the economy. But the long term trend is inescapable. From small manufacturers, to farming, to large scale agriculture, and now to services.

The impact on globalization on US jobs is obvious to us all. Impacts started with manufacturing and have extended to low value services and now extends to professional services such as accounting and computer science.

Next combine the loss of jobs with loss of wealth and income for the middle class. The main drivers of this are also long term. First the competition for jobs due to job scarcity drives wages down. The reduction of the power of organized labor has hurt all US workers. Some claim that the unions were too powerful but that was clearly not the case. The unions never had that much power. But while they were viable they supported wages and benefit levels for non-union workers. Almost all gone now.

All of this would eventually lead to a reduction of consumer spending. This was avoided for awhile. First wives entered the work force in the 70s and 80s. In the 90's there actually was a peace dividend and the subsequent economic growth and asset appreciation (housing and stock market) supported consumer spending.

By 2000 all of these short term influences had been spent. Jobs were still being lost and wealth and income was beginning to become concentrated. But we had two bubbles in the 2000's that disguised the longer term trends. After the Internet bubble we had a jobless recovery. We would likely have fallen into a long recession but then we had even a bigger bubble. The bubble was not just housing. It was an overall asset bubble, a credit bubble and a leverage bubble. All of this excess spending saved or created jobs.

Now that's over and the longer term trends have re-emerged.

I would not be surprised if the unemployment rate stays over 8% for 5 to 10 years.

I would not be surprised if we had a Depression with offical unemployment at 15%.

There are government policies that can improve this situation but they will seem so radical to the American voter that they will not have a chance for success until it gets much worse.