Christian Fong

Graph of the day shows home prices from S&P/Case Schiller index,  which tracks the 20 largest US cities.  Think we can’t fall further?   Consider that Fed’s “cheap money policy,” often cited as the helium inside the housing bubble, has been pumping since about mid-2001.  Now,  the helium is still pumping in (i.e. Quantitative Easing 2 + 0.25% Fed Funds rates) and the balloon is STILL slowly deflating.  It seems less and less likely that the Fed will, in a timely way, end its policy of pushing, pulling and carrying the US economy in a monetary wheelchair.

I don't often rave about an online product.  After all, I've been "surfing the web" since it was a text based system called "Gopher" and a major debate was not whether it was possible to make money online, but whether it was ethical to do so.  I watched IE beat up Netscape, but Mosaic had to come first.  Google upended Yahoo's "What's Cool" page.  But Yahoo had to come first.  Facebook hit Dartmouth "by invitation only" when I was a grad student, but discussion boards had to come first.  Twitter took the world by storm, but texting came first. 

What's the pattern?  Massive disruptive technologies are based on converting known areas (indexing, socializing, short messaging) into a "many-to-many" world.  But everytime they start with a game-changing one-to-many online competitor to "old school" processes.  I'd read about Khan Academy, and in our 'Reducation' (Reform-education, Revolutionize Education, etc) group that I was introduced to it by Iowa's peerless Christian Renaud and education evangelist John Carver last summer.  It was a developing site then.  I returned to it last week, as I looked at how to engage my kids in learning for the summer in a fun way.  Simply put, I believe the next domino is about to fall.

I realize this is the sort of short blog post that will have an obvious conclusion in a few months.  But I find this interesting since I share a weakness with a few other armchair economists: the inability to perfectly foresee the future.  Note that the graph (Click 'Read More' below to see the graph) is for 1Y CDS.  That's a Wall Street instrument that is a "bet" that the US will have some default event in the 12 months, which covers the Debt Ceiling debate.  The cost of a five year "bet" of a serious US default has remained more stable.  My read: the markets are beginning to suspect that over the summer Obama won't agree to House Republican demands for serious cost cutting, and the Senate, marginally controlled by Democrats, has lost the ability to be the adult in the room.  But also that in the mid-term, the economic picture remains pretty stable.  ('Read More' for graph)

Imagine a wedge issue emerging like this, "That other guy isn't as close a friend to Canada as I am."  Perhaps folks would trumpet how many times they have been to Toronto, how they enjoy a good game of hockey, and feel close spiritual kinship to the Mennonite folks in Niagara-on-the-Lake.  They'd point to the other guy and complain that not only does he not know what an icing call is, but actively supported Gretzky's move to Los Angeles.  Maybe even secretly harbors opinions contrary to good relations between Quebec and Ottawa.

Ridiculous, isn't it?  We stand with Canada.  We don't wonder, "What will Britain or Mexico think of our friendship with Canada?"  We don't question their national and cultural commitment to freedom when their politics shifts.  It's not a Democrat or Republican stance.  It's just who we are as their friends to the south. 

Yet in a way that is what is being threatened with Israel.

Israel may be separated from the US by distance, but...

It was announced by US Secretary of the Treasury that we have reached the debt ceiling.  A few things to note, from an armchair economist's perspective:

• It is a self-created crisis.  Imagine you had the ability to set the credit limit on your credit card, and you set it at a level that you KNEW you were going to exceed.  Lousy planning, eh?  The current debt ceiling, at about $14 Trillion, was created in February 2010, when the Democrats controlled both chambers of Congress and the White House.  They created the ceiling...they created this moment.
• You can ignore "the sky is falling" reactions.  Secretary Geithner said there is 11 weeks of what an economist might call "excess liquidity," so that a healthy debate can continue over the coming weeks, or even months.
• The crisis is NOT the debt ceiling.  It is the $14 Trillion of debt.  That is what is causing a threat to America's monetary dominance in world markets, the threat of runaway inflation and hampering our ability to have effective foreign policy in the Far East.  "Solving the debt ceiling crisis" is akin to that classic scene in The Wizard of Oz, when the wizard frantically proclaims, "Pay no atttention to the man behind the curtain."  The crisis is that our national debt is too high, relative to GDP (over 70% of GDP), caused by government spending that, on an annual basis, is nearing 25% of our GDP.  Let's focus on the real crisis: The Federal Budget Deficit.

My generation will spend our lifetimes working to pay for today's spending.  The question is not, "How can we figure out a way to borrow more money."  The question is, "What sort of country sells their childrens' future to make their own lives more comfortable?"  As usual, the crisis is deeper than dollars and cents, and gets to a spiritual crisis.  What will it take to turn the hearts of the fathers to their children?  Apparently more than a self-created debt ceiling crisis.

In 2008, Corridor Recovery was founded by a group of civic leaders during the Flood of 2008 and I was honored to serve as CEO.  Corridor Recovery coordinated over 5000 volunteers, with 160,000 hours spent cleaning over 1500 homes, businesses and churches, culminating in the creation of the Linn County Volunteer Center. It co-founded the Linn County Long-Term Recovery Coalition, which helped over 1500 families get back on their feet.  It led "Operation Hope" during the darkest days of what was the 4th largest natural disaster in US history, to remind the city that even in the darkest of times, the light of hope remained strong.

We rewrote the playbook in Cedar Rapids.  Red Cross recommended we not enter homes...we did anyhow.  State government recommended we be careful to not cross "church and state" lines in cleaning up churches...we did anyhow.  One big business questioned the appropriateness of its volunteers "mucking out" small businesses that didn't have proper insurance...we did anyhow.  We just did what was right.  The community never let us down.

As we approach the three year anniversary of the Flood of 2008, and mark the end of the three years that civic and business leaders asked me to lead it, we begin a transition.

This morning I'm watching the markets absorb S&P's newly announced "negative" outlook on the US debt.  I don't see Obama's plan helping, but rather just kicking the can down the road.  How?  By claiming that "creating a plan to solve the problem" is enough, but then delaying the actual fix until after the next election.  That behavior, so typical of politicians, is a millstone around our own necks.

By the way, when Congress reconvened this January, I put a trade on my personal account that the yield curve would steepen.  That is, a "long" position on short-term US Treasury debt and a "short" position on long-term US Treasury debt.  Why?  My belief was that the US government would do everything possible to keep borrowing costs low until at least the 2012 election.  Simultaneously, that the federal government would use low borrowing costs as an excuse to fail to rein in entitlements, thus driving the federal deficit to unsustainable, long-term levels.  Historically, in other markets, that either requires planned inflation or causes a credit downgrade in debt. Either way, the yield curve would steepen dramatically.

I wish I was wrong in that trade, and I wondered if the House's "Ryan Budget" might have pushed it the other way.  But so far I'm seeing monetary and political history repeating itself.

The government is aiming to cut $35 - 40 billion of spending in the new budget, agreeing that a trillion dollar deficit is the new reality.  I had a good discussion over coffee this morning about whether this plan should be characterized as "still stealing from our kids" or "finally a step in the right direction."  We settled on "both" as the honest answer.  Here are the details:

http://tinyurl.com/5u9mw3d

Is inflation coming?  A few reasons to believe it will: 1) "The Fed is printing money, and that always causes inflation."  2) "Gas prices are so high, isn't inflation obvious?"  3) "My salary has been stuck for three years straight, and my budget would be shot to pieces if prices go up.  Murphy's Law applies...inflation is coming." All good watercooler topics.  In sum, a weak argument.  An Armchair Economist would do better to watch US Capacity Utilitization.  If the number is low, inflation is further away.  If high, watch out!

Why? Supply and demand is still the basis for pricing in competitive and open markets.  Simply stated, it is hard for Company A to raise prices if Company B has the ability to respond by making more, spreading out their costs, and selling more at the old price.  As a result, with excess production capacity, Company A and B might be losing money, but neither can raise prices.  Even if their own costs are rising!  (Beware the "business owners just pass along costs" argument...it implies robust demand and capacity utilitization.)

So how is US Industrial Capacity Utilization doing?  In a word, "Lousy."  Simply put, the US can produce a lot more stuff.  And helping it do so should be the primary policy concern of the government.  (Industrial production = private sector jobs.)  Where capacity utilitization is high (energy) or the markets are becoming less free (health care) inflation is creeping forward.  But overall the numbers might reassure you that we all have a bit of time before Murphy's Law kicks in on inflation.  (Click below to see the official statement from the government data, and the link to the data.)

I recently heard a liberal defend deficit spending as "job creating."  Hogwash.  It's not political red meat, it is economic reality: Deficits are job killers.

New Republic's William Galston wrote last month:

"Several days ago, the Congressional Budget Office (CBO) released its preliminary analysis of the fiscal impact of the president’s FY2012 budget proposal. Its findings were not pretty. In no year between now and 2021 would deficits fall below 4 percent of GDP. Over the next decade, enacting the president’s proposal would create deficits totaling $9.5 trillion, $2.7 trillion more than the cumulative deficit in CBO’s baseline budget. Federal debt held by the public would double from $10.4 trillion to $20.8 trillion, 87 percent of GDP, and annual interest on the debt would rise from 1.4 percent of GDP to nearly 4 percent. Even if the share of the debt held by foreign investors and governments does not increase over the next decade, CBO’s projection suggests that we’ll be shipping fully 2 percent of our GDP (almost $500 billion) overseas each year by the end of the decade, just to pay the interest on foreign holdings of U.S. government debt."

What does a 2% decrease in GDP look like?  Economist Arthur Okun, former Yale professor and Chairman of the Council of Economic Advisors, formulated "Okun's Law" on the relationship of GDP and employment.  A 2% reduction in GDP is equivalent to 1% added unemployment.  That's 1.5 million jobs lost.

The prudent thing to do?  Make sure Washington D.C. politicians know their job is on the line today to get the deficit under control, so that your job isn't on the chopping block tomorrow.

Congrats to anyone who could read through the full "Exploration of Optimal Stabilization Policy" by lead author, Professor Greg Mankiw of Harvard, that I posted earlier this week.

Previous models were either too simplistic (private vs. public consumption), too complex as to be unusable or filled with assumptions that were clearly wrong from everyday experience.  He attempts to stake out middle ground, and in doing so will obviously open himself to criticism from any that prefer simplicity, complexity or wrong assumptions.  For the rest of us, the work is brilliant in giving practical guidance using the tools at our disposal.  Worth reading if any of the questions are interesting to you of "What is a recession?" "How should we respond?" "What should the government do?" and, I write this with a wink, "Is Keynes the devil?"

I think about policy, politics and economics.  Today, I blog about my best trade ever.  Thirteen years ago today, I traded in "singleness" for marriage.   In the Proverbs it is written, "He who finds a wife finds a good thing, even favor from the Lord."  Jenelle is a blessing and inspiration.

Not for the faint of heart, a paper on recovering from recessions from one of my favorite economists, Greg Mankiw at Harvard.  His paper with Matt Weinzeil, entitled "An Exploration of Optimal Stabilization Policy," is brilliant.  It is found here, and I'll share some thoughts in the next couple of days.

http://bit.ly/ffk066

Over the weekend, President Obama gave his support to a Senate bill that would "permit" states more flexibility in carrying out the expensive, job-killing mandates from ObamaCare.  Some pundits will characterize this as "moving to the center."  But it is nothing of the sort. It is another layer of a permission-based culture that is the hallmark of left-leaning, anti-freedom governments the world over.

When I was a child, we played in our schoolyards a game called "Mother May I."  One person was selected to grant or deny requests from a line of kids, who all started the same distance from the "mother".  "Mother, may I take 3 small steps forward" one might ask, as all tried to get to the leader.  The "mother" had full authority to permit, amend or reject any request.  Clearly the game was rigged from the beginning, the sort of cruel game that simply reinforced the pecking order of the schoolyard.

The game should sound familiar to anyone following the turmoil around both Republican and Democrat governors asking for some leniancy on the burdensome rules.

Follow-up to my last post about "idea venture capital".  The "fame and fortune" motivations of venture capitalists in the financial markets are well-defined.  In the Silicon Valley, one can get famous for finding the "next great idea", have fun interacting with the people who come up with and capitalize those ideas, and (hopefully) get wealthy in the process. 

What are the Economics of Influence in the world of ideas?  I'd explicitly carve out academia, because few of us live in that world with its unique motivations.  The general citizenry have thoughts about how to define and prioritize problems, and how to solve those problems.  Who are the intermediaries for the "marketplace of solutions"?  And in a well-functioning marketplace, what should motivate those people in ways that keep them neutral enough to be considered honest brokers, yet well-incentivized for the trouble of being intermediaries for those solutions?

Would love to hear thoughts on this question.  Email me here