Tag Archives: interest rates

Meanwhile Back With My Soy Beans and an Orange Blossom Who Can’t Shoot Straight

So, here’s from the Farm Report:

Soybeans are lower, breaking the support line from their three-day rally overnight. Traders will continue to scour today’s export data for clue on how foreign buyers are responding to the bargains created by Chinese tariffs. Sales are expected to rise after disappointing results last week. Vegetable oil markets in Asia were lower today, losing around a fifth of a cent per pound.  September soybean oil futures in China fell to 36.844 cents and September palm oil futures in Malaysia were at 24.473 cents.

and on soy beans in particular

If production doesn’t swell too much, November futures may try to hold the $8 level into the August report. USDA put the bottom of its average cash price for the 2018 crop at $8, a level already reached in many local markets around the country. It’s still a $2 climb back to profitability. But most growers appear to have priced a good chunk of their expected production when offered a good price this winter and spring.

Hold this thought — $8.00 per for soy bean farmers or — it’s a really bad year down on the farm. “USDA’s July 12 monthly report put a number on the lost revenue farmers face: $325 million in new crop sales. That number is based on the amount the agency lowered its price range for crop, 75 cents a bushel.” [WSR]  Soy bean prices are about $8.55, nearly a ten year low. [CNN money]

All right, it’s not that I am in the soy bean business. It’s not that I expect ANY reader of this blog to have any more connection to soy beans than the occasional purchase of soy milk.  It’s that the little beans are a metaphor, an anchor, a data point, to watch the inexplicable economic idiocy of the current administration ensconced in the Oval Office.

Those slap dash, ham-fisted, wild west, off the cuff, distributive bargaining ploy, grandiose threats and counter threats being on offer from the mis-administration in lieu of any real coordinated trade strategy and policy have real world consequences for real world people — people like Iowa soy bean farmers who can’t take the hit if soy bean prices drop below $6.00.  Did we notice all those “ifs” and assumptions in the USDA pricing report?  Like automobile manufacturers in South Carolina who don’t have to take a hit if moving export production to friendlier climes will put money back into their bottom lines.  Like household appliance manufacturers who thought tariffs were such a lovely idea when they were on Samsung and LG, but on steel and aluminum not so much.

We have a *President who can’t get to “yes.”  He couldn’t get to “yes,” on a health care bill and ended up with a bill he didn’t want.  He couldn’t get to “yes” on a DACA bill, and no one’s ended up with anything at all.  He couldn’t get to “yes” on immigration policy, and ended up with a court order to reunite families in which he, in all likelihood, cannot make yet another deadline.  He can’t get to “yes” on NAFTA terms with Mexico and Canada.  He can’t get to “yes” with Asian regional trade and commerce agreements.  He just can’t get to “yes.”

My way or the highway distributive bargaining works when I want to purchase a vehicle and there are 15 dealerships in a 50 mile radius.  As noted before, the bottom line is the “walk away” point. However, there is no other China, no other Mexico, no other Canada, no other European Union, no other United Kingdom, no other Germany, no other Japan, no other France, no other Brazil.  There is no Walking Away point because there is no other place to walk to.

The price of soy beans (or cars, refrigerators, beer cans, or washing machines) cannot be determined by simply yelling at the dealer, threatening to bludgeon him with penalties,  loudly pronouncing another salvo of letters to the editor about their poor service, and later threatening to sue for ‘false’ something or another.  We have a global economy based on supply and demand principles which Orange Blossom pretends to understand, but which he provides scant evidence thereof.

And NOW he wants to weigh in (at over 239 pounds) on what the Federal Reserve should be doing with interest rates!  [CNBC]

Will someone, anyone, please take him down to that portion of the White House where the last evidence of the fire set by British troops on August 24, 1814 remains, lock him there, quietly close whatever doors are behind him — or at least make him SHUT THE H___ UP?

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Yes, He IS That Stupid? Economics for Ultra Dummies

It’s March 5th, 2018 and the occupant of the White House has just announced — by a tweet as usual — “He tweeted out Friday morning that for the United States, a trade war is “good” and “easy to win.” This is July 3rd, 2018 and evidently le crétin economique still believes this.  There are three very simple reasons why this belief borders on insanity:

First: Prices will go up.  Why? Because in order for prices to remain the same or decline the product must be manufactured in the “home country” at a level which would fill the gap between imported and domestic goods.  Buh, buh, buh but — then American manufacturing will increase to fill the gap! Hooray!!  Maybe eventually, and eventually is always the dearest vision of the economic theorist while the rest of us try to buy our beer in aluminum cans rather more immediately, and there’s another little sticky spot.  For some time now DB’s railed about “financialism” and the propensity of the financial markets to “manufacture” and sell “paper.”  DB’s howling notwithstanding, the US has been primarily a “service economy” for some decades (yes, that’s decades) now and while our manufacturing output and sales may be on the wane our “export” of service related products is definitely not.  As in last year we had a $243 billion services trade surplus. [CNN money]  Please don’t try to tell me Mr. “I went to U PA” just not the famous economics school therein… hasn’t at least grasp the nonsensical nature of starting a trade dispute with countries with whom we have service surpluses… oh, wait… he did already.

 The U.S. goods and services trade surplus with Canada was $8.4 billion in 2017. […] Trade in services with Canada (exports and imports) totaled an estimated $91.5 billion in 2017. Services exports were $58.7 billion; services imports were $32.8 billion. The U.S. services trade surplus with Canada was $25.9 billion in 2017. [USTR]

We could speak of regional trading hubs and re-exportation of goods at this point, but let’s not, it would only confuse him.

Secondly, interest rates could easily go up.  There’s already some pressure for increasing interest rates given the increases expected in the federal debt.  We know, that federal debt the GOP’s been screaming about for years? That debt.

“One thing keeping rates in check so far is the demand for US debt from overseas. America’s foreign trading partners, including China, are among the largest buyers of that debt. It added $127 billion to its holdings last year and now owns more than $1 trillion in U.S. debt, making it the largest foreign holder of our debt.

The trade deficit that President Trump decries is one of the reasons for those holdings. It gives foreign countries a powerful incentive to buy that debt, since they have to do something with the dollars they get back on those sales.”  [CNN money]

Shrink the trade gap = less incentive = significant increase in interest rates.

Third reason, American businesses will lose sales.   Much effort is expended reaching deals for the sale of everything from pharmaceuticals to auto parts.  Remember all those sales and marketing divisions? The ones in every major corporation in this country? The departments and divisions pitching products in every corner of the globe?  Let American products become less competitive because of trade restrictions, and then watch foreign buyers find new suppliers.  Business Rule #1: Losing customers is never a good idea.

So, what went on this week?

“Canada over the weekend imposed tariffs on $12.6 billion in U.S. goods in retaliation for U.S. levies on steel and aluminum. On Friday, China is set to slap levies on $34 billion in American goods like soybeans in response to a symmetrical imposition of tariffs by the United States on Chinese goods. Also last week, the European Union sent a letter to the Commerce Department threatening to implement tariffs on $290 billion in American goods if Trump follows through with his desire to crack down on foreign autos.”

Remember not so long ago when DB was bellowing about soybeans?  Yes, DB is back to bellowing about soy beans.

Threatening tariffs may be a negotiating tactic, but at some point the other party will reach a point at which they tire of the gamesmanship.  Reality sets in, deadlines come, and the skirmishes begin.  World Wars can with something as dramatic as the invasion of Poland or the bombing of Pearl Harbor; however, World War I began with an assassination in Sarajevo.  The US Civil War can be said to have begun with attacks and counterattacks in Kansas.  The problem with skirmishes is that unless they are carefully controlled they can spiral beyond retrieval, the results are usually not pretty.

There is also the poker element; eventually a bluff will be called.  We’re not far from the Canadians and Chinese calling our bluff, the EU as well for that matter.   Someone in a position of responsibility ought to have the wisdom to know when to (and not to) bluff; when to fold; when to up the ante.  In short, there has to be some adult supervision.  My way or the highway is almost never a strong negotiating position.  Bullies often have accomplices, but they rarely have wing-men.

Thus the Business Roundtable, the US Chamber of Commerce, and other organizations not generally perceived as bastions of liberal thought will decry the Administration’s tariff and trade policies, academics will refer to the Smoot Hawley Tariff Act of 1930, and citizens will watch the price of can of beer increase as the cost of the aluminum can increases.  And all because  le crétin economique thinks in bumper stickers.

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Wall Street Fine, Main Street Not So Much, States Caught in the Middle

The situation in Nevada is beginning to demonstrate the universal application of the great literary phrase: “It was the best of times, it was the worst of times.”  Consider the following information from a Las Vegas Sun article about therapeutic services for disabled children back in March:

“In 76 percent of the cases reviewed, the state did not provide all of the services called for in plans agreed to by state caseworkers and families. This was “due to a lack of available personnel resources” and reduced hours the state had to contract with therapists.”

In 52 percent of cases, the state did not initiate services within 30 days, as required by the federal government. This was “attributable to the lack of personnel resources as a result of the reduction in the amount of funds available for contract services.”

There are 2,477 children receiving these services, such as they are, and another 250 ranging in age from newborn to 3 years of age on a waiting list.   So youngsters with autism, physical disabilities, developmental issues, and other serious medical challenges are in the cross hairs of a support system in which “fewer children could have more services, or more children could have fewer services.”  This is what an austerity budget means.   For everyone. If there are no increases in revenues, then all public services will be caught in the same bind as the kids — fewer may have more, or more can receive fewer.

However, in a political climate still clutching the remnants of the failed Voodoo economics of the Trickle Down Artists, and the ephemeral mythology that lower taxes magically transforms spreadsheet pixel dust into increased revenues,  any attempt to raise revenue is the antithesis of good politics.  [“Sandoval, not in favor of business tax initiative“, LVSun]

The often and well debunked MYTH [EconoFact]  that lower rates of taxation will generate the revenues necessary to provide essential government services simply doesn’t work in the real world in which there are pot holes in asphalt, 30 kids in a kindergarten class, not enough health inspectors to cover the number of restaurants in a single year, not enough deputies to keep trucks from speeding through small towns, aging fire fighting equipment, and what might generously be called “antique” drinking water delivery systems.

For small businesses in Nevada this isn’t the best of times either.  Nevada’s experiencing job growth of about 1.1% YOY, a tick behind the national YOY job growth of 1.4%.  [DETR] Of special note is that the capital region — Carson City — has lost 4.2% of its job growth.  In fact, the capital city MSA is the only one in the state which is having declining job growth.

When the “business” of a MSA is primarily government then the private sector is affected when government declines.  We can craft a little home-made chart showing what happened to Carson City in terms of the percentage change YOY in its taxable sales as reported to the Department Of Taxation, as the state shed jobs and shaved the budget.  (pdf reports)

It’s no wonder small businesses and local retailers feel the bind when there’s been only one YOY increase since 2007 — and they started digging and backfilling out of the prior four year hole.  This is what an “austerity” budget looks like to local businesses trying to function in an area in which government payrolls help support the local economy.

So, why all the demand for “austerity,” if it doesn’t help provide public services and it doesn’t help local businesses? 

Federal and state deficits are a problem when interest rates are high.  Here’s one of the simplest explanations I’ve found so far:

“When long-term interest rates are high, a federal deficit competes against and “crowds out” private borrowing and investment. When long-term interest rates are low, the federal deficit is not taking away from borrowing by the private sector. On the contrary, the federal deficit is acting as a needed boost to aggregate demand in the economy, an action also known as “fiscal policy.” When the economy is slack, every dollar of reduction in federal spending takes three or four dollars off of our gross national product.”  [Grayson](emphasis added)

Got that?   The “crowding out private borrowing and investment” happens when interest rates are HIGH.”   So, what are the long term interest rates now?  The Treasury 20 year CMT is 2.13%. [Treasury] What does this look like in a historical context?  This:

The overall trend line doesn’t seem to indicate “high interest rates” does it?  Notice that the top of the line for the interest rates shown on the chart doesn’t go above 5.5%  Now, let’s compare that to the 30 yr. CMT for a previous era, say 1980 to 1990:

Since the old 30yr column has gone the way of the DoDo, and really long term Treasuries are spoken of as 25+’s, perhaps a better comparison would be the current 20 year rates:

The rate for 20 year notes hasn’t crept up over 3.08% during 2012 thus far.  We could sit and look at pretty charts all day, and the message would remain the same — this is NOT a period of HIGH interest rates, therefore the old “government borrowing drives out private capital” maxim doesn’t apply.  What the heck! Let’s look at one more — the U.S. Treasury’s Yield Curve showing the yields (rates) for all the notes available:

And, there it is — a graphic illustration of Low Interest Rates.  So, let’s get this straight.  We have to have an “austerity budget,” meaning that the federal government has to cut back on aid to the states, because when the government has to borrow money it crowds out private investment — EXCEPT when interest rates are low.   No, this doesn’t make sense, and Laura D’Andrea Tyson explains why:

“The “crowding out” argument explains why large and sustained government deficits take a toll on growth; they reduce capital formation. But this argument rests on how government deficits affect interest rates, and the relationship between government deficits and interest rates varies.

When there is considerable excess capacity, an increase in government borrowing to finance an increase in the deficit does not lead to higher interest rates and does not crowd out private investment. Instead, the higher demand resulting from the increase in the deficit bolsters employment and output directly, and the resulting increase in income and economic activity in turn encourages or “crowds in” additional private spending.”  [NYT] (emphasis added)

How do we know when we have excess capacity?  High unemployment is one really good tell.   What have we learned?

(1) Austerity budgets, the result of program funding cuts without any new revenue don’t serve to provide basic services for Nevada citizens, and others throughout the nation.

(2) We know that in regions in which government spending constitutes one of the major supports of the local economy local retailers and other small businesses see their sales decline.

(3)  Deficit reduction is necessary when government borrowing during periods in which we are operating at or close to our economic capacity when interest rates will be affected by the “crowding” to get capital.

(4) Our interest rates, for even very long term treasury notes, are exceedingly  low.

(5) Our economy is not functioning close to its capacity — witness the unemployment rates.

Therefore, the argument that we have to privatize Social Security, turn Medicare into a voucher coupon program, cut women and children off WIC nutrition support, take SNAP benefits from working families, cut spending for infrastructure maintenance and improvement, slash preventative medicine and wellness programs, and leave the national parks to rot…. because We Have To Reduce The Deficit — is ultimately ideology and currently bogus economics.

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