Manufacturing Data Shows Weaker Recovery

Mike Mandel, (via Mark Thoma):

There’s been a lot of happy talk recently about the revival of U.S. manufacturing .  According to an article in the New York Times,  “manufacturing has been one of the surprising pillars of the recovery. “  In a Forbes.com column entitled “Manufacturing Stages A Comeback,”  well-known geographer Joel Kotkin talks about “the revival of the country’s long distressed industrial sector.”  The Economist writes that “against all the odds, American factories are coming back to life.”*
Truly, I’d like to believe in the revival of manufacturing as much as the next person. Manufacturing, in the broadest sense,  is an essential part of the U.S. economy, and any good news would be welcome. 
Unfortunately,  the latest figures do not back up the cheerful rhetoric.
Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments,  incorporating the results of the 2009 Annual Survey of Manufacturers. 

He follows up with a number of charts, which show that previous data releases were revised downward significantly.  I also think sentiment numbers in manufacturing have been trending downward, while still on the expansion side.  I would anticipate some further decreases in upcoming months.

Was the Auto Bailout Worth It?

David Kiley says yes (via Ritholtz):

The GAO is merely doing its job as watchdog on government spending. Even though the benefits are clear, there are still plenty of pundits and politicians who have doubted the value and propriety, even the constitutionality, of the government bailouts of the two automakers two years ago. Two years in, and they are still complaining. Critics are entitled to their ideology about letting free markets determine the fate of private companies. But the White House and auto companies should not have much trouble defending the wisdom of not letting GM and Chrysler, representing more than a quarter of the U.S. auto industry, collapse into liquidation, which would have created chaos and vast unemployment in the most important manufacturing industry remaining in the U.S.

Both automakers are here today, building cars, mostly in the Midwest, and re-hiring thousands of workers, because the U.S. government kept both companies, in the midst of the meltdown of financial markets in 2008 and early 2009, from being chopped up piecemeal. The rescue of the two automakers also kept hundreds of auto parts companies from going bust. The U.S. auto industry is still the spine of the economies of Michigan, Ohio, Indiana, as well as being important to other states including Pennsylvania, Illinois and Kentucky.

In all, the Center for Automotive Research (CAR) in Ann Arbor, Mich., reckons the government's bailouts of the U.S. auto industry spared more than 1.14 million jobs in 2009, and prevented "additional personal income losses" of nearly $97 billion in 2009 and 2010. Another 314,400 jobs were saved in 2010. The research organization based its conclusions on the potential impact of auto-industry collapse for jobs at U.S. automakers and suppliers, and ripple effects on the economy at large.

The legion of critics of the bailout is quite a gallery: from Presidential hopefuls Rep. Michele Bachmann (R-Minn.) and Mitt Romney (let's see if he sticks to that when he campaigns in Michigan this year) to the more thoughtful, if still stubbornly incorrect, Dan Ikenson, associate director of the libertarian Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies.

Of all the decisions made during the financial crisis, this was probably the most controversial.  I don't see how they could have let GM and Chrysler go under at that time.  It wasn't ideal and it wasn't pretty, but I think it worked out for the best.  If those two companies failed, and they dragged down a bunch of parts suppliers with them, we'd have had a tremendous mess on our hands.  As the article goes on to say, the banks weren't healthy enough to try to finance GM and Chrysler as they entered bankruptcy, so the government was the lender of last resort.

What Economics Brings to the Table

Edward Glaeser, highlighting what he sees as the role of economists, as he finishes his stint blogging at Economix (via Mark Thoma):

Economics marries a predilection for personal freedom with a longstanding tendency to view the interests of the government as being distinct from the welfare of the people. Adam Smith’s “Wealth of Nations,” modern economics’ founding document, emphasized that point.

In the 18th century, it seemed clear that what was good for King George III was not necessarily good for Britain and certainly was not necessarily good for his American subjects.
Democratic revolutions muddied the waters and made it possible for some to think that the government was a faultless servant of the people’s will, but a healthy skepticism about the benevolence (and competence) of the state continued within economics.
Both markets and governments are quite imperfect, and it is important to weigh their failures against each other.
The world isn’t and shouldn’t be run by economists — many perspectives need to be at the table. But economists have plenty to add: formal models, statistical evidence, a focus on freedom and a sophisticated centuries-old approach to public policy.

Can't really argue with that.  Too bad economists argue like surveyors.

A Bullish Trend

Mark Hulbert says the ECRI WLI indicates fears of a double dip recession, like I was voicing, are wrong (via Ritholtz):

 A double-dip recession? More like double-dip sloppy thinking.
No, I’m not saying that all of those advisers who believe another recession is imminent are automatically guilty of sloppy thinking. But many of them are: When the facts on which they base their argument end up changing, they simply look elsewhere to find other facts that support their conclusion.
They remind me of the famous line with which Adlai Stevenson, the Democratic party candidate for president in 1952 and 1956, used to mock his opponents: Here’s the conclusion on which I base my facts.

I hope he's right.  Only time will tell.

Taxes in the U.S.

Matthew Yglesias includes the following chart in his post about whether the U.S. can preserve Medicare as currently constituted:

One thing to note is that each of those other countries has some sort National Health System which covers more people than our government does.  Once you figure in the privately funded portion of our health care system, which could truly be looked at as a privately administered tax which is paid to health insurance companies, doctors, hospitals and malpractice insurance providers, we would probably move up on the list a decent amount.  Also, imagine how low our taxes could be if we didn't carry the burden of defending all these other developed world countries who spend very little on defense.

Trying to Get to the Definition of Inflation

Robert's Stochastic thoughts (via Mark Thoma):

Most people in the USA use "inflation" to refer to increased prices and assume that inflation does not cause increased nominal wages. They will not be surprised by the graph. That's what they imagine when they say inflation is a problem. Most US adults would not object of told "inflation reduces the amount of goods workers can buy with their salaries." They hate inflation (considering 10% inflation by far the biggest problem for the USA in the 70s) exactly because they assume that price increases don't cause wage increases even in the long run.

Evidently the idea is that lower inflation (and they ask economists how to achieve it) means higher real wages and the same employment. Then in a sick twist the older New Keynesians (Fischer, Taylor, Gordon) argue that central banks are tempted to cause surprise inflation, since lower real wages are clearly desirable.

Most people who fear the inflation monster under their beds don't fear a wage price spiral, they don't hope for a wage price spiral. They think higher inflation means lower real wages forever which are not compensated by any benefit such as higher employment ever.

The debate is schizoid because economists and not totally ignorant policy makers accept the public view that inflation is hugely costly (assuming complete nominal wage rigidity) and also assume that high inflation is persistent and hard to eliminate because they know how nominal wages really respond to inflation.

At the moment this is all irrelevant (as you note) since core inflation is low, wage inflation is low and a higher relative price of petroleum really does reduce US aggregate real income. But the current insanity is made more likely by the general inflation insanity. Basically policy makers know that high gasoline prices make people vote against incumbents and they demand that Bernanke save them from the effects of increased Chinese demand for petroleum.

There is a lot of truth there.  The 70's inflation was driven by Nixon dropping the gold standard, along with the oil embargo and decreasing oil production in the U.S. (Texas reaching peak production) driving down the dollar and driving up oil costs.  This combined with automatic cost-of-living wage increases tied to the consumer price index to kick in, starting a wage-price spiral.  Today we have the weaker dollar and the higher oil prices, but we don't have the wage increases.  What wage increases we do have go directly to helath insurance companies.  With high unemployment, workers don't have leverage to push for wage increases, and must make do by cutting back.  Employers have enough trouble passing on raw material costs, let alone labor cost increases.  Our main hope would be to reduce consumption of energy, and bring down that dead load cost on our economy, but that means getting off of our fat asses and walking, biking or using public transit, and since suburbal sprawl has made that tremendously difficult, I don't think we'll be seeing much voluntary decrease in energy usage.

More on the Endgame

John Mauldin, over at the Big Picture:

Let me jump out on a real limb. I was having dinner last Monday with Christian Menegatti, the #2 economist at friend Nouriel Roubini’s economic analysis shop. We were comparing notes (imagine that), and he said their opinion is that the US has until 2015 before the bond market really calls the deficit hand. Knowing that Nouriel is seen as the ultimate bear, it makes me nervous to put out my own even more bearish analysis.
I think the crucial point will be reached in late 2013. If the bond market sees a serious move to control the deficit, I think they let us “skate.” Then we Muddle Through. But if not, I think we begin to see some real push-back on rates then.
Why so early? Because bond investors are going to be watching the slow-motion train wreck that is happening in Europe and especially Japan. It is one thing for Greece to default (which they will in one form or another, with lots of rumors flying this morning), yet another for Japan to do so. Japan is big and makes a difference. Japan could start to go as early as the middle of 2013. As I have said, Japan is a bug in search of a windshield. Whenever this happens, 2013 or a year or so later, it is going to spook the bond market. The normal indulgence that a superpower and reserve-currency country would be accorded will become much more strained. It will seemingly happen overnight. Think Lehman Brothers on steroids.
I think the chances we will deal with this potential crisis are about 75%. Not doing so is such a horrific outcome that I think politicians will do the right thing. See, I am an optimist. (What was it Winston Churchill said? “You can always depend on the Americans to do the right thing, after they have exhausted all the other possibilities.”)

He is endorsing $3 in spending cuts for every $1 in tax increases.  I would think more along the lines of drastically overhauling the heath care sector with single payer, slashing defense spending and wrapping up the wars in Iraq and Afghanistan, (and Libya), then $2 in tax increases/tax reform for every $1 of spending decreases.  I think he is right that the deficit and debt are huge issues, but I think he is slanted too much in an anti-government direction.  Likewise, he is much more optimistic about Republican politicians being able to fix this mess.  So far, I have yet to see a decent likely candidate for the GOP nomination in 2012.  I sure don't want any of the guys who participated in the debate last week running the country.  He also doesn't mention issues we may face with resource scarcity or climate change.  We face a lot of hurdles in the near future, and we're going to have to put aside much of our enmtiy with our political opponents and make true shared sacrifice.  So far, I don't see much of that from Republicans.  I don't even see them acknowledging what I think are pretty obvious facts.  This is going to be a tough process.

David Hume's Birthday

Crooked Timber (h/t Mark Thoma) marks David Hume's 300th birthday on May 7 (April 26-Julian calendar):

David Hume was born 300 years ago today. His influence on philosophy is well recognized. His influence on the social sciences, rather less so. Dan Sperber proposes that readers of his blog celebrate this anniversary by selecting particularly relevant quotes. Sounds like a good idea – let me start the ball rolling by stealing a particularly appropriate one from Cosma Shalizi.

It is excellent reading.  Commenters added their own favorite quotes.  My favorite came from commenter Geo:

Hume, Of Commerce:
“A too great disproportion among the citizens weakens any state. Every person, if possible, ought to enjoy the fruits of his labor, in a full possesion of all the necessaries, and many of the conveniences, of life. No one can doubt that such an equality is most suitable to human nature and diminishes much less from the happiness of the rich than it adds to that of the poor. It also augments the power of the state, and makes any extraordinary taxes or impositions be paid with more cheerfulness. Where the riches are engrossed by a few, these must contribute very largely to the supplying of the public necessities. But when the riches are dispersed among multitudes, the burden feels light on every shoulder, and the taxes make a not very sensible difference on any one’s way of living.
“Add to this that, where the riches are in few hands, these must enjoy all the power, and will readily conspire to lay the whole burden on the poor and oppress them still farther, to the discouragement of all industry.”

We could stand to consider that again today.

Irish Economy Struggling With Austerity

NYT:

Benefiting from years of low interest rates that followed the creation of the euro zone in 1999, Ireland enjoyed one of the biggest growth spurts of any country in Europe, and spent lavishly as its wealth increased. The economy expanded an average of 7 percent in the decade leading up to 2007 before plunging into a deep recession. Per person, inflation-adjusted economic activity has fallen approximately 18 percent from the peak, when the average gross domestic product per person was a shade over 43,000 euros ($62,000). Now it is less than 35,000 euros ($50, 767).
As the country tries to recover from the bust, many of its people are paying a tremendous cost for the folly of the country’s banks and to bring its government finances back in order.
As part of Ireland’s effort to pay down its immense debts and bail out the banks, the Condras’ salaries from their state jobs as hospital workers have been cut 20 percent in two years. Higher taxes and further spending cuts are on the horizon.

It looks like years and years of pain for the Irish as they bail out their corrupt banks.  They should have let them fail.  Bondholders should have taken haircuts and stockholders should have been wiped out.  Now the taxpayers are going to be slowly bled out.

244,000 Jobs Added in April

From Calculated Risk:

We're starting to climb away from the bottom, but I get the feeling that we're working toward another leg down.  I wouldn't be surprised if we are losing more jobs in the fall, the weekly unemployment claims are growing again, and we're going to start feeling the drag from local, state and federal spending cuts.  I also wouldn't be surprised if a combination of commodity prices and Euro-zone issues bring on a double dip.  Even if we avoid the double dip, growth will be anemic.

Limited Resources

Ryan Avent looks at the commodity price boom and the rapid development in emerging markets, and comes away with this observation:

The ADB is saying that 3 billion Asians could reach European income levels by 2050, on top of the billion affluent Europeans and North Americans, not to mention the contemporary ranks of rich Latin Americans and Africans.
I don't think it's impossible to imagine a world in which four times as many people enjoy rich-world living standards as is currently the case. But for it to be possible, humanity must either start discovering and exploiting new earthlike planets, or come up with revolutionary new ways to increase terrestrial supplies of critical resources, or dramatically decrease the resource-intensity of wealth. The mechanism that will encourage one or some (or, I suppose, all) of these developments is high resource prices. And until those developments materialise, high prices will act, instead, to check growth. Or so it seems to me.

Dramatically decrease the resource-intensity of wealth.  In other words, the world must make improvements in standard-of-living without being as wasteful as America has.  Our first step has to be increasing efficiency in transportation and electrical distribution, as both are tremendously wasteful.  If we don't, our standard-of-living will decrease dramatically.

Are the Chinese Hoarding Commodities For Financing?

Yves Smith highlights  that Michael Pettis claims China is importing excess copper because (somehow) it allows cash-strapped businesses to access financing.  He also speculates that they might be doing the same thing with soybeans:

As much as it may sound barmy to stockpile commodities to obtain better terms on financing, Michael Pettis claims that’s one of the factors behind what looks to be unduly aggressive purchases of copper by the Chinese. An excerpt from his latest newsletter, courtesy Michael Shedlock:

China had been importing for many months far more copper than was needed for real use…. Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China’s value-added tax.

Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses.　 Why?　 One possibility of course was pure speculation…

It turns out, that the copper purchases were not entirely, or even mainly, speculative.　 They were part of a financing scheme for companies that….were having trouble accessing bank credit.　

Credit-starved companies were importing copper because they could obtain trade finance or some other sort of foreign financing, and then used the physical copper (or warehouse receipts, I guess) as collateral for domestic borrowing.　 The financing was continually rolled over.　 Buying copper was just a way to borrow for companies that needed loans and were otherwise unable to get them.

As I mentioned two weeks ago, when I discussed this in February with a senior executive in a major commodities company, he responded by saying that he thought the same thing might also be happening in soya…

I don't understand this at all, but if they cut back purchases, we might get some really nasty price drops, especially if this wet weather continues and the market gets concerned about acres switching from corn to beans at the end of the month.

Obama, Osama and America in Crisis

The death of Bin Laden reminded me of this article written by James Fallows in the summer of 2005 in The Atlantic.  The idea is that the writer is composing a memo in 2016 to the man who will win the 2016 presidential election in a landslide, writing about the economic, political and social catastrophes which had struck the U.S. since 2001, explaining how they find themselves in the moment they are in.  The man who will be president came to the public's attention by:

The chaos in public services spelled the end for the administration, and for the Democratic Party in the long run. The Democrats couldn't defend the unions. They couldn't defend pensioners. They couldn't even do much for their limousine liberals. The nation had never been more in the mood for firm leadership. When the "Desert Eagle" scored his astonishing coup in the Saudi Arabian desert just before Christmas of 2011, America knew who its next leader would be. For a four-star general to join his enlisted men in a nighttime HALO³² special-operations assault was against all established practice. The Eagle's determination to go ahead with the stunt revealed him to be essentially a MacArthuresque ham. But the element of surprise was total, and the unit surrounded, captured, and gagged Osama bin Laden before he was fully awake.
The general's news conference the next day had the largest live audience in history, breaking the record set a few months earlier by the coronation of England's King William V. The natural grace of this new American hero was like nothing the world had seen since Charles Lindbergh landed in Paris. His politics were indistinct, but if anything, that was a plus. He was strong on defense; urgent (without details) about "fighting smart against our economic enemies"; and broadly appealing on "values"—a devout Catholic who had brought the first openly gay commandos into a front-line combat unit. ("When we were under fire, I never asked who they loved, because I knew they loved our flag.") Political pros had always assumed that America's first black president would be a Republican and a soldier, and they were right. He just didn't turn out to be Colin Powell.

While the timeline doesn't quite play out the way he imagined it, Fallows touches on a large number of important issues which have come into play, or may soon, in the story.  It is well worth the read.

Stimulus Spending Analysis

Via Ritholtz, Miller-McCune looks at the stimulus spending.

Inflation in Food

Federal Reserve Bank in Dallas, via Mark Thoma:

Among the causes of the recent world food price surge are weather-related poor harvests of staple crops such as wheat and some coarse grains. Affected heavily by drought in Russia and excessive rains in Canada and Australia, world wheat production for the 2010–11 marketing period is on track for a decrease of 5 percent compared with the 2009–10 period. World production of coarse grains (corn, sorghum, barley, rye and oats) is on pace to fall 2.5 percent.[4] Export bans by some countries, increased stockpiling by others and higher input costs—especially for energy in the production of fertilizer—likely also contributed to diminished supplies of many agricultural commodities.[5]

A basic principle of economics is that decreased supply increases a good’s relative price—that is, its price in terms of the other enjoyable things one must sacrifice to acquire the good. The number of theater tickets or MP3 downloads or haircuts one must sacrifice in order to enjoy a steak dinner increase when the relative price of steak increases. So too, does the number of hours one must work—and forgo leisure—to obtain a given amount of steak.

This is true in a world where money is used to facilitate the exchange of goods and services and would be true in a world without money (and thus without monetary policy).

Over periods of a few years (and, of course, over longer horizons), central banks can exercise considerable control over the rate at which the prices of an economy’s goods and services rise or fall, in units of money. An important point, though, is that—with a few qualifications—monetary policy affects money prices for goods and services in general, not the terms at which goods and services exchange for one another.[6]

Monetary policy can slow the rate at which food prices (together with all other money prices) rise; it cannot make food—or any other particular good or service—more affordable in terms of other goods and services.

Also, it includes a chart with the food components of CPI, beer is one.

Oil Prices - Speculation, Supply and Demand or Both

Ezra Klein discusses James Hamilton's report on the price run-up in 2007-2008:

Traditionally, Hamilton says, Saudi Arabia, the world’s largest producer of oil, would smooth out spikes in demand. But around 2007, Saudi Arabia stopped. They left oil in the ground, assuming they could sell it for more later. Hamilton calls this “the beginning of a new era for oil pricing dynamics: without the Saudis’ willingness or ability to adjust production to smooth out price changes, any disturbance to supply or demand will have a much larger effect on prices than in earlier periods.” Greenstone agrees with Hamilton, and says that this can hardly be overstated. Saudi Arabia is the one player with the power to really do what people think speculators do: take enormous amounts of potential oil off the market because they think they can get a better deal later.
But that was 2007-2008. Is Saudi Arabia part of the story now? It appears so. Not only did they slash production in March, but they’re freaking everybody out by offering accounts of their production volume that don’t make any sense.
On the demand side, China — and other developing nations, but mostly China — is the 800-pound gorilla in the room. “China was a net exporter of petroleum up through 1992, and its imports were still only 800,000 barrels a day in 1998,” writes Hamilton. “By 2007, however, China’s net petroleum imports were estimated to be 3.7 mbd, making it the world’s third-largest importer and a dominant factor in world markets.”
Here’s what Hamilton argues happened in 2007-2008: Everyone knew that the world was demanding more oil, but they had made two assumptions that turned out to be mistakes. First, they thought that higher prices would lead to a lot less oil use in rich countries, which would allow what oil we did have to stretch further. Economists call this ”elasticity,” and oil turns out to have a lot less of it than we thought. Second, they thought we — or, more specifically, Saudi Arabia — would be able/willing to increase production much more dramatically than proved to be the case. But they weren’t. So supply held relatively steady even as demand shot up and demand held relatively steady even as prices shot up.
So what ended the 2007-2008 oil crisis? A global recession more sever than anything we’d experienced since the early 20th century. But now the same factors are reasserting themselves. Demand from both developed and developing countries has returned. Saudi Arabia is tapping the brakes. Now add in turmoil in the Middle East. Now look at the price of gasoline and note that demand isn’t falling.
“The key question you should be asking is the following,” says Hamilton. “Is the current price too high in the sense that the physical quantity being produced is greater than the physical quantity being consumed? If yes, then where is the difference going, and what mechanism accounts for that?” Left unsaid is the “if no.” But if no, then who is supposed to start using less oil in the coming years, and if the answer is no one, then how, absent recurrent recessions, are we supposed to make what oil we have go around at a price the global economy can handle?
On some level, speculation is an easy problem to handle. It’s a problem you can crack down on. The same can’t be said for China, Saudi Arabia or the world’s dependence on oil.

Naked Capitalism Link of the Day

Today's link: China Controls Our Food Supply, Barry Lynn interviewed by Dylan Ratigan:

Because of our obsession with efficiency over flexibility, our “lowest-price-above-all” philosophy over fair prices for producers, and our acceptance of a monopolistic commercial distribution structure, lots of essential products are now coming over seasons from a single foreign source.
That includes one critical preservative that is in nearly every food in America’s grocery stores, which China currently has a monopoly on.
The issue with getting critical products from one place is that, as we’ve seen over recent years, the world isn’t predictable.  Global disruptions — like an economic squabble with China, a massive political upheaval in the Middle East, or a natural disaster like the tsunami in Japan — have the capacity to topple the very fragile U.S. import structure.  The culprit? Our reliance on monopolistic, single-source production and distribution structure for things we need to survive, says Barry.
China currently has a production stranglehold over a critical chemical compound that helps keep food fresh — ascorbic acid.  We use this to preserve almost all the food that is on the store shelves.  It’s essential to keep food on America’s tables, and we don’t have any control over its production or distribution.
“It was first synthesized by an American scientist, it was first mass produced by an American company.  100% of our ascorbic acid or vitamin C now comes from China,” says Barry.  “In terms of pricing,  just about to the day that the Chinese finished capture and control over our supply of Vitamin C, ascorbic acid, they jacked up the price by 400%,” says Barry.

This doesn't seem to be a smart way of doing business.  As Yves notes, "First rare earths, now this."  Always striving for the cheapest has undermined our manufacturing base, now it is crucial supplies in which we are at others will.  Our oil dependence is also tremendously deleterious to our future.

Naked Capitalism Link of the Day

Today's link: How Goldman Sachs Created the Food Crisis, at Foreign Policy.  The whole thing is fascinating.  There is also more on food production here.  To summarize, Goldman created a long-only commodity index fund, and after the CFTC allowed speculators to take unlimited positions in 1999, long-only funds have grown massively.  The new money flowing in from investors, pension funds, insurance companies and such are driving up food prices.  I really liked this history at the beginning of the article:

It took the brilliant minds of Goldman Sachs to realize the simple truth that nothing is more valuable than our daily bread. And where there's value, there's money to be made. In 1991, Goldman bankers, led by their prescient president Gary Cohn, came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy, and wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known henceforth as the Goldman Sachs Commodity Index (GSCI).
For just under a decade, the GSCI remained a relatively static investment vehicle, as bankers remained more interested in risk and collateralized debt than in anything that could be literally sowed or reaped. Then, in 1999, the Commodities Futures Trading Commission deregulated futures markets. All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food.
Change was coming to the great grain exchanges of Chicago, Minneapolis, and Kansas City -- which for 150 years had helped to moderate the peaks and valleys of global food prices. Farming may seem bucolic, but it is an inherently volatile industry, subject to the vicissitudes of weather, disease, and disaster. The grain futures trading system pioneered after the American Civil War by the founders of Archer Daniels Midland, General Mills, and Pillsbury helped to establish America as a financial juggernaut to rival and eventually surpass Europe. The grain markets also insulated American farmers and millers from the inherent risks of their profession. The basic idea was the "forward contract," an agreement between sellers and buyers of wheat for a reasonable bushel price -- even before that bushel had been grown. Not only did a grain "future" help to keep the price of a loaf of bread at the bakery -- or later, the supermarket -- stable, but the market allowed farmers to hedge against lean times, and to invest in their farms and businesses. The result: Over the course of the 20th century, the real price of wheat decreased (despite a hiccup or two, particularly during the 1970s inflationary spiral), spurring the development of American agribusiness. After World War II, the United States was routinely producing a grain surplus, which became an essential element of its Cold War political, economic, and humanitarian strategies -- not to mention the fact that American grain fed millions of hungry people across the world.
Futures markets traditionally included two kinds of players. On one side were the farmers, the millers, and the warehousemen, market players who have a real, physical stake in wheat. This group not only includes corn growers in Iowa or wheat farmers in Nebraska, but major multinational corporations like Pizza Hut, Kraft, Nestlé, Sara Lee, Tyson Foods, and McDonald's -- whose New York Stock Exchange shares rise and fall on their ability to bring food to peoples' car windows, doorsteps, and supermarket shelves at competitive prices. These market participants are called "bona fide" hedgers, because they actually need to buy and sell cereals.
On the other side is the speculator. The speculator neither produces nor consumes corn or soy or wheat, and wouldn't have a place to put the 20 tons of cereal he might buy at any given moment if ever it were delivered. Speculators make money through traditional market behavior, the arbitrage of buying low and selling high. And the physical stakeholders in grain futures have as a general rule welcomed traditional speculators to their market, for their endless stream of buy and sell orders gives the market its liquidity and provides bona fide hedgers a way to manage risk by allowing them to sell and buy just as they pleased.

I've cursed the speculators a number of times, but they are important to the liquidity of the markets.  Unfortunately, the limitations on the size of their positions shouldn't have been removed.  There is a special place in hell for Phil Gramm.

Update: The Food issue has a lot of interesting stuff.

Scary Chart and the Endgame

John Mauldin over at the Big Picture:

I have written repeatedly about the Endgame in the weekly letter, as well as in a New York Times best-seller on the same topic. By Endgame I mean the period of time in which many of the developed economies of the world will either willingly deleverage or be forced to do so. This age of deleveraging will produce a fundamentally different economic environment, which the McKinsey study referenced below suggests will last anywhere from 4-6 years. Now, whether this deleveraging is orderly, as now appears to be the case in Britain, or more resembles what I have long predicted will be a violent default in Greece, it will create a profoundly different economic world from the one we have lived in for 60 years. This makes sense, in that the prior world was defined by ever-increasing amounts of leverage. Outright reductions in leverage or even a significant slowing of the rate of growth is a whole new ballgame, economically speaking.
In all this I have explained the various options facing the developed world, but I have refrained from putting forth my own estimates as to what will actually happen and what the environment surrounding that outcome will be. That is about to change. I have been giving this a great deal of thought and research. While my conclusions will be somewhat controversial (I know, surprise, surprise), with enough to offend almost everyone on some point, I hope that I can muster enough clarity to help you think through your own personal views and how you will respond to what I think will be yet another crisis on the not-too-distant horizon. Whether that is Crisis Lite or Crisis Depression is up to us and the politicians we elect. I argue that we need to choose most wisely, because we are at a crossroads that is as critical as any since 1940.

Why Leaders Can't See Disaster Coming

Via Ritholtz, Paul Farrell's 7 reasons why leaders can't see the next catastrophe:

Farrell enumerates seven reasons this always has, and is likely again, to lead to more trouble. He advises you to not forget any of the following elements:

1. Many, many experts did predict and warn of the 2008 meltdown years in advance.
2. Wall Street banks, corporate executives and Washington politicians are short-term decision-makers.
3. Most business, banking and financial leaders are short-term thinkers, focused on today’s trades, quarterly earnings and annual bonuses. Long-term historical thinking is a low priority.
4. As a result, it is virtually certain that America’s leaders will focus on upbeat, good news and always miss the next meltdown because warnings of a coming catastrophe are ignored.
5. Warnings from the few with a long-term perspective will always be dismissed during every investment cycle and every future recession/recovery cycle. Always. It’s in their DNA, trapped in their brain cells and demanded by their followers.
6. If you are a typical left-brain Wall Street or corporate executive, it’s virtually certain that you will miscalculate the timing/impact of the next meltdown, the next big collapse that’s off your radar. As a result, your company’s assets are at risk of suffering massive losses that are “predictable, not random.” But because you’re in denial, you will not deem it necessary to take steps to protect your assets.
7. If you’re a right-brain thinker, your longer-term historical perspective will give you a clear advantage in preparing for the next crash and the depression that follows.

File this away, and look back at it in a few years — I like to do that with Outlook or Yahoo Calendars, and get a pop message. This one is scheduled for 2014 . . .

I get the feeling something bad may happen before 2014.  I guess we'll wait and see.