Bearish News

Evidently the government hasn’t done enough for GE lately. $100b + in debt guarantees was nice and all, but they’re constantly looking for ways to work with the government. Looks like Cap and Trade is the next potential windfall. From the Washington Examiner:

“The intersection between GE’s interests and government action is clearer than ever,” General Electric Vice Chairman John G. Rice wrote in an Aug. 19 e-mail to colleagues.

Rice was calling on his co-workers to join the General Electric Political Action Committee. “GEPAC is an important tool that enables GE employees to collectively help support candidates who share the values and goals of GE.”

On to the Cap and Trade nonsense (which even the creator admits is flawed and vulnerable to manipulation link):

“On climate change,” Rice wrote, “we were able to work closely with key authors of the Waxman-Markey climate and energy bill, recently passed by the House of Representatives. If this bill is enacted into law it would benefit many GE businesses.”

Most of all, Waxman-Markey would profit a GE joint venture called Greenhouse Gas Services, which deals in greenhouse gas credits, products that have value only if a cap-and-trade bill like Waxman-Markey passes.

GE and others wouldn’t be interested in carbon trading if there weren’t fat profits to be made. A carbon tax is preferable to cap and trade, if we must. Either way the resulting utility bills will hit consumers hard. I don’t think the time is right for either. But a tax is the lesser evil when weighed against another market for investment banks banks and conglomerates to mosh around in.

Disclosure: No position in any companies mentioned.

Blasphemy! Jon Najarian of Fast Money would feign condescending laughter and pffffftttt at such ideas (at least that’s how he treated Bill Fleckenstein the other day). His Goldman buddies doubtless advise him to dismiss such nonsense. This recovery is real, didn’t you see Big Ben’s victory speech from Jackson Hole? The guy saved the freaking world, give him some respec’.

Insight from Stefan Karlsson, Swedish economist. To see more of his work, visit his blog and his articles at Mises.org.

Robert Lucas, one of the key architects of the extremely useless and misleading “New Classical” macroeconomics model here tries to defend the New Classical model despite its obvious failures.

The Economist’s briefing also cited as an example of macroeconomic failure the “reassuring” simulations that Frederic Mishkin, then a governor of the Federal Reserve, presented in the summer of 2007. The charge is that the Fed’s FRB/US forecasting model failed to predict the events of September 2008. Yet the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring.

Get that? The forecast was not really meant to be a forecast even though it was presented as a forecast and requested for the purpose of forecasting, but simply a description of what would happen if it happened…..

Well, just about anything can be posed as happening if it happens, including theoretically absurd things like pigs flying by flapping their ears, cats going vegetarian or all prices being fully flexible. Indeed, the whole “New Classical” macroeconomic model is really nothing but a mixture of a few sensible theories with many really absurd assumptions (like full price flexibility) formulated for the purpose of making the model mathematical.

The bottom line is that New Classical models have no real world applicability or relevance. And since the New Classical models are often presented as the only alternative to [New] Keynesian models, they are doing a lot of harm by making the harmful Keynesian models appear relatively more credible.

Originally published 08/06/2009. Visit Stefan’s blog here.

Guest Post by Stefan Karlsson, a Swedish economist who has made some prophetic calls. In 2005 he wrote, “But there is also a darker side to the current boom. It is to a high degree driven by the cheap-money policy of the Federal Reserve.” More articles can be found on his blog and Mises.org.

Economists were shocked by the relatively high U.K. inflation number for July 2009, 1.8%. By comparison inflation is -0.7% in the Euro area and -2.6% in neighboring Ireland. How could price inflation stay that high given the deep slump in the U.K. economy and the dramatic drop in commodity prices from their peak in July 2008 (the base month for this 12 month number)?

Perhaps it could have something to do with, you know, the dramatic depreciation of the U.K. pound. If you look at the individual inflation numbers for European countries, you can see that countries with the euro (or with currency pegged to the euro) have generally much lower inflation than those who have their own freely floating currencies. The exceptions being Switzerland and to a lesser extent the Czech Republic, but that reflects that the Swiss franc and the Czech Koruna has been much stronger than other small floating European currencies.

Some might object that while the pound is down dramatically since July last year, it has stabilized and even appreciated somewhat against the euro since its low late December 2008. But this shows just how these economists are deceived by their “perfect market” models.

Assuming “perfect markets”, prices adjust immediately. A 10% depreciation will immediately raise import prices by 11.1% so that prices are equal in all countries. But in reality, companies are reluctant to change local currency prices too often because they fear it could, for example lead to permanent loss of market share even though the currency fluctuation is only temporary. So as long as they think that the currency fluctuation might be temporary they will not raise prices, even though prices are unsustainably low in the long run. But eventually as the depreciation appears increasingly permanent they will raise prices. Alternatively, if the depreciation proves temporary they will not raise prices, but they will abstain from the price cuts that you would otherwise expect.

What this means is that the inflationary effect of currency depreciation has a lagged effect on price inflation. Meaning that even though the pound hasn’t depreciated any more this year, previous weakness still continues to create upward pressure on prices.

Eventually, the effect of last year’s brutal pound depreciation will pass through entirely, and assuming the pound doesn’t depreciate any more, this will cause relative inflation in the U.K. to fall. But the lagged effects of the previous pound depreciation, just like the lagged effects of the depreciation of the Swedish krona and other weak European currencies, could continue to put upward pressure on prices for many more months.

Visit Stefan Karlsson’s blog here.