Wikinvest Wire

Daniel Gross: Why it's worse than even he thinks

Monday, June 09, 2008

Don't tell the "economic Pollyannas" that a second half recovery may not materialize. That's the gist of the subtitle for the refreshingly clear-headed view espoused by Daniel Gross in the cover story of the current Newsweek.

Yes, you can be refreshingly clear-headed and still take a dim view of things - you just can't do that if you're a government economist.

And yes, this is the same Daniel Gross who, as the housing bubble was in the early stages of popping more than a year ago, wrote Pop!: Why Bubbles Are Great For The Economy.

What are the odds of him having second thoughts on the lasting benefits of the housing bubble after having another year to reflect on things? Really. Financial innovation? Advancements in home improvement technology?

On the current state of the economy, he notes:

But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.
As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low.
The situation we're in is nowhere near stagflation—the consumer price index is rising at a 3 percent annual rate, compared with 13 percent in 1979. But it's still a shock to the system. Fuel surcharges have become de rigueur from exterminators to personal trainers. On May 28, Dow Chemical announced it would increase prices 20 percent to compensate for higher energy prices. The realization that the U.S. no longer controls its economic destiny is contributing to the widespread feeling of unease and crisis of confidence. Economically speaking, the 1990s belonged to the U.S. and New York and Silicon Valley. But as this decade motors toward its close, it seems powered by China, and Russia, and Dubai and Mumbai.
You'll know when we've really started to turn the corner on this whole "inflation" charade when you stop reading things like this when comparing the current era to the 1970s.

How can anyone seriously think that inflation is just 3 percent?

Even the government says inflation is 4 percent - it's been at that level for seven months now with another update due this Friday. Maybe he split the difference between overall inflation and core inflation as a sort of unwitting accomplice to the unwitting accomplices at the Bureau of Labor Statistics and the Federal Reserve.

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GP said...

He must be talking about the GDP deflator or PCE or the new chain-weighted CPI that are closer to 3% than 4% rather than the more familiar CPI.

Aaron Krowne said...

I'd put my money on Gzross just being an idiot.

Anonymous said...

Giant Calif. land partnership files for Chapter 11

By ALEX VEIGA - AP Business Writer
Edition Date: 06/09/08

LOS ANGELES — The outlook for housing was still rosy a little more than a year ago when the nation's largest public employees pension fund invested almost $1 billion in LandSource Communities Development LLC, a real estate project that includes the last major tract of undeveloped land in Los Angeles County.

But falling land values forced that venture into Chapter 11 bankruptcy protection over the weekend, raising questions as to whether investors will ever recoup their money, including the California Public Employees' Retirement System, a pension fund that provides health care and retirement services for about 1.5 million public employees.

LandSource said late Sunday it was seeking bankruptcy protection in U.S. Bankruptcy Court in Delaware after trying for months to restructure a $1.24 billion debt.

The venture's key asset is the Newhall Land and Farming Co., which owns around 15,000 acres of undeveloped land in the Santa Clarita Valley, about 30 miles north of Los Angeles.

CalPERS spokesman Clark McKinley on Monday declined to speculate on how the bankruptcy process will play out, but said the potential impact on the pension fund "is not critical."

"We certainly want to see it restructure the debt (and) see if we can get some way to stretch this out and keep this thing alive," McKinley said.

The fund has about $970 million invested in LandSource, McKinley said.

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