The Bear’s Lair: Tumbril time for King Dollar

Larry Kudlow, the President’s new chairman of the National Economic Council, is a well known proponent of the idea of “King Dollar.” That concept states, basically, that the U.S. should aim for a strong dollar, even though it produces large trade deficits, because it allows the country to buy more foreign goods and services and increases its importance in the world economy. This is precisely the reverse of the optimal policy, given the world we live in. Continue reading

The Bear’s Lair: Balance the budget the McKinley way

Opponents of President Trump’s proposed tariffs obscure one important feature of them: they provide revenue for the Federal budget. President William McKinley financed the naval squadron that Admiral George Dewey sailed into Manila Bay to capture the Philippines entirely without an income tax. Looking at our budget today, he would be horrified by the trillion-dollar deficits but would point out that we had deliberately ignored several very substantial revenue sources, which could be used to alleviate the deficit problem. It is time we returned to McKinley-era budget policies, balancing both our tax system and the budget. Continue reading

The Bear’s Lair: Toothless FAANGs.

For several years, the stocks of the FAANGs (Facebook, Apple, Amazon, Netflix, Google) have been the way to make money. Over the five years to December 31, 2017, the FAANG stocks returned 41.6% annualized, compared with 18.6% for the S&P 500 Index, to trade at almost 70 times historic earnings by that point. Yet all five of the FAANG stocks have weaknesses in their business models that are becoming increasingly apparent, suggesting that they are just today’s equivalent of the 1999 dot-coms, the 1972 Nifty Fifty, the 1929 Investment Trusts or the 1720 South Sea Company. Continue reading

The Bear’s Lair: The Qing Dynasty approach to monetary management

Richard Clarida, heavily tipped to be the new Fed Vice-Chairman, has propounded an interest rate theory of the “new neutral.” This states that the Federal Funds rate at full employment, when policy is neither loose nor tight, should revolve around an interest rate of 2% instead of the previous 4% — in other words zero in real terms, since the Fed’s inflation target is also 2%. With zero real interest rates as a target, achieved only at the top of the cycle, capital will receive no risk-free real return, but simply sit there, in infinite stasis, producing economic stability but no real growth. This approach has been tried before, by the Qing Dynasty of Imperial China, in power from 1644 to 1912. Continue reading

The Bear’s Lair: The anti-social nature of social media

The fury from Facebook and its friends over Cambridge Analytica’s misuse of their database to help elect President Trump is matched by the reality that Facebook officials voluntarily allowed use of their data to help elect Barack Obama in 2012. Given these realities, close to 100% of the users of Facebook (everybody except the modest Obama/Trump demographic) should be furious that their data was used for the candidate they did not prefer. The costs of social media are becoming apparent, while its benefits appear increasingly illusory. How much of Silicon Valley’s post-2000 output has been a complete waste of money? Continue reading

The Bear’s Lair: Is there a win-win with Rocket Man?

The announcement of a possible meeting between “Little Rocket Man” North Korea’s Kim Jong-un and President Trump has startled observers, with much of the American right, especially the neocon variety, worrying that Trump will prove incapable of outmaneuvering Kim. Yet an examination of the economic and political possibilities for North Korea and for Kim himself suggests there may be a deal to be done. Continue reading

The Bear’s Lair: De-globalization gathering momentum

President Trump’s sudden announcement of tariffs on steel and aluminum is by no means unprecedented – Presidents Reagan and George W. Bush took similar actions. Yet it emphasizes a reality first pointed out in these columns in 2010 and in a presentation later that year: the globalization project, beloved of Whig economists and big-government types everywhere, is falling apart. De-globalization is here to stay and, contrary to Whig belief, it will be good for the world economy and for our living standards. Continue reading

The Bear’s Lair: The 1820s are more relevant than the 1950s

Many supporters of Donald Trump have expressed nostalgia for the 1950s, when large companies, strong unions and international competition that had been bombed flat guaranteed well-paid blue-collar jobs. Yet the current situation looks nothing like the 1950s. With robots, genetic engineering, self-driving vehicles, serious emerging market competition and debt defaults on the horizon, we are entering a new economic age, not yet christened, in which both jobs and policymaking are more uncertain than ever before. To me, the new age looks like Britain’s 1820s. Continue reading

The Bear’s Lair: Ferment brings us the future

Large organizations are almost never innovators. You can quote the occasional exception, such as the Manhattan Project, but even in space exploration the ability of Elon Musk’s SpaceX, on a tiny budget, to outdistance NASA in rocket design, shows that big is generally intellectually barren. Throughout history, the periods of greatest innovation have coincided with the periods of market chaos, with a myriad of small competitors and no established standards. We need to figure out a way to encourage such periods. Continue reading

The Bear’s Lair: Debt and Taxes become more inevitable

The White House’s 2019 Budget is pure fantasy, but it assumes a deficit in the year to October 2019 of $984 billion. However, Congress’s 2-year Budget deal has added at least $80 billion more spending, pushing the deficit well over $1 trillion. Since we are at the top of a business cycle, with unemployment around 4%, this is very disquieting. However, the driver of current deficits is more a past lack of productivity than a burst in profligacy, and it is there that we must look for a solution. Continue reading