Tuesday, December 22, 2009

Improvement on the margin







What's more important: the news that third quarter GDP was revised down to only 2.2%, from an original estimate of 3.5%? Or the news that credit spreads continue to decline yet are still at levels that in the past have been consistent with recessionary conditions? I'll take the spread news any day, since it's real-time, and not subject to revision. GDP news is always old and always subject to revision.

The downward revision to GDP amounts to only $46 billion, when you de-annualize the numbers. That's a rounding error these days. Heck, the federal government alone spends that much money in fewer than 5 working days. The important thing about the GDP numbers is the change on the margin. Q1=-6.4%, Q2=-0.7%, Q3=2.2%. Going from minus 6.4% growth to plus 2.2% growth, that's a big deal. And growth in the current quarter is very likely to be higher than 2.2%. Things are improving significantly on the margin.

Declining credit spreads tell us that the outlook for the economy is improving almost daily. Cash flows are stronger, profits are stronger, default risk is declining. Unemployment claims tell us the same thing: fewer people are getting laid off, more people who have been laid off are finding jobs. Rising commodity prices tell us that global growth is improving. Implied volatility in equity options today reached a new low for the year, and that tells us that confidence is returning and uncertainty is diminishing.

The equity market is grudgingly coming to terms with the improvement, but still has along way to go, just as credit spreads have a long way to go before they get back to "normal" levels. The dollar is strengthening on the margin, which means that conditions here are turning out to be better than they world had thought. The dollar is still extremely weak, of course, but on the margin it's getting better. Same can be said for the economy: there is a whole lot of idle capacity out there, and many millions without a job, but things are getting better on the margin.

I don't see a reason for all this improvement to suddenly falter. The news from Washington has been awful all year, and I am just as dismayed as anyone that ObamaCare has advanced as far as it has. But on the margin the clear message is that the people increasingly don't like the far-left agenda. There is a significant amount of resistance brewing out there, and the people will have their revenge in November if the politicians persist in pursuing a wrong-headed policy direction. Even if healthcare passes, it is going to be mired in lawsuits and consitutional challenges for many years.

Obama's greatest legacy might not be the one he dreams of. Instead of permanently and massively expanding the role of the state, he may end up being the catalyst for a new political awakening, and a return to this country's libertarian roots. That would be the most astounding change on the margin imaginable.

6 comments:

Bret said...

"[Obama] may end up being the catalyst for a new political awakening, and a return to this country's libertarian roots..."

Nice dream, but probably not.

The primary reason is that libertarians nearly universally detest politics and politicians, therefore generally won't become politicians. If libertarians won't become involved in government, there won't be a libertarian government.

Benjamin said...

I, too, would enjoy a libertarian revival, and more reverence for the price signal in allocating resources.

But just try mentioning in any crowd that large parts of the federal government are heavily supported by the right-wing--the Department of Agriculture and the Department of Defense come to mind--and have nothing to do with free markets, and have never been tested by market competition.

Indeed, the whole agriculture sector is creature of subsidy, price and output regulations, government-financed education, research etc etc etc. US farmers call themselves the most productive in the world--US taxpayers and consumers deserve a prominent listing in the credits.

The Department of Defense--sheesh, what do you say? It is simpy not allowed to point out it is another federal agency, with its budget determined by Congress, a completely political body. DoD is never market tested--fat, waste and lard, trimmed off of private sector companies by competition, just gets thicker through the generations.

You ever see a federal agency do something, and you think, "Man, I could have done that for one-third the money?" Never say that about the Departmenbt of Defense--you will be accused of ingratitude and providing succor to terrorists (terrorists have replaced commies as the bogey de jour, though I feat terrorists about 1/1000th as much as the old Soviet Union. The old SU was a real threat.)

So where does this leave libertarians?

The right-wing is as much of the problem, maybe more, than the left-wing--through with health care, maybe the left-wing is the bigger threat. As of now. Or maybe they are the ones in power.

Ron Paul looks better all the time.

Scott Grannis said...

When I refer to the country's libertarian roots, I refer to limited government, free markets, and a sound currency. I don't see the Libertarian Party becoming triumphant in my lifetime, but I do think the Republican Party could take its cue from the Libertarian Party.

Benjamin said...

Scoot-
In the holiday spirit, I will say I hope you are right.
Privately, I have given up hope on the R-Party, for the reasons I mentioned.
The last R-Party prezzy to even propose a balanced budget? Put it this way--I am bald, and I could not vote in elections back then.
I think an impartial review of that portion of federal spending financed by income taxes will scare you off the R-Party too. The R-Party is steadfastly behind the bulk of spending financed by income taxes. Medicare and Social Security are financed by payroll taxes (which should be cut too, btw).
If I hear a Republican say he is serious about cutting federal budget outlays back to 18 percent of GDP, I would happily vote for that candidate. Even a meat-axe approach--whacking total outlays by 15 percent across-the-board--might work.
Well, we can hope.

Public Library said...

I agree with Benjamin. Anyone who claims the left is full of waste and fat needs to take a good look in the mirror.

The amount of Federal outlays heading in the Repubs direction is mind boggling.

It's all propaganda and it has every little Joe brainwashed into fighting for or against one side or the other.

Health-care, Defense, Agriculture, Insurance all fall into the same boat for both the left and the right.

Don't let religion and abortion get in the way of your thinking.

Scott Grannis said...

If the public gets really fed up with big spending and big taxing, the politicians are going to respond. It wasn't until the appearance of the Tea Parties that public anger became significant. I continue to hope this movement has legs and a future.