Strong retail sales growth

Say what you will about the sluggishness of the recovery, but it is ongoing. Retail sales in October were only 2% shy of a new all-time high, after posting sizable gains in recent months. Sales rose an impressive 7.3% in the past 12 months, and gains were widespread. In real terms, sales were up a strong 6% in the past year. No signs here of any threat to future growth.

As a supply-sider, I don't believe that retail sales (i.e., "demand") drive growth. Growth is driven by "supply:" by work, production, investment, and risk-taking. The strength of retail sales is a sign that the economy is getting back to work and recovering its confidence. This is what portends continued economic growth going forward. If Congress can see its way to extend the Bush tax cuts (in light of the recent election and the sluggish recovery, what politician would dare vote to allow taxes to rise?) then confidence in the future and the incentives to take risk and start new enterprises will increase, and that should provide a significant boost to growth—and jobs—in the coming year.

U.S. dollar once again at an all-time low

This chart is arguably the best measure of the dollar's value relative to other currencies. It compares the dollar to a large basket of trade-weighted currencies, and it is adjusted for relative inflation differentials. This eliminates the distortions which come from, for example, a large nominal rise in the dollar against a currency that is suffering from very high inflation: if the dollar's rise offsets the effects of that currency's inflation, then the dollar has not really risen at all. Similarly, it corrects for large depreciations of the dollar relative to currencies (in particular the yen) that have enjoyed lower rates of inflation than the U.S.

The latest data from the Fed show that the dollar has once again—for the fourth time since the early 1970s—hit bottom. It is now as effectively weak as it was in Oct. '78, Jul. '95, and Apr. '08. Put another way, a U.S. tourist traveling around the globe today would find that his dollar has never bought less. For that matter, a dollar today has never bought less gold, fewer industrial commodities, or a smaller basket of consumer goods and services.

To say that the U.S. economy is at risk of deflation, at a time when the dollar has never been weaker, is nothing short of cognitive dissonance. One wonders what, exactly, the Fed is looking at when they reason that a bold, risky, and unprecedented experiment in monetary expansion (i.e., QE2) is justified. When the dollar's value is at an all-time low, it follows that there has never been such an oversupply of dollars relative to the world's demand for dollars as there is today. There are more than enough dollars flooding the world already; we don't need even more.

The market is smart enough to figure this out, of course, and that is undoubtedly one of the reasons the dollar is so weak today. Given the prospect of more dollars being dumped into the system tomorrow, the market's demand for dollars has already declined, depressing its price. So the real key to the impact of QE2 will be how it compares to what the market has already priced in. It remains my belief that the reality of QE2 will prove to be less than the anticipation. The Fed will not remain oblivious to the monetary realities forever, and the U.S. economy is already stirring in anticipation of a positive course correction in fiscal policy.

We have survived similarly weak episodes in the dollar before without a devastating rise in inflation (with the notable exception of the late 1970s, when inflation rose to the low double-digits following the dollar's plunge in 1978), and there is no a priori reason we can't do it again.

The six fatal flaws of ObamaCare

In a series of posts earlier this year in which I discussed the growing list of fatal flaws in healthcare reform, I opined that "the defects of this legislation are so massive and pervasive that it will never see the light of day." Arguably, that's still true today, especially as we can now add one more fatal flaw to the list: you don't have to comply with the law because you can get a waiver! To date, 111 firms have been granted waivers by the Obama administration, and the list is sure to grow by leaps and bounds. The very fact that many firms need to apply for waivers is good evidence that ObamaCare is fatally flawed. To celebrate the increasing likelihood of ObamaCare's eventual demise, let me recap the fatal flaws as I see them:

Fatal flaw #1: The penalty imposed for not buying a policy is very likely to be less than the cost of insurance for a great many people. This, combined with the requirement that insurance companies may not deny coverage to anyone with a pre-existing condition, means that a large number of people will forgo signing up for a policy, knowing that they a) will save money and b) can always sign up for insurance if they turn out to develop a serious medical condition. Thus, the actual revenues will far way short of projections.

Fatal flaw #2: The government has no ability to enforce the penalty for noncompliance.

Fatal flaw #3: Mandating that people buy a health insurance policy simply because they are alive is arguably unconstitutional. It is also a way of hiding the fact that young people will effectively be paying a huge new tax in order to subsidize older people.

Fatal flaw #4: Regulating the price which insurance companies must charge for policies, coupled with a requirement that companies must rebate to their customers the amount by which their loss ratios fall below 90%, effectively turns these companies into government-run enterprises and would likely result in the effective nationalization of the healthcare industry. That is a violation of the Fifth Amendment, and of a Supreme Court requirement "that any firm in a regulated market be allowed to recover a risk-adjusted competitive rate of return on its accumulated capital investment."

Fatal flaw #5: A government-imposed restructuring of the healthcare industry can't possibly improve our healthcare system, and is extremely likely to make it worse. As Don Boudreaux has noted, "Trying to restructure an industry that constitutes one-sixth of the U.S. economy is ... so complicated that it's impossible to accomplish without risking catastrophic failure."

Fatal flaw #6: In cases wherein companies find that complying with the law would result in large increases in healthcare premiums that would threaten employees' access to a plan, the Dept. of Health and Human Services may grant a waiver to the company. As evidence of the first five fatal flaws accumulates, and as healthcare insurance companies continue to raise premiums to pay for the unintended consequences of government attempting to regulate an entire industry and hundreds of millions of people, more and more companies are likely to apply for waivers. At some point the whole edifice will come crashing down of its own weight. 

I have a more detailed discussion of each of these flaws here, here, here, here, and here.

UPDATE: Lest I be accused of offering only non-constructive criticism, I refer readers to previous posts about the right way to reform healthcare, here, here, and here.