Category Archives: Economics

Miscellaneous economy stuff

School Lunches

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Apparently our school kids are eschewing critical parts of the First Lady’s Federally mandated (via the Healthy, Hunger-Free Kids Act) school lunch menu. A University of Vermont research report says that the kids are tossing their veggies after they’re forced by their schools, under the Act, to select one (or a fruit), rather than actually eating them.

The report, entitled Impact of the National School Lunch Program on Fruit and Vegetable Selection, noted that average waste increased from a quarter cup to more than one-third of a cup per tray.

A USDA spokesman said,

Ninety-five percent of schools are successfully serving healthier meals….

Nice try, Mr Alinsky, but we’re talking about what the kids are eating, not what you’re serving. Besides, you’re apparently serving those veggies to the trash can.

Much Ado about Nothing

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Many traders reported difficulty buying and selling exchange-traded funds, a popular investment in which baskets of stocks and other assets are packaged to facilitate easy trading. Dozens of ETFs traded at sharp discounts to their net asset value—or their components’ worth—leading to outsize losses for investors who entered sell orders at the depth of the panic.

Products built to provide insurance for investors came up short. As a result of trading halts in futures tied to the S&P 500 index, it was difficult for investors to get consistent prices on contracts linked to them that offer insurance against S&P 500 declines.

That’s how Bradley Hope, Saumya Vaishampayan, and Corrie Driebusch opened their Wall Street Journal piece about Monday’s stock market performance, a piece interestingly titled Stock-Market Tumult Exposes Flaws in Modern Markets.

They also had this:

The giant swings in the market and problems with ETFs pointed to a need to rethink rules governing stock trading, analysts said.

“There needs to be a deeper examination of how the stock-market circuit breakers behaved on Monday,” said Joel Dickson, a senior investment strategist at Vanguard Group of Valley Forge, PA. “There was a major market-structure component to what happened.”

Illustrative of the bleating is this, too:

“Pricing options is almost impossible on the kind of move you had that day,” said Wayne Wu, who trades SPDR S&P 500 ETF options on the NYSE floor for Integral Derivatives.

Yeah, and? If an investor can’t get/doesn’t like the data related to an investment plan, it’s on him to take the risk, or not. It’s not on government to protect him from the outcomes of his decisions.

More government rules, or more layers on existing ones? No. Fewer government rules, and simpler. Tumult is the necessary noise of a free market. The PRC’s failure is illustrative of the outcomes of government “management” of markets and of underlying economies. We’re not where the PRC is, yet, and we don’t need to approach that, either.

But, but–what about guys who already had staked out positions when this happened, when the information breakdown occurred?  Second Rule of Investing (the First Rule is “Never invest anything you can’t afford to lose all of”): “Know where the back door is before you go in through the front door.”

Personal responsibility. Government needs to butt out. Caveat emptor.

Panicky Central Planners

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…and maybe pundits, too.

For the Federal Reserve, the aftershocks threaten to set back its path to interest-rate normality yet again….

That’s how Alex Frangos and Justin Lahart opened their Wall Street Journal piece Monday, writing of the People’s Republic of China’s (second in a month) “market” meltdown last week and with it the demonstration by the PRC’s economic central planners and their panicky twitchings with interest rates, bank reserve requirements, market interventions, and the like that, once again, central planning cannot seriously impact economies for longer than the moment.

Never mind that the PRC has little impact on the global economy—as Frangos and Lahart themselves note, PRC imports from the US run to 1% of our GDP and all of 2% of the S&P500 companies’ revenue are PRC-related. The situation is little different for Europe: most of those nations’ economic interactions with the PRC represent roughly 1% of their GDPs as well.

They added this to their fandango:

September is still on the table for the Fed, but markets will need to calm before then.

No, they don’t. The markets aren’t the underlying economy. The markets are tied to the economy by a stout rope, but that rope has large and nearly randomly variable slack. The underlying economy, slow as the Obama recovery has been, nevertheless is in solid territory, and as Frangos and Lahart themselves concede, “a US recession led by China doesn’t look to be in the cards.”

The Fed needs to move on the longer-term state of the economy, not on the short-term, animal spirit vagaries of the markets. The Fed needs to stick to a plan—any plan—and move interest rates up on schedule, which means in September. Or better, loosen and then release controls, letting interest rates float in those same markets—which for all their animal spirits influence still are better at “managing” a free market economy than any central planners, including those at the Fed—determine the appropriate interest rate levels.

And this:

[T]he Fed’s problem with China is what it will do to a pace of US inflation that already isn’t anywhere close to its 2% target.

No, again. The Fed’s problem has nothing to do with the PRC. The Fed’s problem is that US inflation isn’t anywhere close to its 2% target, and it’s not going to get there anytime soon. Interest rates are intrinsically inflationary; the only way to move our present inflation rate to 2% is to raise/let rise interest rates to levels consistent with 2% inflation rather than continuing to suppress the one (and so the other) to artificially low levels.

Market Timing

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Gerald Driscoll, Senior Fellow at the Cato Institute and former vice president at the Federal Reserve Bank of Dallas, thinks the Fed should engage in market timing regarding its planned short-term interest rate hike in September—a planned move that he actually calls a course change.

The world markets are in turmoil, he worries, and the Fed should delay its planned hike. Why raise rates now, he asks.

Why not now? Well, the inflation rate doesn’t justify a monetary tightening, he says.

Well, raising interest rates now—or in September as the Fed has said it’s ready to do—from their current suppressed-to-artificially-low rates, and bringing them closer to rates more consistent with the Fed’s price stability goal of 2% inflation isn’t monetary tightening. On the contrary, that would be controls loosening. Letting the market determine interest rates will spur economic growth and national—and individual citizen—prosperity.

Low interest rates were thought to be stimulative. But we have learned that financial intermediaries struggle with spreads in a low-interest-rate environment.

Indeed. Many of us have learned also—and the Fed should have learned this, too—that we all struggle with artificially low interest rates: they’re inconsistent with a robust economy.

The Fed isn’t any better at market timing—at predicting the actions of animal spirits—than any other institution or collection of skilled investors. The key to prosperity is discipline, sticking to a plan even when things seem momentarily uncomfortable.

The Fed should be disciplined and stick to its plan. It shouldn’t try timing the animal spirits.

There’s a Hint Here

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Boeing Co is scrambling to renegotiate an about $85 million satellite contract that became the first big casualty of the US Export-Import Bank’s loss of its operating charter due to congressional opposition.

Asia Broadcast Satellite last month terminated its order for a Boeing 702SP satellite, although the two say they are continuing to discuss the deal.

On the other hand,

SpaceX played down the threat, and said only two of the 50 launches in its current manifest were due to be backed by the bank.

And

Orbital ATK has recently relied on the bank for about one satellite deal a year, though doesn’t currently have any Ex-Im backed space business.

Hmm….