Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
Fault Is Shared in Misjudging of ISIS Threat (Peter Baker and Eric Schmitt, The New York Times) Barack Obama has had his George W. Bush moment. Just as the "W" administration was unaware of the imminent 9/11 attack, the Obama White House was taken by surprise by the rise of the Islamic State. It can be debated whether total ignorance (Bush) or total misjudgement (Obama) is worse. Econintersect would suggest that it little matters which - the end result is the same, a blindside. See following articles.
Obama Dismisses Al-Qaeda Resurgence: They’re JV (Sharona Schwartz, The Blaze) Here is a 9-month old report about Pres. Obama's ill-advised dismissal of Al Qaeda and related jihadists. It discusses specific comments made in the lengthy bio-sketch article: Going the Distance (David Remnick, The New Yorker). Remnick referred to the president's remarks of 07 January about the Islamic State takeover of Fallujah and JV players as "an uncharacteristically flip analogy".
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America's Equipment Is Getting Seriously Old (Sam Ro, Business Insider) Capex (capital expenditures, aka investment) should be adding to economic growth over the next few years. It has actually already started (see second next article). See the next article to understand just how much business capex investment might contribute to GDP growth. This article quotes an analyst (Morgan Stanley's Vincent Reinhart) who estimates: "Beyond the recent acceleration, we look for capital spending to grow at a 4% to 5% pace over the next couple years."
What Are the Components of GDP? (Kimberley Amadeo, about news) In 2013 business investment contributed nearly 18% of GDP ($2.643 trillion). Using the 4-5% cap ex growth over the next couple of years, this would add 0.7% to 0.9% to GDP per year. With recent GDP growth being about 2% this would constitute an increase of 35% to 45% in the GDP growth rate.
Business Spending Plans Haven't Been This High Since December 2007 (Myles Udland, Business Insider) In reading the graph realize that the y-axis is the percentage of firms surveyed which planned to make capital expenditures over the coming three months and the percentage of thos which had made capex investments over the past six months. Because of the two time frames it is expected that the "actual" curve will be much higher than the "planned" curve when the economy is healthy.
EBay to Spin Off PayPal, Adopting Icahn’s Strategy (Michael J. de la Merced and Andrew Ross Sorkin, The New York Times) After 12 years of owning Pay Pal, EBay has announced it is spinning the payment processing operation off into an independent company. More than 40% of EBay's revenue will go with the new company. Pay Pal, on the other hand, gets less than 1/3 of its revenue from EBay transactions.
New technology makes wild subprime auto lending easy and profitable (Fabius Maximus) Fabius Maximus contributes to GEI. If you fail to make a car payment the car won't start. And the repossession company can find it immediately. This technology certainly reduces the loss exposure for auto loans that default. It may be that this new technology is part of the reason sub-prime auto loans are up by 35% since 2009. (But they are still 25% below the 2006 peak.) See also The Ugly Economics of Subprime Auto Loans (Sarah Goodyear, The Atlantic City Lab)
AIG bailout trial may be good therapy! (Kenny Polcari, CNBC) Former AIG CEO Hank Greenberg is bringing a lawsuit against the federal government over the financial crisis bailout which saw his former firm get an $85 billion rescue (by some accounts $182 billion or more) from the Treasury to bail them out from insolvency that resulted, in part (substantial part?) because the disposition of derivatives obligations was deemed to be for 100% restoration of nominal value for Goldman Sachs and other big banks. This was done at the expense of AIG which held counterparty positions to the banks. Greenberg is claiming that the onerous burden of the AIG bailout occurred to a substantial extent because of a sweetheart deal for the banks. This trial should be educational and possibly, as the headline indicates, therapeutic. See also Was AIG Bailout Legal – NO!!!!! (Martin Armstrong, Precious Metals) and Court Casts a New Light on a Bailout (Gretchen Morgenson, The New York Times)
Europe’s Austerity Zombies (Joseph E. Stiglitz, Project Syndicate) Hat tip to Rob Carter. The benefit of the current austerity program in Europe is to "provide economists with more facts to prove the point" that austerity doesn't work. Prof. Stiglitz says that "betting Europe's future on a long-discredited theory" which is producing "all of the suffering in Europe ... is even more tragic for being unnecessary". See also next article.
The Coming European Depression (Christopher T. Mahoney, Capitalism and Freedom) This author says that Europe seems determined to repeat the American experiment 1930-1933, which was so well documented by one of the greatest economists that no one pays any attention to (Econintersect characterization):
"Unless some counteracting cause comes along to prevent the fall in the price level, a depression tends to continue, going deeper, in a vicious spiral, for many years. There is no tendency of the boat to stop tipping until it has capsized. Only after almost universal bankruptcy will the indebtedness cease to grow. This is the so-called natural way out of a depression, via needless and cruel bankruptcy, unemployment, and starvation." - The Debt-Deflation Theory Of Great Depressions, Irving Fisher, 1933
Are We In a Permanent Liquidity Trap? (Cullen Roche, Pragmatic Capitalism) The title is actually totally misleading. Cullen ends up with the conclusion that the liquidity trap argument for recent monetary history is a myth. The Fed is not trapped. The problem is that interest rate control is a pretty poor money supply control tool in general (and "a pretty weak way to steer the economy and we didn't realize it until the current crisis").
In other words, has the interest rate always been a poor way to enact monetary policy? I'd say that's pretty accurate. And either way, it renders the idea of the liquidity trap misguided at best and useless at worst.
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