Daily Digest - Jan 13

Monday, January 12, 2009, 7:48 PM
  • Influential Professor Says US has 'Entered a Depression'
  • We're Borrowing Like Mad. Can the U.S. Pay It Back? (Hat Tip JKibbe)
  • Humor, Video on Central Banks
  • Bush to Seek Rest of TARP Money At Obama's Request
  • The Companies That Will Dominate Retail Job Cuts
  • Shane Co., U.S. Jewelry Retailer, Seeks Bankruptcy
  • Cost of war (Graphic)


Influential Professor Says US has 'Entered a Depression'

Richard Posner, an influential law professor at the University of Chicago, believes the United States has entered a depression. The conservative lecturer believes Keynesian-style stimulus would be a better solution to the economics crisis than tax cuts.

Posner acknowledged that "depression" is an ambiguous term, but in the Becker-Posner Blog, a daily commentary he writes with Nobel Laureate Gary Becker, he argued that the current environment fits his own definition: "There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis."

Posner said conservative economists, such as Fed Chairman Ben Bernanke, generally do not like deficit-spending programs that sponsor public works and transfer payments. However, monetary policy has proven inadequate to staving off the recession, he said, which has converted "almost the entire economics profession - virtually overnight - from being Milton Friedman monetarists... to being John Maynard Keynes deficit spenders."

In the current environment, tax cuts won't prove to be a good idea, as extra income will only be used to increase savings, he said. "One of the reasons why the recession has turned into a depression is that Americans have meager savings, most of them in overpriced houses and overpriced stocks, and so they are sensibly reallocating income from consumption to saving."

By contrast, sponsoring infrastructure projects could reduce unemployment, increase worker confidence, and spur a recovery in spending, he said.

"There is a legitimate concern that many of the projects undertaken by the federal government will yield costs in excess of benefits," Posner said. "But the concern is exaggerated, because it ignores the benefits that such projects confer on fighting the depression as distinct from simply improving the nation's transportation system or reducing carbon emissions or buying military equipment to replace what has been lost in the Iraqi and Afghan wars."

Posner said the multiplier effects of a Keynesian plan make it a better option than simply reducing taxes. "The government's expenditure on buying goods and services (a road, a bridge, or whatever) increases output directly, but it also does so indirectly because the company that builds the project with government funds pays its employees and suppliers, and they in turn spend part of the money they receive, further stimulating output," he said.

We're Borrowing Like Mad. Can the U.S. Pay It Back? (Hat Tip JKibbe)

In its battle against the financial crisis, the U.S. government has extended its full faith and credit to an ever-growing swath of the private sector: first homeowners, then banks, now car companies. Soon, President-elect Barack Obama will put the government credit card to work with a massive fiscal boost for the economy. Necessary as these steps are, they raise a worry of their own: Can the United States pay the money back?

The notion seems absurd: Banana republics default, not the world's biggest, richest economy, right? The United States has unparalleled wealth, a stable legal tradition, responsible macroeconomic policies and a top-notch, triple-A credit rating. U.S. Treasury bonds are routinely called "risk-free," and the United States has the unique privilege of borrowing in the currency that other countries like to hold as foreign-exchange reserves.

Yes, default is unlikely. But it is no longer unthinkable. Thanks to the advent of credit derivatives -- financial contracts that allow investors to speculate on or protect against default -- we can now observe how likely global markets think it is that Uncle Sam will renege on America's mounting debts. Last week, markets pegged the probability of a U.S. default at 6 percent over the next 10 years, compared with just 1 percent a year ago. For technical reasons, this is not a precise reading of investors' views. Nonetheless, the trend is real, and it is grounded in some pretty fundamental concerns.


Humor, Video on Central Banks

Bush to Seek Rest of TARP Money At Obama's Request

President-elect Barack Obama asked President Bush to request the remaining $350 billlion of the Wall Street bailout fund, and the White House said Bush would do so.

"President Bush agreed to the president-elect's request," White House spokeswoman Dana Perino said in a statement. "We will continue our consultations with the president-elect's transition team, and with Congress, on how best to proceed in accordance with the requirements of the statute."

The request came shortly after Bush told a news conference that he would let Obama dictate when to seek access to the remaining $350 billion in financial sector rescue funds.

The request would permit Obama's administration to have the ability to use the money shortly after taking office.

Bush's assertion that the decision to tap the money rests with Obama was an acknowledgment of what has been an extraordinary ceding of power to the incoming administration. In fact, when it comes to the economy, Bush in recent weeks has let Obama be the driving force behind most recovery efforts.


The Companies That Will Dominate Retail Job Cuts

Several estimates from retail analysts predict the tens of thousands of retail outlets will close this year. Some put the number as high as 70,000 in the first half of 2009. Wall St. is bracing for a large number of bankruptcies in the sector, some of them public companies.

But, the largest fifteen or twenty retailers will not go out of business. They have the sales and balance sheets to make it through the next two or three years, unless the recession turns to a depression. To make it through the hardest retail environment in decades, most of them will have to cut under-performing stores. Now that the holiday shopping season is over and traffic has dropped off, the job cuts are likely to accelerate.

These are some of the nation's largest retailers and estimates of what they will have to do to cut expenses as revenues fall.


Shane Co., U.S. Jewelry Retailer, Seeks Bankruptcy  Jan. 12 (Bloomberg) --

Shane Co., the family-owned jewelry retailer with 23 stores in 14 states, sought bankruptcy court protection blaming "disappointing" holiday sales and a "grim" outlook on the deepening U.S. recession.

The 38-year-old company, based in Centennial, Colorado, listed both assets and debt of $100 million to $500 million in Chapter 11 documents filed today in U.S. Bankruptcy Court in Denver. The company lined up turnaround financing from an unspecified source, Shane said in a statement.

"The severity of this past holiday season dramatically impacted existing liquidity requiring the company to seek this bankruptcy protection," Chief Executive Officer Tom Shane said in the statement. "The company plans to continue operating the business without interruption."

Shane's bankruptcy filing comes amid a prediction today by ShopperTrak that retail sales will likely drop 4 percent in the first quarter. Retailers are digesting what may have been the worst holiday-shopping season in four decades, triggered by rising unemployment and a tightening credit market.


Cost of war (Graphic)

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blackrott's picture
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Posts: 20
Re: Daily Digest - Jan 13

The shane Co. going bankrupt. I thought diamonds had intrinsic value.  lol

Mike Pilat's picture
Mike Pilat
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Posts: 929
Re: Daily Digest - Jan 13

Hmm, that is a very interesting point! I would have bet that diamonds could be the next tulip bulb, except they haven't inflated quite as much. But now, as people really start looking for value shrewdly, they will realize that the diamond market is largely controlled by a few companies that artificially cap supply to prop up prices. Besides, better quality diamonds can be made in lab for a lower cost. I wonder when this will really come down and people will acknowledge that yes, even diamonds are not quite as scarce as we thought they were.

I still stand by gold.

joemanc's picture
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Posts: 834
Re: Daily Digest - Jan 13

Davos - perhaps for tomorrow's blog....Treasury Secretary nominee Tim Geithner was a tax just can't make this stuff up! 

Mike Pilat's picture
Mike Pilat
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Posts: 929
Re: Daily Digest - Jan 13

joemanc: I second that. As I think most of us can agree, the status quo is being maintained as we speak, corruption and all. It's not the least bit reassuring to hear members of Congress glossing over these "honest mistakes" and "simple oversights." I demand justice!

Fogle's picture
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Re: Daily Digest - Jan 13

another job well done, Davos.

you very much for all the hard work you put into this daily summery.
It is the one sure highlight of my day. And you never seem to take a
day of.

video of Newstopia is the best I have seen sofar. Extremely funny.
Especially the last comment about all currencies becoming worthless
followed by the dangling feet. Brilliant. Great find.

again. You are a great asset to this community. Keep up the good

cybernytrix's picture
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Re: Daily Digest - Jan 13

In the current environment, tax cuts won't prove to be a good idea, as
extra income will only be used to increase savings, he said.

A very astute observation! But can someone speculate what is the probability, of masses of people rioting and arsoning on the streets if some $350bn is given to banks and nothing is given back to the tax payers?

I am really shocked that a Chicago School professor talking favorably about Keynesian ideology!

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