I'm writing a few long posts—you've been warned—but that machine doesn't have Internet access right now.* So I'm just going to point to Kash, who writes about something else:

In looking at the data I was struck by how small (relatively) the worldwide market for gold really is. That means that relatively small inflows of funds into the market for gold could potentially have very large effects on the price of gold. And that in turn means that the price of gold could be very sensitive to a number of factors that have nothing to do with economic conditions or inflation....

[M]oving just 0.1% of the financial wealth of US households into gold could be enough to have a dramatic impact on the price of gold. Note that the same can not be said of other asset prices that we care about; it would be difficult to discern any price effects whatsoever of a move of an additional $50 billion more or less per year into the stock market (valued at over $50 trillion around the world), the bond market (also with a total value in the tens of trillions of dollars), or real estate.

[A] good advertising campaign by gold producers could be enough to move the price of gold. Imagine that an effective, sustained advertising campaign, targeted at wealthy, conservative individuals in the US, is able to persuade 25,000 of them per month to switch a portion of their financial assets into gold....Such an advertising campaign would have the effect of pushing $15 billion per year into the market for investment gold -- very possibly enough to have a significant impact on the price of gold, given how small the overall market for gold is.

[A] very similar thing happened to the market for diamonds in the middle of the 20th century. The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds.

Whether or not you like that analogy, the central point here is a very simple one. Since the market for gold is so small, its price may be strongly affected by things that have nothing to do with the state of the economy.

Kash's analysis—read the whole thing—should drive the final stake through the heart of the idea that, in the current economy, gold is anything more than what I quoted Warren Buffett as saying it is more than a year and one-half ago.

*In this context, does anyone know how to add the Windows Live Writer app to a Droid X?

I had a post on the federal deficit talks and the speeches made to 'resolve' the political emergency, perhaps to turn into a fiscal emergency, and surely to further idealogy. But this picture was so much more accurate.


(no attribution found)

It's now two years after the end of the Great Recession, and the unemployment rate has ticked downward just 9 pps (percentage points) since its 10.1% peak. Pundits call this an expansion since GDP has fully retraced its recession losses; but the unemployment rate tells a very different story.

(click to enlarge)


The chart illustrates the unemployment rate after 24 months since each recession's end spanning 1948 to June 2011. The business cycle dates are set by the National Bureau of Economic Research. The rates are indexed to the first month of each cyclical recovery for comparison, and the raw data are referenced in the table at the end of this post.

MORE AFTER THE JUMP!

More below the fold...

Industrial production was reported to have increased 0.2% in June as compared to - 0.1% declines in April and May. The entire gain was in mining and utilities as manufacturing output was unchanged.

The chart shows industrial production this cycle compared to other cycles. The old forecasting rule of thumb was that it took about a year from the bottom till industrial production surpassed its prior peak. You can see that on average this was a good rule in both mild and severe recessions. But this cycle some 19 months pass the bottom output is at 111.1 versus 120 at the peak. Despite all the talk of the rebound in manufacturing is clearly weak compared to historic norms and the thesis that manufacturing is returning to its old glory days is at best unproven.

More below the fold...

Not Scarcity, But Surplus is the Problem (Just as Dismal, though)

by Noni Mausa, lifted from comments at Economist's View

They were discussing scarcity last week at Economist's View. But to my mind scarcity isn't our core problem. I wrote (and then edited a bit for this post):

=======

Yes, scarcity of resources is fundamental to econ theory, and it's a real concern, not just an abstract factor for calculations.

But less often mentioned is the truism that human beings, working in concert, produce surplus. Generally this is very great surplus. In any society beyond the most desperately poor, this surplus is sufficient at least to support the 1/3 to 1/2 of the population who cannot support themselves-- children, and the elderly and disabled...

This surplus ... inevitably leads to the specialized class we would call the wealthy. This clan has existed as far back as we have written records. They may be more useful, or less useful, to their host societies, but they can only exist when those societies produce large surplus.

Economics talks about managing scarcity, but ... our real problem is managing the surplus.

Sandwichman takes a stab at Ecological Headstand with Tenacity of Textbook Truism.

CBS Marketwatch Devalues their Brand. Kash views the carnage:

Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.

Yes, quite. In fact, some specific numbers are provided in this column: federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.

I've made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that size would reduce the US's 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.

So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they're really advocating is a new and deliberately caused Great Depression. And not just in economists like me.

Can it really be that bad? Well, yes. This is what Marketwatch allows to be given their imprimatur, as one Kurt Brouwer presents "in a Q&A; format...what I believe you need to know at a basic level":

If we do not raise the debt ceiling by August 2nd, we will not default on Treasury obligations. Nor, will we have trouble making Social Security payments. However, there would be a big drop — roughly 44% — in government spending because that percentage represents the difference between government revenues which would be about $200 billion for the full month of August and [sic] $172 billion for August if we start counting after the first week when the deadline hits. Spending is slated to be over $300 billion that month.

Kash is right; that's about $100B a month. So how does Brouwer solve that $100B+ shortfall?

The [Bipartisan Policy Center] study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there’s enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).

That leaves you with about $39 billion to fund (or not fund) the following:

Defense vendors ($31.7 billion)

IRS refunds ($3.9 billion)

Food stamps and welfare ($9.3 billion)

Unemployment insurance benefits ($12.8 billion)

Department of Education ($20.2 billion)

Housing and Urban Development ($6.7 billion)

Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion) [formatted for style]

Oh, he doesn't.

Now, does Brouwer prioritize payments by "bang for the buck" (multiplier effect)? No. Paying interest on debt supersedes even the Social Services. If you're looking to do as little damage as possible to your domestic economy (this is our government, not China's), you don't prioritize paying the interest on the debt (multiplier well <1, especially in the current businesses-are-cash-rich environment) before food stamps, welfare, and UI (multiplier for all >1; those people are liquidity-constrained in a way that coupon-clippers never will be).

And if you want to be a viable long-term investment, you don't cut your current investment in long-term human capital (DoE, EPA).*

So what do you do, pay bond interest, or pay for parts and repairs on that military equipment that keeps active-duty military active? If you're sane, you put troops on the line in priority over investors whose interest payment won't be the source of their next meal or the protection from that next IED.

What does Brouwer say about these choices?

No doubt picking and choosing who gets paid and who doesn’t would be chaotic. And, lots of programs would not get their funding and that would lead to plenty of screaming. Nonetheless, it should be clear from this exactly how much we are spending in excess of government revenues. And, that could and should lead to a sober assessment of what government can and cannot do.

Ayup. Government can, if they ignore Brouwer's advice, keep Brad DeLong calling this "The Little Depression," keep people employed, and set up future growth with trained workforces and people who are not starved into unhealthiness.

Or it can do what Brouwer wants, and pay bond market investors who don't need the cash while soldiers die and people starve.

Mark Thoma should be ashamed to share pageviews with this guy.

*As Beverly's post notes, Texas notes that "beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce." Conservatives used to see the value of human capital development in creating an environment for jobs, and I still hold to that one.**

**Rick Perry has, of course, reversed this, so anyone looking to start a business in the mid-2030s might do well to avoid the Lone Star State. Unless, of course, everyone else follows suit.

If Obama's first term is a different thing than GW's third term, why is Obama's Secretary of Defense telling US troops that that they're in Iraq because the US was attacked on September 11?

Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that's without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.
   
   I don't see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude's less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.
   
   The only proper conclusion from the entries after the first two would be that Pete Davis can't do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, "Pete, you know better, and you’re just enabling them." The integrity of posters at CG&G doesn't usually get questioned so directly in the mainstream.
   
   
2. And there's good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission's "making Social Security solvent for future generations" fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:
   

   Actually, the government should budget the way families should. It's just not clear that families actually do what they should. Both families and the government should budget countercyclically -- their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

   
   Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn't work so smoothly in reality as in the standard models. Or both. So it's probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

More below the fold...