The Tobin Q ratios for Germany and America tell us Elizabeth Warren and David Dayen are wrong

Louis Woodhill, here:

Put simply, a Tobin Q ratio higher than 100% means that a company is creating economic value, and a Tobin Q below 100% means that a company is destroying value.  The most fundamental social responsibility of a company is to add value to the capital it employs, so the most fundamental job responsibility of a corporate CEO is to keep the Tobin Q ratio of the company he or she leads above 100%. 

Writing for The New Republic, progressive David Dayen argues:

“There’s proven evidence that this model of corporate governance [Warren's] can work. “Co- determination,” the term for worker representation on corporate boards, has created a form of capitalism in Germany where workers are far more equitably compensated and decisions are made with an eye toward long-term goals.”

The problem with this argument is that Piketty’s data shows that, since 1995, America’s Tobin Q ratio has averaged more than 100%, while Germany’s Tobin Q ratio has averaged about 55%.  In other words, America’s evil, rapacious corporations are creating economic value, while Germany’s enlightened companies are doing the equivalent of burning 45% of the euros entrusted to them.

Nothing Else Is Working, So The US Federal Reserve Should Be QEing Gold Instead Of Treasuries

So said Christopher T. Mahoney, a former Vice Chairman at Moody's, for Project-Syndicate last June, here, just not in so many words:

It may be that when rates are at the zero bound and the banking system is broken, the appropriate policy instrument may not be to buy bonds from banks, since buying them doesn’t seem to affect the price level. Bernanke was certainly correct that the Fed could create inflation by dropping money on citizens from helicopters, but that would be a rather blunt instrument.

It seems to me that the Fed needs to buy something besides Treasury and agency bonds. The obvious alternative to Treasuries would be foreign government bonds, or gold. Since the former would constitute a “currency war”, that would seem to leave gold.

I have no doubt that if the Fed were to announce that it will buy gold until it has achieved 2% inflation and 6.5% unemployment, it would get there. It would disrupt the gold market (and enrich some of the wrong people) but that is a small price to pay. No foreign government could object to the Fed buying gold; it’s been doing it for 100 years.

But I said it more or less three times a year ago this month, here, here and especially here:

The United States at present is in the throes of a deflationary collapse of monetarist making, not of dollar currency but of credit money, and it is the principal reason for the collapse of GDP. One of the largest sources of the "currency" of credit money in recent years has been mortgages, which are now effectively unacceptable as collateral because of the rot permeating the system in the form of defaults and underwaters.

Federal Reserve policy has actually been removing such collateral from circulation, along with US Treasuries, by placing it on its balance sheet. But since there is nothing "real" behind the dollars the Fed replaces this collateral with, there is no corresponding expansion of credit in size to match the former vigor of the process.

So perhaps the Fed should QE gold instead of MBS and Treasuries to provide something real behind the money created which would give that money a surer basis in collateral.

Central banks around the world have been buying gold in quantities not seen in 30 years in order to fill the collateral gap. The Fed should join them.

Louis Woodhill: Premature Signifi-ca-tion

not seasonally adjusted civilian labor force February 2008 to February 2014

Louis Woodhill, here, evidently referring loosely to the seasonally adjusted measure of the civilian labor force level, which is up 523,000 on January 1 and 264,000 on February 1 to 155,724,000:

It was extremely significant that labor force participation continued to move up during February, after its big surge in January. This confirmed that allowing extended unemployment benefits to expire in late December was the right thing to do.

Progressives predicted that limiting unemployment benefits would cause people to drop out of the labor force, but the exact opposite occurred. It turns out that people respond to incentives. Who knew?

Otherwise, I don't know what he's talking about.

The not seasonally adjusted figure was down January 1 and up February 1, more on which below. The seasonally adjusted participation rate was up slightly on January 1 and flat on February 1. Not seasonally adjusted the rate was down Jan. 1 and up February 1.

In the key 25-54 age group, the labor force level is up both seasonally and not seasonally adjusted two months straight: 607,000 and 402,000. That's important because this measure of the vital core of the workforce has been in freefall from the 105 million level reached before the Great Recession. But as it is, the members of this group are still struggling to pop back above 101 million. The deficit in the level of this group's participation is key to a jobs recovery: 4 million people. It's hard to tell why they are back in the labor force in the last two months. It could be their unemployment benefits ended, as Woodhill says. It could also be they've finished new degrees and certifications and have reentered the fray. It could be both of these things, and more.

Not seasonally adjusted, unfortunately, the civilian labor force level still looks troubled to me. Since the beginning of 2011 the level has made three consecutive new highs and two consecutive higher lows, until January 1, 2014 when the low at 154,381,000 fell below the March 1, 2013 nadir of 154,512,000. That broke the pattern of higher lows. At least the level went up on February 1.

The real test is if we make a new high in the summer of 2014 above 157,196,000, the last high and the all time high on July 1, 2013.

Arguably had the Great Recession not intervened, we'd be talking about levels more like 164 million by now. That's how far we still have to go.

Louis Woodhill: Gold As Money Is Inevitably Deflationary In Terms Of Its Supply

So says Louis Woodhill for Forbes, here:

"The most fundamental issue that determines the workability of a gold standard is whether it attempts to use gold as money.  Any gold standard system where the size of the monetary base is determined by the physical supply of gold will eventually suffer a deflationary collapse.  The economic catastrophe that occurred in 1930 was inevitable, given the design of the gold standard system in use at the time. ...

"The use of gold as base money would quickly become the biggest single source of demand for gold, just as was the case during the years prior to the Great Depression.  Sooner or later, this new demand for gold would cause the real price of gold to start rising.  This would automatically cause the real value of the dollar to rise, precipitating a financial and economic crisis.

"Our highly leveraged financial system simply cannot tolerate monetary deflation.  During a financial crisis, everyone tries to become more liquid at the same time.  That is, everyone tries to increase their holdings of money, because the possession of money itself is the only thing that can guarantee that you will be able to pay your debts.

"If gold is money, and money is gold, this means that, once a liquidity crisis started, the demand for gold would increase.  This would drive up gold’s real value even farther, intensifying the crisis.  A destructive feedback loop would develop, leading to a complete meltdown of the financial system and the real economy.  This is exactly what happened in 1930."

It should be added that a monetarist system, by way of contrast, cannot tolerate credit deflation, but that is exactly what the United States is now facing with total credit market debt outstanding slowing to a crawl of $1.17 trillion added per year between 2007 and 2012. At the very slowest it should be growing at a rate of $4.33 trillion per year by historical measures, and at its fastest by $8.31 trillion per year.

The United States at present is in the throes of a deflationary collapse of monetarist making, not of dollar currency but of credit money, and it is the principal reason for the collapse of GDP. One of the largest sources of the "currency" of credit money in recent years has been mortgages, which are now effectively unacceptable as collateral because of the rot permeating the system in the form of defaults and underwaters.

Federal Reserve policy has actually been removing such collateral from circulation, along with US Treasuries, by placing it on its balance sheet. But since there is nothing "real" behind the dollars the Fed replaces this collateral with, there is no corresponding expansion of credit in size to match the former vigor of the process.

So perhaps the Fed should QE gold instead of MBS and Treasuries to provide something real behind the money created which would give that money a surer basis in collateral.

Central banks around the world have been buying gold in quantities not seen in 30 years in order to fill the collateral gap. The Fed should join them.

Twelve Times Today's Silver Price Means $279 Gold

Louis Woodhill doesn't get there by the same rule, but he's in the same ballpark in this story from May 2012, when the average price of gold was $1,586:

[I]t only makes sense that the gold price be set by the application of a rule, and not via discretion exercised by “experts”.

It is possible to imagine catastrophic consequences to setting the value of the dollar in terms of either a gold price of $800 or $1600/oz.  In The Golden Constant, Roy Jastram argued that, over time, gold maintains its value in terms of the general price level.  If Jastram is correct (and he may well be), the gold price that would be consistent with today’s general price level would be around $225/oz.

Based on the average price of silver in May 2012, twelve times that yielded $343 gold.

Josh Brown Doesn't Think Too Much Of Your Paper Gold

Oliver Cromwell

And he's not too fond of the real thing sitting right in front of you, either, here:

'It is utterly uninteresting to me and gold equity investing - things like paper ETFs and the shares of horrible gold miners - seems to defeat the whole purpose of an end-of-the-world asset class in the first place. I promise, should a torrent of plague and genocide wash across the land on a roaring floodtide of blood and economic catastrophe, your stupid-ass "stock market gold" shan't be left unscathed.  And if I am dismissive of it as an investment, you can imagine how I feel about it as an actual real-life medium of exchange - I live in the United States of America in the 21st Century and I have no interest in exchanging dollars in my savings account for something that hedge funds and sovereign governments can pump and dump at will.'

Well, they can pump and dump worthless paper currencies, too, and are. That's the problem. But as I pointed out here last year, gold has been on a tear ever since paper gold in the form of GLD made its appearance in November 2004. At the time, the US Dollar Currency Index opened the month at 81.82, just a little under where it is today, and then promptly rose, but gold closed that year under $440 the ounce, as it had the year before. After dropping about 4% on Friday to $1,501 the ounce, gold today is presently down another 6% to $1,404, but even that is a price which is much too high even though gold is now technically in a bear market, down over 26% from the September 2011 highs around $1,900.

They have made a market of gold which didn't exist before, and the price went up, up, up, just as they have made a market of mortgages and of houses through securitization and commoditization, and the price went up, up, up, until it came down, down, down.

I'd say gold has about another $1,000 down to go to get to fair value, but if you follow Louis Woodhill a price in the $200s is more like it, and John Tamny rather likes it at $800. Which is to say, there is lots of distortion in markets generally which is preventing price discovery.

Time will tell. So keep your powder dry as they say, if you've got any left. If you don't, maybe you'll have to sell some gold.

Libertarian Louis Woodhill Panders Left And Right

Louis Woodhill, here, who wants to go over the cliff to save the country:


"The electorate, as a whole, understands economics. ... (collectively) the voters know everything . . .."

Which is why they voted for divided government. Democrats were right! Republicans were right!

Uh huh.

Price Of Gold Adjusted To The Purchasing Power Of The Dollar

What is today's fair value price of an ounce of gold? Is it really $1,579 the ounce?

In 1913 the price of gold was still fixed at $20.67 the ounce and remained there until FDR devalued the dollar and fixed the price at $35 the ounce. It wasn't until 1971 that gold convertibility was finally ended and the dollar allowed to float completely freely. Today's gold price represents a price increase of over 7500 percent from $20.67 the ounce, which was gold's prevailing price after the War Between The States until the establishment of the Federal Reserve in 1913 and right up to the Great Depression election of FDR in 1932.

Does that sound right to you? 7500 percent?! 

One way to decide is to see what's happened to the dollar in terms of its purchasing power since 1913, which marked the end of a long 35 year period of dollar purchasing power stability.

From 1913 through 2011, the dollar's purchasing power has declined so much that it took $23.40 to buy in 2011 what $1 could buy in 1913. Another way to say that is the dollar has suffered a devaluation of 2340 percent over the period.

So if you applied that percentage to the price of gold in 1913, you'd arrive at a gold price in 2011 of $484 the ounce, suggesting that today's gold price is inflated by about 226 percent and needs to fall about $1,095 the ounce.

Opinions vary on the fair price of gold, from $218 (Woodhill's calculation of purchasing power) to $800 (Tamny's ten year average) and even today's market value around $1,500 (Lewis).

I think it is interesting that gold ended both 2003 and 2004 below $440 the ounce. It was in November of 2004 that GLD, the SPDR Gold Shares, first made its appearance on the NYSE, making daily speculation in gold like daily trading in a stock.

It has hardly looked back since, but it probably should, and probably will.

The UK Lets Taxes Rise in 2010, Gets Ugly Recession in 2012

Louis Woodhill for Forbes details the history here, wondering why they call tax increases in the throes of an economic crisis Conservatism in the UK.

Maybe because Prime Minister Cameron isn't really a conservative, just like George Bush wasn't a conservative (junking free market principles to save the free market system). The top marginal tax rate went from 40 percent to 50 percent in 2010 in the UK.

Conservatism hasn't been practiced in either place in a very long time.

Cain's 999 Plan Would Produce Faster Economic Growth Than Perry or Romney

So says Louis Woodhill for Forbes, here:

Comparing the Republican candidates’ tax plans as written, Cain’s “9-9-9” proposal is the best, because its 9% (effective) corporate income tax rate would produce faster economic growth than Perry’s 20% rate or Romney’s 25% levy.  Cain’s plan has a number of problems, but these could be fixed if he were to give up on the notion that it should be “revenue neutral”.

Given that Cain has the best plan for economic growth, it is not surprising that the latest polls show him leading the Republican pack.

This having been said, Cain’s 9-9-9 plan is not as good as the FairTax, which Cain himself says is his ultimate goal.  The FairTax , which taxes only consumption spending, would yield the fastest economic growth of any tax system.  The FairTax plan has also had the benefit of years of analysis and refinement to minimize the distributional inequities that would attend any kind of fundamental tax reform.

Mr. Cain should start emphasizing that economic growth is much more important than revenue neutrality, and he should promise to refine his plan so that no income group ends up having to pay much more than they would under the current system.  If he does so, he, like fundamental tax reform, will be unstoppable.

The Federal Reserve Should Stop Paying Interest On Reserves

So says Louis Woodhill, here:

While the IOR rate has been constant at 0.25% since December 2008, the 90-day T-bill has fallen from an average of 0.14% in November 2010 (when QE2 commenced) to zero today.

Most people believe that an inverted yield curve heralds a recession, and right now we have an inverted yield curve at the point where new money is supposed to enter the economy. Not surprisingly, more and more economic indicators are now signaling recession. And, with inflation accelerating, the specter of stagflation once again looms over the land.

America does not need QE3, it needs a complete reversal of Fed policy. The Fed should end IOR. Then it should announce an upper limit for the gold price and use Open Market operations to contract bank reserves as needed to enforce this ceiling price. To accomplish this, the Fed would have to let interest rates be set by the markets, rather than by fiat.

The ultimate solution for a stable dollar, stable financial markets, and a stable, growing economy is for Congress to pass H.R. 1638, which would require the Fed to keep the value of the dollar stable in terms of gold. Until then, let’s pray that the Fed learned its lesson with QE2, and that it doesn’t give us QE3.

Tax Reform Had Better Be Revenue Neutral, Otherwise No Thanks

Louis Woodhill isn't fooled by Gang of Six types, Gang of Twelve types, or any other types looking for increased revenues from tax reform flying under the banner of eliminating tax loss expenditures while making the Bush brackets permanent:

Republicans want to reform the tax code and broaden the tax base in return for lower tax rates.  However, they must insist that such reform be (at most) “revenue neutral”, because an effort to get more revenue via reform would mean higher tax rates, and therefore lower economic growth.  An increment of economic growth provides somewhere between 27 times and infinitely more benefit to federal finances than raising taxes.  So, no thanks.

And he says No Thanks to about seven other things, too, here.

EU Growth Rate 2000-2010 at 1.56 Percent

Yeah! Let's be more like Europe!

Wait. We already are.

Data here and here.

What Baseline Budgeting Does to Spending in Ten Years

If you listen to Larry Kudlow, you know that he believes that baseline budgeting contributes only as much as 4 percent to the annual increase in spending built-in to the process.

Many others assert the number is more like 7 percent.

Let's see what 7 percent does to a budget over ten years.

Obama submitted a budget for fiscal year 2012, which was defeated in the Democrat-controlled Senate 97-0 in the spring. It called for $3.729 trillion in spending for the fiscal year 2012, set to begin in October 2011.

Let's assume his spending proposal had passed both houses of Congress without objection, and then add 7 percent to the total spending to get the next year's budget, also passed without objection, and so on for ten years.

Here are the ten annual increases, in billions of dollars: 261, 279, 299, 320, 342, 366, 392, 419, 448, and 480. The built-in new spending after ten years totals $3.606 trillion. (Coincidentally, to keep the AAA bond rating from Standard and Poor's, its Sovereign Ratings Committee was looking for $4 trillion in spending cuts today as a first step. It didn't get them.)

That gives you a total budget in 2022, ten years later, of $7.335 trillion, just $123 billion shy of a doubled budget in 10 years, and just what you should expect under the rule of 72.

This kind of doubling is fairly typical for actual spending for any ten year period you pick in the last forty or fifty years, and explains how we got into the pickle in which we presently find ourselves.

So spending increases are built-in at about 7 percent, and Kudlow is underestimating.

Growth to pay for these increases, however, is not built-in, and can never be. It's highly unpredictable and for that reason alone baseline budgeting should be abandoned.

But there's another reason. There hasn't been a single decade since the 1930s where average real growth has come even close to 7 percent, as Louis Woodhill has shown here. Our best decade was way back in the 1940s, when real growth measured 5.57 percent. We haven't done as well since.

There's only one word for what passes for America's spending policy: insanity.

We haven't ever been able to afford what we've been doing.

Employment Deterioration Under Obama More Than 2 Times Worse Than Under Bush

Louis Woodhill has the numbers here:

Over Bush 43′s two terms in office (96 months), America lost ground with respect to full employment by an average of 94,000 jobs per month, for a total of 9.1 million positions. During Obama’s first 29 months in office, the U.S. moved an additional 6.0 million jobs away from full employment, equivalent to an average rate of 206,000 per month.

So, in terms of the rate of employment deterioration, Obama’s presidency has been more than twice as bad as George W. Bush’s. ...

In June 2011, America had 2.9 million fewer people working than when Obama was inaugurated.

Louis Woodhill Thinks Gold at $218 the Ounce is About Right

Here, based in large measure on what it can buy, in relative terms.

Here's a similar way to look at it from measuringworth.com, using the 1913 price of gold in dollars:

Either way you cut it, gold is presently overvalued.

Growth in 2000s 38 Percent Lower Than 1930s

Louis Woodhill doesn't much like the Paul Ryan plan because of "static analysis," here, but fails to note that Ryan's is an intellectual and political concession to the status quo. This has been the GOP's problem for decades, and why we perceive the party to be "moderate" and a paler reflection of liberalism. Why vote for that when you can get the real thing from Democrats?

Unsurpisingly, support for the Ryan plan is overwhelming in the over-55 set, for whom the plan changes nothing. Those who stand to lose under it, however, and lose votes, understandably don't like it. America's problem has been and remains addiction to socialism. That Ryan is trying to chip away at this is really what drives liberals crazy, but America simply cannot afford to continue spending $30,000 per year subsidizing every retiree in the country.

Woodhill unintentionally provides support for this point in his brief history of economic growth, which should be a wake-up call for conservatives who need to re-assess their past support for Bush era Republicanism. 

Average real annual rates of growth by decade:

1930s: 2.71 percent

1940s: 5.57 percent

1950s: 3.50 percent

1960s: 4.20 percent

1970s: 3.18 percent

1980s: 3.24 percent

1990s: 3.40 percent

2000s: 1.67 percent

"This last number is shocking. Our real growth rate in the 2000s was less than half of the average (3.5 percent) from 1930 to 2000, and it was 38 percent lower than that of the 'Great Depression' decade of the 1930s."

Yes, the 2000s, when George W. Bush out-liberaled the liberals and expanded government more than at any time since the Great Society programs of the 1960s, with his massive "drugs for seniors" program. Why, he even got liberals to vote for two wars at the same time. Talk about guns and butter.

No wonder Democrat liberals hate him. No wonder growth went nowhere.

One Man's Austerity is Another Man's Tax Increase

When it comes to "austerity," most people with common sense think "frugality," "reduced spending," and generally going on a diet of lower consumption. 

Louis Woodhill reminds us here that what people without economic common sense mean by it is tax increases. Which is why Obama, and some Republicans, want to raise yours.

Woodhill knows we're already in the toilet, and thinks raising taxes now is tantamount to flushing it.

He makes a good case for repatriating capital by lowering corporate income tax rates. In view of the fact that corporations contributed only about $300 billion to federal revenues in 2008, he might very well be right: most of their money is "over there," escaping taxation.

Zen and the Art of Economic Cycle Maintenance

In which Louis Woodhill asks the disciples of John Mauldin:

“In a time of famine, would you plant less rice?”

Read it all at Forbes.