Fed Pumping Money into the Economy

This is a very good catch, and an underreported story. The Federal Reserve in the US is surreptitiously pumping money into the economy, fueling cash available for speculation. This is propping up the economy in the near term, especially in light of the contuing decline of the housing market, but it may not be sustainable. The Big Picture blog has the details. Bottom line:

This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:" While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives -- even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand -- print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.

Its not just the increase in Money Supply that should be concerning to investors -- its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?

Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.

Concession Obsession?

Just a quick observation about something I see rather often among negotiators who really like to compromise.

Of the five core negotiating styles (competitiion, avoidance, accommodation, compromise and collaboration), all have their place. Some are better to deploy in some situations than others, depending on the magnitude of the stakes involved and the degree to which the negotiating parties will retain a relationship of some sort following the bargaining process.

I myself have a default bargaining style of accommodation with a strong follow up of collaboration. This means I'm very good at understanding and looking out for the other party's interests, but I will also assert myself to get my interests addressed as well. I tend to keep relationships intact. I'm experienced enough to behave very competitively as the situation warrants. Other people have other strengths, and they are all useful.

Of all the bargaining styles, the one I deploy the least is compromise. I don't like to just split the difference if I can avoid it. I'd rather change the scope of the issues somehow to work around the arbitrary middle ground, and I'm also a bit pigheaded and passionate about standing up for a solution I think is right. I never argue for something I don't believe in, and when I believe in it, I'm all in.

Whatever my own biases, compromise (or "split the difference") is a good strategy at the end of a bargaining process just to get a good deal done, but the people whose first tendency is to compromise tend not to do very well as bargainers.

Why?

They are very susceptible to giving up their own goals very quickly, and very often, they soften their counteroffers before they even gain a concession from their counterparts. There's more than one way of negotiating against yourself. There's nothing wrong with setting ambitious goals: in fact, you should do so. But if someone comes at you with a fairly aggressive, but more or less credible, bid or offer, stick to your guns. Don't soften your counteroffer, making an implicit concession up front. Let the process work for you. Don't concede if the other side is not also conceding, or else, expand the field of issues in play so that you can get something else you want, perhaps something more valuable to you, in exchange for your concessions.

Compromise is a good secondary strategy for any bargaining situation. But the other approaches are almost always better primary strategies, depending on the stakes and on any future relationship interests.

Economic Populism in America is Back

I mentioned before the elections that economic populism looked like it would be a winner, if the polls were right. The polls were right and Democrats won big. In my home state of Virginia, George Allen lost to former Secretary of the Navy under Reagan Jim Webb, a Democrat, who is very much of the economic populist mold. He has an editorial in today's Wall Street Journal:

ELECTION 2006
Class Struggle
American workers have a chance to be heard.

BY JIM WEBB
Wednesday, November 15, 2006 12:01 a.m.

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Incestuous corporate boards regularly approve compensation packages for chief executives and others that are out of logic's range. As this newspaper has reported, the average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

In the age of globalization and outsourcing, and with a vast underground labor pool from illegal immigration, the average American worker is seeing a different life and a troubling future. Trickle-down economics didn't happen. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth. At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners' pockets rather than from insurance, and 47 million Americans have no medical insurance at all.

Manufacturing jobs are disappearing. Many earned pension programs have collapsed in the wake of corporate "reorganization." And workers' ability to negotiate their futures has been eviscerated by the twin threats of modern corporate America: If they complain too loudly, their jobs might either be outsourced overseas or given to illegal immigrants.

This ever-widening divide is too often ignored or downplayed by its beneficiaries. A sense of entitlement has set in among elites, bordering on hubris. When I raised this issue with corporate leaders during the recent political campaign, I was met repeatedly with denials, and, from some, an overt lack of concern for those who are falling behind. A troubling arrogance is in the air among the nation's most fortunate. Some shrug off large-scale economic and social dislocations as the inevitable byproducts of the "rough road of capitalism." Others claim that it's the fault of the worker or the public education system, that the average American is simply not up to the international challenge, that our education system fails us, or that our workers have become spoiled by old notions of corporate paternalism.

Still others have gone so far as to argue that these divisions are the natural results of a competitive society. Furthermore, an unspoken insinuation seems to be inundating our national debate: Certain immigrant groups have the "right genetics" and thus are natural entrants to the "overclass," while others, as well as those who come from stock that has been here for 200 years and have not made it to the top, simply don't possess the necessary attributes.

Most Americans reject such notions. But the true challenge is for everyone to understand that the current economic divisions in society are harmful to our future. It should be the first order of business for the new Congress to begin addressing these divisions, and to work to bring true fairness back to economic life. Workers already understand this, as they see stagnant wages and disappearing jobs.

America's elites need to understand this reality in terms of their own self-interest. A recent survey in the Economist warned that globalization was affecting the U.S. differently than other "First World" nations, and that white-collar jobs were in as much danger as the blue-collar positions which have thus far been ravaged by outsourcing and illegal immigration. That survey then warned that "unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash" in America that would take us away from what they view to be the "biggest economic stimulus in world history."

More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests. The "Wal-Marting" of cheap consumer products brought in from places like China, and the easy money from low-interest home mortgage refinancing, have softened the blows in recent years. But the balance point is tipping in both cases, away from the consumer and away from our national interest. . .

That's most of the article, but it's an exerpt, per copyright law. What's old is new again, folks, and the Repoublicans are not likely to gain back the House or Senate in 2008.

Why?

On the House side, the Dems won big: they needed 15 seats for a majority, and they got double that, mostly in already Democratic states where the have other majorities. That means those seats won't flip back easily. On the SEnate side, of the 33 seats up for reelection next time, 21 are Republican. That means Republicans will be on defense. What's more, after majority control flips, people form the former majority tend to retire, so expect some open seats with no incumbents for Democrats to shoot at in the Senate next time. Congressmen must seek reelection every two years, but Senators get six year terms. Get used to a Democratic Congress, folks.

Right now, the $2 billion corporate lobbying industry in DC is trying to find ways to do business with Democrats, and to be sure, there are Democrats who want to take campaign money from big business. But then again, that's not the same as getting policy guidance and for the first time in who knows when, even the social conservatives among the Democrats seem to be pretty united on the pro-labor and economic populist issues Jim Webb articulates above.

Smart business will see what's coming and adjust. I've seen this coming for a while and have been writing about it. If you've been a regular reader, this is no surprise to you.