Geoff Gannon February 10, 2009

On the President’s Address

President Obama spoke about the economy last night. I am not a political commentator, so I may not be able to correctly score the politics of the fight.

The President began by painting gloomy word pictures of a Depression – without actually using the “D” word:

“…They can’t pay their bills and they’ve stopped spending money. And because they’ve stopped spending money, more businesses have been forced to lay off more workers. Local TV stations have started running public service announcements that tell people where to find food banks, even as the food banks don’t have enough to meet the demand… As we speak, similar scenes are playing out in cities and towns across the country. Last Monday, more than 1,000 men and women stood in line for 35 firefighter jobs in Miami.”


Although the President said – correctly I think – that most economists agree a stimulus is necessary, agreeing a stimulus is necessary and agreeing it is sufficient are two different things. Economists don’t agree a stimulus is sufficient. Nor did most of them think very highly of a New Deal redux like this one until more proven measures – like monetary stimulus – were already depleted.

What economists do agree on is that the economy is very bad and that the number of tools that have been tried before and not yet tried this time around is very low. In technical terms, they are advocating a kitchen sink approach.

Seventy years of social science have given government a whole new toolbox with which to approach the same problems (of 1929) and despite the change in process the outcome has remained the same.

Eventually, this will make for an interesting case study. The idea that the Great Depression was a unique and unrepeatable event will be challenged. The idea that lessons learned in retrospect can be applied in the future has been seriously compromised. It is not clear that in an ever-changing system like an economy, theory could keep pace with reality. Prescriptive economics may not work. But prescriptions have to be made nonetheless.


The President made some errors last night. He gave in to partisan temptations and reminded Republicans of their previously profligate ways.

An excellent point – if he was aiming for honesty – but honesty is rarely the best policy. Utility is.

He needs to pass bills – not win elections – and maybe his little reminders helped Democratic chances at the ballot box, but he hurt the country’s chances of getting the bills it needs passed. It was an understandable but idiotic mistake. It wasn’t just partisan politics, it was poor tactics.

The President is a lot weaker than he appears. Constitutionally, his legislative powers are – well – non-existent. A President is not a Prime Minister.

The man himself is popular. His policies are not. His party’s majorities are large, but not large enough to pass bills in the Senate – even without any Democratic defections. And there will be defections. Remember, this is a Democratic caucus that includes both a Socialist from a Vermont and a Conservative from Nebraska.

The President, still glowing with inaugural stardust, has had a tough time passing a stimulus bill that most Senators – on both sides of the aisle – actually support in principle. Sure two-fifths of them voted against it, but when has a Senator’s vote told you anything about his principles?

The Hard Part

Most Senators want a stimulus – some stimulus – to pass. The TARP is a different story. It is not popular. It is merely necessary.

Today, the Secretary of the Treasury will present the latest incarnation of the bank-bailout.

The public will hate it. They won’t understand it – neither will I, but that won’t stop me from writing about it – but they will hate it.

The job of Secretary of the Treasury of the United States is one of the most thankless jobs on planet earth.

Throughout history, the post has been filled by some of the country’s most illustrious men – and none of them, not one – has ever gone on to be President.

Clinton is better known than Geithner, but Geithner has the more important – and more difficult – job.

Today, Geithner has to sell the American people something they don’t want.

The President paved the way for him by painting a very dire picture.


The situation is dire. It is no longer enough to say this is the worst “recession” since the Great Depression. We can now say the only thing comparable to the current economic downturn is the Great Depression.

I’ve been reading a lot of fourth-quarter earnings call transcripts over at Seeking Alpha. And I can tell you the anecdotal evidence is worse than the composite picture.
The biggest thing that jumps out at you – especially when you read about the kind of simple, predictable, “recession resistant” businesses I like – is just how clear the signs of deflation are.


Deflation is an increase in the perceived value of cash. When the value of cash rises, the cash price of everything else falls. This is usually when deflation is recognized by economists and journalists. But the root cause of deflation is not a decrease in man’s appetite for goods and services but an increase in his appetite for cash.

A lot of asset prices – like houses, stocks, bonds, gold, and oil – are driven in part by the prices themselves.

What Charlie Munger said about stocks applies equally to other quoted assets:

“They are valued partly like bonds, based on roughly rational use value in producing future cash. But they are also valued like Rembrandt paintings, purchased mostly because their prices have gone up so far.”

This Rembrandt effect makes quoted asset prices unreliable indicators of deflation. Yeah – cash is worth a lot more relative to houses, stocks, and oil than it was a year ago – but is that because the value of cash has risen or because the value of those assets has fallen due to a total Rembrandt reversal?

It’s too difficult to insulate each side of the price ratio from the other. But when demand for goods and services that are repeatedly purchased without much awareness of price suddenly drops off, you have a strong indication that deflation is already occurring.

The reason is simple. The other side of the ratio is pretty stable. For instance, the value of hair cuts doesn’t change much.

Yet, Regis (RGS) reported its first same-store sales decline in 87 years. Regis controls about 4% of the U.S. hair salon industry and operates different salons under different names; so it’s unlikely that its horrific December sales numbers were company specific. Industry-wide numbers are probably about the same.

That means customer counts at U.S. hair salons were down over 10% in December. That doesn’t happen in “normal” recessions. The clear culprit is an increase in the perceived value of cash.

Consumers want to hoard cash more than they want to get their hair cut. That means deflation. And that’s bad.

The Press

Also bad: the performance of the press last night.

These are not normal times. Last night both the President and the country wanted to converse about a single topic of extreme importance – the economy – and the press (with a few exceptions) treated the whole thing like business as usual.

The President’s worst moment was when he answered the Alex Rodriguez steroid question with the same serious tone he had used while explaining the country’s dire economic conditions.

In the President’s defense – he has one setting: serious.

But the combination of the press throwing out the same political potpourri and the President’s face giving equal weight to questions on the economy, baseball, and Iran undermined the purpose of the press conference.

Last night was supposed to be about the economy. No one cares about Iran. Times change and the press needs to change with them.

Related Reading

On Keynes, the Stimulus, and Old Ideas