Fed Watch: Rate Cuts Increasingly Likely

Tim Duy says "the Federal Reserve is inching closer to lower interest rates":

Rate Cuts Increasingly Likely, by Tim Duy: This week’s data flow only confirms what was apparent last week – the US economy deteriorated as we headed into the third quarter. By now, there should be no doubt that the US consumer is devoid of resources to further propel spending. And without an active consumer, the US economy will undoubtedly stagnate, especially since the rest of the world appears equally reliant on the US consumer. Such persistent weakness would traditionally prompt additional rate cuts on the part of the Federal Reserve, but I suspect interest rate policy has largely lost effectiveness. Starting with the mortgage meltdown that began last year, credit channels have become increasingly impaired despite aggressive rate cuts. The credit explosion of this decade has proven unsustainable; you cannot borrow your way to prosperity. The US economy is undergoing a structural adjustment that the Fed can only cushion, not stop.

Monday brought the personal income and expenditure report for August, which indicated that consumption expenditures will be negative in Q3 for the first time since 1991, a point pounced upon by commentators (here and here). Interestingly, private wage and salary growth continued to defy gravity:

Over the last year, however, inflation has destroyed any nominal wage gains. Lacking sufficient savings to compensate for inflation, and cut off from the housing ATM, consumers are reduced to living within their real incomes for the first time in years. It hurts. Federal stimulus masked the damage during the second quarter, but the affect was only temporary – indeed, the economy deteriorated at a startling pace as soon as the checks stopped coming.

The ISM manufacturing survey highlighted the extent of the deterioration, with a plunge in the headline number from 49.9 to a recessionary level of 43.5 amid a stunning drop in new orders. With the exception of rapidly diminishing price pressure as commodity prices faltered, there is no positive spin one can place on this report. Indeed, this is the type of report that traditionally triggered rate cuts; the lack of such weakness has been an anomaly in the current policy cycle. Manufacturing weakness is aggravated to no small extent by the collapse in auto sales. Again, a stunning decline, but not entirely unexpected given the strains on household budgets. As long as your existing car still runs, a new car is one of the easiest items to forego.

If you are counting on a housing rebound to cure the nation’s economic ills, you were once again disappointed with the Case-Shiller report. The decline in housing prices continues seemingly unabated. I am amazed by the number of commentators who believe that fixing the nation’s economy is as simple as restoring confidence in the housing market. I very much dislike the argument that confidence is the problem. It makes me feel like I am in Oz, and that all that we need to do is collectively click our heels together, saying “I want to go home,” and suddenly it will be 2004 and we can expect our homes will appreciate 15% a year risk free. A more likely reality: Housing prices will contract until those prices are consistent with traditional underwriting conditions and incomes. Here I agree with Barry Ritholtz – policy should not be focused on trying to raise asset prices, but instead to cushion the blow from the reversion of those asset prices to the values determined by social conventions, which, in this case, is ability to repay the mortgage.

In the wake of this week’s no vote on the bailout package, the Federal Reserve is inching closer to lower interest rates, although such a move is more likely to occur at the October or December meeting rather than in the intermeeting period. I doubt the Fed ever expected to cut rates further; they were hoping for a rapid passage of a bailout package to bring quick relief to credit markets. No such luck; each day that passes more damage is done. Atlanta Fed President Dennis Lockhart summed up the situation with a rather dour assessment:

Overall, the outlook for inflation may have improved, but prospects for growth have weakened. Importantly, I believe problems in our financial system add significant risk to the downside for the economy.

He did note that he was assuming the bailout plan was dead, although such predictions appear to be premature given tonight’s Senate vote. But the recent market upheavals have already done significant damage regardless of the bailout; comprehensive action is mostly about containing the damage at this point. And note that the August data that started trickling in the end of last week was largely pre-most recent crisis. Adding to Lockhart, arch-hawk Philadelphia Fed President Charles Plosser shifted his position notably and opened the door to a rate cut. From MarketWatch:

A Federal Reserve official who twice voted against interest-rate cuts earlier this year said he'd be open to supporting further decreases in the Fed's federal funds rate target if required. In an exclusive interview with Market News International, Philadelphia Fed President Charles Plosser said he believes the economy is "more resilient" than many believe in the face of the worst post-war financial crisis, adding that people need to "take a step back and take a deep breath." But he did indicate that if credit conditions worsen to the point that the economy is imperiled, he'd vote to cut rates.

That’s right – a collective deep breath and our confidence will return. And the bad assets will suddenly disappear. And we all wake up in the morning back in Kansas.

Bottom Line: If Plosser is willing to consider rate cuts, it is a fair bet most of the FOMC is already there. Still, a cut at this juncture may just be doing something to do something. If the Fed sits tight through the rest of this year, they simply have come to the conclusion that rate cuts are ineffective at this point. Does anyone really believe that another 50bp will have anything more than a marginal impact? As long as the credit markets are impaired, rate cuts are almost a sideshow. Without a mechanism to channel large amounts of dollars to consumers, or some other sector of the economy, the Fed can drop rates to zero with little impact. The price of money only matters if you can get some, and getting some is hard to do when the financial sector is deleveraging in an attempt to save itself.

Comments

[esb]

The inevitable lock limit down day on the NYSE later this month will force BB's hand.

I also suspect that Congress will be back in session, or perhaps will not be able to adjourn. (It would almost be worth it to see the looks on Harry Reid's face).

Nationalization is on its way, sooner rather than later.

[Michael McKinlay]

Bombshell !

A Bailout for Foreigners ! Screwed by Goldman Sacks Again !

"For nearly a year, we have been asking ourselves why the investors and foreign banks that bought up hundreds of billions of dollars of worthless mortgage-backed securities (MBS) from US investment banks have not taken legal action against these same banks or initiated a boycott of US financial products to prevent more people from getting ripped off?

Now we know the answer. It's because, behind the scenes, Henry Paulson and Co. were working out a deal to dump the whole trillion dollar mess on the US taxpayer. That's what this whole $700 billion boondoggle is all about; wiping out the massive debts that were generated in the biggest incident of fraud in history. Rep Brad Sherman explained it like this last night to Larry Kudlow:

"It (The bill) provides hundreds of billions of dollars of bailouts to foreign investors."

Yes, ladies and gentlemen, we are paying for Wall Streets illegal sales of these toxic assets overseas.

Not One Dime!

http://www.informationclearinghouse.info/article20915.htm

Screwed by Goldman Sacks Again !

In case you haven't heard the CEO of Goldman was in the room when AIG got bailed out ... Why is this important ? That AIG bailout saved Goldman Sacks a cool 20 billion dollars. It only cost the tax payers 85 billion in loans.

Wall Street's Infinite Sleaze:

http://www.huffingtonpost.com/dean-baker/hi-dean-baker-your-profil_b_129954.html

[hari]

Prospect of 50bp cut is in the order of magnitude according to Fed watchers. My fear is galloping inflation! What if Fed does cut, followed by ECB cut, and hell comes down with galloping global inflation. What then?

[James Kroeger]

What if Fed does cut, followed by ECB cut, and hell comes down with galloping global inflation. What then?Uh, well, the Fed would then want to remove loanable reserves from the banking system by selling paper assets. Or they might want to emulate the PBoC and issue 'sterilization' bonds, which would accomplish the same goal. Pumping reserves into the system is not inflationary if it is done at a time when banks have not been lending money. When they start lending money again, that's when the Fed will want to take some of that excess money out of the economy...

[BJ Feng]

A rate cut would be nearly useless for anyone outside of the financial sector right now. Credit isn't flowing to consumers, we're not seeing lower rates at the consumer end. The FED already lowered rates from 5% to 2%, but mortgage rates have barely budged, and have even increased for non-conventional loans.

Excessive rate cutting is what provided the fuel for this out of control fire in our financial sector. The first thing to do is restore liquidity and restore the flow of credit. Afterwards, we'll reassess the situation, but we should not make the same mistake of cheap credit and easy money that made it attractive to buy high risk assets for a 6-7& yield. If you place FED Funds under inflation, then you force investors to reach for yield. They are forced to take risk just to keep even and not lose money.

Articles like the one above were part of the problem that led us to this point. The FED felt enormous pressure to keep rates at historically very low levels. Low interest rates created the conditions for the real estate boom. People figure out the most house they can buy for a certain income stream. Low rates means they will borrow more money, and this is not necessarily a good thing. If everyone has access to more money, housing prices will be bid up, that's how we got to this point in the first place.

A 6% mortgage is not expensive! I still view 7-8% mortgages as normal, and it wasn't that long ago when they were. The FED FUNDS rate should be 2-3% higher than inflation most of the time. Nowadays, any hint or even the fear of something negative and the FED is pressured to cut rates below that level. In fact, I don't think we've seen a FED Funds rate 2%-3% higher for some time, when such a rate should be normal.

[ken melvin]

Why shouldn't people who borrowed more than they could pay for a house worth 1/4 what they paid for it have to pay? Why should we have to pay foreigners back? Why shouldn't Iraqis pay for our war? Lo, lo, lo.

[kharris]

I know I may seem ungenerous toward Duy, but tell me again why he ends up as the featured commenter on the Fed when he can't see past one week's events? What is happening now has been unfolding for some time. All along the way, Duy has taken a sort of "Oh tosh!" tone toward the view that the Fed might need to ease further, or that the economy was headed toward serious trouble. Now, events have unfolded in a way that is not all that mysterious, and his view changes. It is to his credit that he has not continued in error, but if the point is that Duy is giving us more insight into what is going on that we might otherwise have, I think changing his tune only after credit has dried up is evidence to the contrary. This is sort of like giving space to all those guys who "knew" there were illicit weapons in Iraq, even after finding out there weren't.

[anon]

agree with kharris

its annoying. rate cuts were "off the table" here not too long ago

and agreeing with Ritholtz is a sign of real desperation

give up the prediction game, please - you're not good at it

[bakho]

Will rate cuts really help? Isn't the problem that credit is currently not affected very much by Fed rates because of the credit freeze-up? Would a rate cut be shooting blanks? Would it make sense to unlock the credit freeze before making Fed rate cuts?

[paine]

"Without a mechanism to channel large amounts of dollars to consumers, or some other sector of the economy"

where's mr D's keynes ?????

this is the height of one eyed macro

we need EFFECTIVE DEMAND
the call goes out to uncle not to lend bt to grant

big one timer to the states to increases their declining expenditures
to pay roll tax payers
a rebate of payroll taxes (on the jobholder side )
that puts the system temporarily on pay go and stops the trust fund build up

need more effective demand fast ????

start sending out house heating stamps
convert the mortgage deduction into a credit
then raise the amount
renters receiving the full benefit of their land lord's pro rated mortgage

if the payments are less then the credits
or the tax exposure too small
refund the difference

we need a harry hopkins here
to throw uncle's costless cash
at every thing in sight

as to spender of last resort
east asia has to take up the slack
and the oilers
rebalancing trade
is a do it now
our part???
let the dollar crash
in fact threaten the world's exchange rate manipulators
with an automatic currency adjustment surcharge on all imports arriving here from forex fiddlers
make it fair
make it an algorithm applicable to all

come on
buying every banks crud is a joke
a diversion
recap the lenders an equal goober play

by pass the por profit credit system

ramp up to cruising speed??

sure that'll take some time and create some bottle necks
in the payment system
but that's what holidays are for
put the legal system the bankrupcy court etc etc on holiday
no foreclosures till further notice
need staff for the new uncle operations ???
i suspect whole corporate orgs could be assumed at zero cost
once these privateering credit critters realize
the bail is dead as a door nail

"uncle don't play dat "

[paine]

gem lne

"The price of money only matters if you can get some"

rationing is the word for credit markets
drill that into your models kids
and add
markets for jobs

job and credit never clears

and right now
both sets of rations are about to get cut
at a thousand different points of blight
for reasons of private profit not public welfare

[paine]

"(The bill) provides hundreds of billions of dollars of bailouts to foreign investors"

mike m

i say let these wally world grifters face the music
when the law suits start rolling in
from across the land and over the oceans

by pass em
in fact far from a rescue
they need to be put into quarantine

why wasn't all this
so so so obvious ??

"My fear is galloping inflation"
hari forget inflation
we can deal with inflation when ...and if we have to

now is about effective demand
now is about putting the real economy the production system
on a credit bypass machine

its about increasing tack home pay
its about a balance trade dollar
if this induces price increases we'll know its working for god's sake

kill the stag not the flation
"

[paine]

"they might want to emulate the PBoC"

great irony
what we need right now
is a yank version
of the PRC's state controled credit system
well obama could starting to plan now
and implement in january
could easily throw one together by st patrick's day

[paine]

"Would a rate cut be shooting blanks?"
odd to see u asking questins bay

tugging the fore lock in front of mark's august guests ???

hey if the sure thing profit

like the thrill ....is gone

uncle's gotta think by pass machine
the for profit heart ain't up to it
but the time for loving restorative surgery
is not now
that will come regrettably
but one hopes only
after the whole body of tissues
are all back receiving oxygen again

the for profit heart ain't up to it

[markg]

I agree with most everything Paine says. Only thing I will add is govt may have to offset some of the payroll tax cut with a higher gas tax. Putting more money in the hands of the American consumer may allow OPEC to raise prices at will knowing we can afford it. Have to force Americans to conserve (while still spending in other areas besides energy) or shift to other domestic energy sources.

[George Smithers]

This bailout is a B.O.M.B. (Bush-Obama-McCain-Bailout) from hell.

Only Bob Barr is talking sense about the bailout.

How come the media isn't pushing for Barr to be in the debates? America deserves to be able to vote for someone opposed to a bailout plan, but McCain, Obama and the media don't want us to have a choice.

Vote Barr to oppose the bailout.

Contact the media to demand that Barr be included in the debates.

Call your congressman to demand that he votes no on this new version of the bailout bill when it goes to the House.

[Below Zero]

"The credit explosion of this decade has proven unsustainable; you cannot borrow your way to prosperity."

Negative interest rates create the temporary illusion that you can, until the party stops.

[paine]

"Only Bob Barr is talking sense about the bailout"

now that IS a crisis

bob barr is a bed bug

[paine]

below zero

the job class spent less
these pass 10 years
then the past 30 years
of productivity tracking wages
would have paid them

would would would

did
god bless our nation's
protracted
reagan era senior moment ????

[Below Zero]

"the job class spent less
these pass 10 years
then the past 30 years
of productivity tracking wages
would have paid them"

The job class can't get productivity tracking wage increases because the increased production is subsidizing low short term interest rates. Decide. Would you rather have your wages buy more, or subsidize low interest rates (with forced savings)?

[homer]

perhaps if congress cannot agree on a bailout, they should pass a law allowing the fed to lend directly to businesses, cutting wall street out entirely.

[Julio]

Below zero:

"The job class can't get productivity tracking wage increases because the increased production is subsidizing low short term interest rates."

"because"???
A semicolon would be nice instead.

[hari]

ECB left the rates unchanged today. So much the better because Trichet and gang are targetting CPI. Yet ECB has injected - just in dollar terms - millions into the credit market since this crisis got serious on 15 Sept.

[paine]

below zero

you need to fully untangle your connecting wires here
that's why models exist
so you make sure at least in wonderland or oz
the full wiring diagram is explicitly known
and simulated

now to your sub miltonic line

"The job class can't get productivity tracking wage increases because the increased production is subsidizing low short term interest rates "
theres a sputtering short here zero

two part analytic assumption:

the total change in value added
partly went up the job income ladder
ie
the tren is for ever more skew
to the job comp distribution

property and positional income share has grown

positional income ????

insiders surplus

one poser

could we be here at the present summit of prosperity as a nation
with an unchanged 70's income distribution ???

[anne]

Paul Krugman suggested that allowing Lehman Brothers to fail was a crisis driving mistake by Secretary Paulson, beyond the mistake of failing to anticipate the inherent financial system weakness since at least as early as spring and summer 2007. Suppose the criticism of Japanese policy, at least after the financial crisis was fully recognized in Japan, suppose that criticism was wrong? What if the complete support of the financial system by ordering the prime city banks to support each other while supported in turn by the Bank of Japan, and massive use of spending to support middle class households through employment was precisely what was needed even though general economic growth was quite low for a sustained period?

[paine]

"Would you rather have your wages buy more, or subsidize low interest rates (with forced savings)?"

this is a pair of options
one of which higher real wages we all can grasp
the other of which i find so twisted
up with odd money and credit notions
as to be postively martian to me

anne would ask you to explain
i'l only say
come back when your ready for prime time

[Tim Duy]

kharris:

Getting ahead of the Fed has been a challenge lately. No argument from me. The second half of the year deteriorated much more quickly than I had anticipated - the ending of the fiscal stimulus was like flipping a switch.

paine:

I too can think of lots of ways to use the government to channel money to consumers...and I am somewhat curious to know if that would trigger another inflationary burst like we experienced this past year.

[anne]

Several anecdotes about the peculiar aversion of the Japanese to direct family support as opposed to the employment security and union support, those anecdotes notwithstanding, my continual impression in and out of Japan was how remarkably well Japanese families fared through a spate of superficially grim economic reports. I have long thought Japanese growth figures much distorted by the deflation. Deflation made income and savings go that much further. Where were the suffering Japanese, who are all style in Tokyo and Osaka and the like?

Suppose spending really worked in sheltering the Japanese, as I have always thought?

[paine]

anne

japan's story
like sweden's contemporaneously
holds many lessons

question does sweden's milder journey
reflect better macro policy
or better pub sec micro
ie market and institutional policy ????

[anne]

The need has long been to support ordinary workers and employment and troubled households here, but Democratic policy makers have been talking of no such need. Krugman was the only analyst I am aware of who wrote that Japanese spending policy was proper and wondered whether should there ever be a similar American problem we would use spending as the Japanese were doing.

Evidently, no.

[paine]

"and I am somewhat curious to know if that would trigger another inflationary burst like we experienced this past year."

damn the torpedos sir full speed ahead

to me
the war was lost in the late 70's when we turned
from the innovative suggestions
to go beyond incomes policy
to a mark up market cap and trade system
we used the hammer of volcker
not the market of lerner

but that's a bit outre
for stormy seas
my point however
when it comes to inflation
the only fear is fear itself

[anne]

When I was in Tokyo, the only economic number that was taken seriously was unemployment, and an increase in unemployment was considered politically intolerable even among secure wealthy Japanese. American analysts were arguing, throw the bums out, meaning supposedly unnecessary workers. The idea of throwing Japanese workers out considered absurd among well-meaning Japanese and those I know have always been well-meaning.

Labor union is Japan defended workers security and wages, properly. Krugman understood, and I knew for sure directly and indirectly Japan would not become America in 1994 and 1995 and 1996 and 1997 and 1998.

[anne]

So, as Krugman asked, would we respond as the Japanese in a similar situation? Japan experienced a bubble in assets of immense proportions, but the idea of a city bank ever failing was unthinkable. Why was Lehman allowed to fail? Japanese accepted protecting the city banks because they were being protected. Everywhere in Tokyo there was construction going on. "Waste" American analysts shouted, jobs the Japanese knew.

[anne]

The recovery from recession and expansion from December 2001 to December 2007, was marked by a notably weak job market and wage and benefit pressures on ordinary workers. Since January 2008, there have been job losses every month and no likelihood of any meaningful change. Where is the support for workers? Such lack of support would have been politically impossible in Japan.

[anne]

Besides, when we were mocking for Japanese on absurdly low interest rates through a liquidity trap in the 1990s, look at Treasury rates here and now and we are not experiencing deflation in any way.

[anne]

We really do need to consider that the Japanese experienced a liquidity trap when the was pronounced deflation, month on month for years the Japanese price index fell. We have a liquidity trap with inflation. What difference do Treasury interest rates make unless there is "forced" lending which there was among larger institutions in Japan. Also, in Japan lenders protected household mortgage holders against default.

[Callahan]

By gosh I believe I have a novel idea/plan to fix this poor economic situation, 1. cut taxes for the rich, 2. give tax breaks to companies that outsource, 3. bring in more cheap labor from south of the border and overseas. 4. start another war, ... be good for somebody. 5. privatize or abolish social security. 6. abolish medicaid/care. 7. abolish gays and abortions. and last but not least, drill baby drill.

[Winslow R.]

Tim wrote: "Without a mechanism to channel large amounts of dollars to consumers, or some other sector of the economy, the Fed can drop rates to zero with little impact. The price of money only matters if you can get some, and getting some is hard to do when the financial sector is deleveraging in an attempt to save itself. "

Exactly.

Hopefully some good comes from all this. Once the private financial sector shrinks down to size, let's keep it that way.

It is time to separate funding to corporations from lending to citizens. Opening the fed window to citizens opens a channel.

Now that corporate lending has been shut down I can compete against bankers for the first time in years (first time since 2001). I can finally, once again, find new projects that make economic sense.

Yes, I'm being selfish, as I'd like to be able to compete with bankers all the time.

[anne]

I am so pleased that we have a rescue (not a bailout nor a "pricing to need") plan, only please, please do not look at numbers from Brazil to Canada and as for the bond market.... Back now to philosophy reading.

[im1dc]

Cast your gaze through the window and away from the mirror:

The New Global Middle Class: Potentially Profitable -- but Also Unpredictable

Published: July 09, 2008 in Knowledge@Wharton

A new global middle class is rising up from poverty in emerging economies around the world, providing competition for labor and resources, but also enormous promise for multinationals that tailor products and services to the burgeoning ranks of first-time consumers, according to Wharton faculty and analysts.

Coca-Cola's newly appointed chief executive Muhtar Kent sees this market as critical to his company's future and describes the scale of the opportunity as equivalent to adding a city the size of New York to the world every three months. The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030. The bank defines the middle class as earners making between $10 and $20 a day -- adjusted for local prices -- which is roughly the range of average incomes between Brazil ($10) and Italy ($20).

A look at the geographic distribution is striking. In 2000, developing countries were home to 56% of the global middle class, but by 2030 that figure is expected to reach 93%. China and India alone will account for two-thirds of the expansion, with China contributing 52% of the increase and India 12%, World Bank research shows.

According to Wharton management professor Mauro Guillen, the world's middle class has, until recently, been located in "the triad" of Europe, North America and Japan. In the 1970s and 1980s, countries such as South Korea, Brazil, Mexico and Argentina also built sizeable middle-class populations. "Nowadays, it's China and India," says Guillen. "The driver is economic growth. As the economy expands, the domestic market starts to become bigger, and it is typically a middle-class market."

Wharton marketing professor Jagmohan Raju predicts the shift in distribution of the global middle class will continue as developing countries adapt to remain competitive in the world economy. "Due to economic pressures, more and more companies in developed nations are seeking educated workforces in emerging markets to outsource manufacturing and service jobs," he says. "More economic pressures in the West mean more jobs in emerging markets and a bigger middle class that has higher buying power."

As a result, multinationals that have so far viewed developing nations largely as a cheap source of labor, are now poised to benefit again as many of the workers they paid to build their products are increasingly able to afford Western consumer goods. "Countries like India consist of young consumers who are ambitious and save quite a bit, but are also willing to spend on small luxuries like Western brands of consumer packaged goods," says Raju.

Bill Amelio, CEO of Lenovo, the Chinese firm that merged with IBM's personal computer business, notes that China is now the world's largest market for television sets and cell phones and the second-largest market for automobiles and personal computers. "This demonstrates that there is a big consumer economy that's being driven in China, which is exactly what the Western world was looking to happen many years ago. And that's just China. Add India, and we're seeing consumerism pulling up a lot of the poverty in many areas."

The McKinsey Global Institute, the consulting firm's independent economic research arm, projects India's middle class will grow from 50 million to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the fifth.

Meanwhile, China is expected to become the world's third-largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute projects China's middle class will increase from 43% of the population today to 76% by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term. China has maxed out on the input model," says Diana Farrell, the Institute's director. India has been more open to consumption, but like China it has a very high savings rate that Farrell says should be converted to consumer spending to strengthen the overall economy.

Aspiring to New Brands

Clearly this broad expansion of a middle class with discretionary income to buy more than life's necessities presents a remarkable opportunity for multinational corporations. According to Wharton marketing professor John Zhang, the middle class in any country is at the forefront of consumption and leads important business trends. Marketers must pay close attention to this population to reap the benefits of an expanding global middle class.

At the same time, Zhang says, even though millions of individuals are now reaching middle-class status in their own countries, they still do not have the same levels of income as their counterparts in mature economies. To capture customers in these markets, companies must create new products that take into account price sensitivity.

For example, he says, Coca-Cola has a layered strategy for China in which Coke is sold in urban areas at only a slightly lower price than in Western markets. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is sold in the countryside for less, but consumers must drink their beverage on the spot and return the bottle to the vendor -- a strategy that saves costs and drives down the price. In addition, bottles are smaller than those in the West. "Coca-Cola customized a product for lower price points so that [those consumers] can have a taste of the product. As the economy grows and more people join the middle class, demand will keep increasing," says Zhang.

According to Farrell, distribution is an important consideration for companies hoping to reach the emerging middle classes. Roads and airports are underdeveloped, particularly in India, a situation that presents a significant challenge -- and opportunity -- for companies that want to create innovative distribution systems.

Amelio points to management structures that multinationals should embrace to conquer new consumer markets. As an American, he says, he realizes how difficult it is for a Western company to grasp the changes underway in developing consumer markets. He said a key metric for managers is whether growth is as fast -- or faster -- than market growth in emerging economies such as Russia, Brazil and China.

"If you're not planning to have more business outside the U.S. than in the U.S. market, then you're probably planning wrong," he notes, adding that management diversity is crucial. Lenovo's merger, he says, forced the company to build a top management team with varying global perspectives. "It's important to cherish diversity, but it's difficult to do. The best way is to put people from diverse backgrounds at equivalent levels" and let them debate issues that arise. Lenovo currently has 10 different nationalities represented on its management team: "A diverse set of thinking keeps us honest," Amelio says. In addition, Lenovo operates on a hub system with no official global headquarters. "We blew up our idea of a headquarters and it forced more decentralization and more decision-making closer to the customer."

Farrell notes that many Western firms focus on services, but that this sector is not as developed among the rising middle classes as consumer goods. "When it comes to services, we're pretty [much in] the early days," she says. One obstacle to reaching new consumer markets with services is regulation in foreign countries. For example, she points to India's restrictions on foreign ownership of retail businesses.

'The Dynamic Character of Social Class'

While the growth of the global middle class is predicted to continue at a rapid pace, forces exist that could derail the process of global expansion for Western multinationals. One factor to consider is the differences in income distribution between countries and within nations, according to faculty.

"When you look globally, you see an emerging middle class in some geographies and a stagnant or declining middle class elsewhere," says Wharton management professor John Kimberly. "What is truly interesting is the dynamic character of social class, certainly not stable on a global basis and quite variable on a country-by- country or region-by-region basis." While statistically speaking, there is an emerging global middle class, "we need to look carefully at the various indicators on a more fine-grained basis in order not to miss the variability."

Meanwhile, according to Maurizio Bussolo, an economist with the World Bank's Development Prospects Group, it is not clear how well Western multinationals will fare in reaching the emerging middle class. "We have observed that if you look at the economic cycle in the last five to 10 years, you see that the U.S., Europe and Japan have a cycle that is becoming disconnected from the economic cycle of the developing world," says Bussolo. That means if there is a crisis in the U.S. or another rich country, it does not necessarily harm progress in the emerging economies. It also means growth in the developing world does not necessarily benefit mature economies. "There is some disconnect. It's not necessarily true that all these new clients that appear in the Third World will be served by U.S. and European firms. It is not clear to us that Chinese clients will prefer a U.S. firm for services if they can have equal quality from a Chinese firm."

He predicts that future globalization will be built, at least in part, on new integration between South Asia and East Asia and other developing markets. "Mainly these countries have traded with the U.S. and Europe, but now there is new South-South integration." For example, Chinese businesses are investing in South America and Africa, not only to gain access to commodities, but to get in position to profit from sales to the emerging middle class.

Lately, the developing world's middle class has been blamed for rapid and unsettling increases in commodity prices, but faculty and analysts say the tightening will be corrected, in the long run, by forces of supply and demand. "In the case of consumer durables, such as automobiles and washing machines, supply can be expanded quickly. The same goes for non-durables, such as soft drinks," says Guillen. "The problem is with oil and foodstuffs. A major driver of price increases for these goods has been expanded demand from China and India."

Raju suggests that the emerging middle class is only part of the problem. "It is indeed possible that increased consumption in China and India will lead to higher prices for many basic goods, but the role of the middle class may not be any more than that of other groups," he argues. "It is the higher consumption and, might I say, often the waste of resources in developing countries that is also contributing to the price rise. But there is no doubt that increased consumption by those who did not have discretionary incomes in the past will contribute to price increases."

Another potential blow to reaching the new ranks of the global middle class would be protectionist policies by countries with a middle class that feels threatened by growth abroad, including the United States.

In an article that appeared last month in the International Herald Tribune, Amelio argued that growth is not a zero-sum game and that businesses are now on the brink of profiting from new markets in the current era, which he calls "Global 2.0." What you're going to hear about in the coming general election "is the economy, and it's becoming clear that some people might view protectionism to be the way to go," says Amelio. "I'm hopeful that cooler minds prevail. History is full of examples of how policies restricting trade hurt the home country."

'Global 2.0'

According to Wharton management professor Stephen Kobrin, regardless of who may be hurt temporarily, lifting millions of people up from poverty is a positive step. "Nobody should have to live on ... $1 a day." The degree to which workers in the U.S. and other developed markets will benefit from the rise of a global middle class will depend on their own level of competitiveness and their ability to move toward new technology and highly skilled jobs requiring better education systems, he says. "The fact that this is a good thing may not mean it's a good thing for the U.S. in the short run, but as the world gets richer, there should be more demand for U.S. products -- assuming the U.S. remains competitive."

Kobrin, however, cautions against making assumptions that the world's new middle class will act exactly as prior generations of middle-class consumers have around the world. "This is important, because we tend to assume all middle-class people have certain values," says Kobrin. He points to the common assertion that people rising into the middle class will press for democracy. But that does not seem to be happening in China where he suggests that people may be willing to accept more autocratic regimes in return for stability and middle-class lifestyle.

"The assumption has been that there's a link between capitalism and democracy, that as incomes rise and people become educated, they will increase pressure for democracy and freedom and civil liberties," notes Kobrin. "That may or may not be true."

link: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2011

[anne]

Possibly, had we given closer attention to Japan as Krugman wished, and respected Japan's response to crisis even though critical, we could be more flexible in thinking now. Flexible thinking however is only for the French.

[im1dc]

This polling data shows just how much trouble we are in due to the 'Give me a tax cut' generation that ushered in Ronald Reagan, George Walker Bush with their enablers the so-called Conservative Republicans.

American is now made up of 3 generations of folks who have a serious case of entitlement, who want stuff now but do not want to pay for it or pay for anyone one else either.

No shared responsibility only individual responsibility that is ignored when the price becomes so high they have to go without to pay the bill.

That is why the bailout, oops I mean the Recuse Package, continues to have life, imho.

The '3 gimme generations'.

Americans Favor Tax Cuts Just As Much As Rescue Plan

Wednesday, October 01, 2008

Just as many American adults think an across-the-board tax cut would help the economy as the number who favor Congress passing a financial rescue plan, according to a new Rasmussen Reports national telephone survey.

Thirty-nine percent (39%) favor each option, and 22% are undecided in the survey taken Monday and Tuesday nights (see crosstabs). On Monday the House voted down the $700-billion taxpayer-backed rescue plan prompting the biggest drop in the stock market in 21 years.

Forty percent (40%) are more worried that Congress will pass a new version of the bailout bill rather than doing nothing. A virtually identical number--39%--worry more about Congress doing nothing.

Investors are similarly divided on the worry question, but 47% of those with a financial stake in the markets think a new bailout plan is best for the economy. Thirty-six percent (36%) like an across-the-board tax cut more.

While 42% of voters say Congress’ failure to pass an economic rescue plan will hurt their personal finances, 11% believe a lack of congressional action will help their finances, and 33% say it will have no impact on them whatsoever.

Republicans are generally more skeptical of the bailout plan and its overall impact than Democrats.

There is more at link: http://www.rasmussenreports.com/public_content/business/general_business/americans_favor_tax_cuts_just_as_much_as_rescue_plan

[im1dc]

Ooops "Recuse Package" = Rescue Package

[im1dc]

I wonder: "Recuse Package" instead of 'Rescue Package' = Freudian Slip?

[paine]

anne
we now in recession have a hi fi cash sump
not ..yet a liquidity trap

ie the bank credit needed to keep the payments system
rolling is the pinch point
the demand for short term loans or
pay on demand credit lines
for mid-small bizz
is greater as the payment system slows
as paables/receivables back up

now making net credit flows to business at a high enough rate
will cause further slowness and further demand for working cap loans
at least until these cash strapped firms begin to fail
hen ....

and when the bottom is reached
and the negative settles into a zero bottom sliding mode
thats where pushing on a string time arrives
at least as the phrase
was used in the great D

when offering generous industrial loans
even at a zero nominal rate
are useless
because building added capacity
is still senseless
with large under utilized capacity
nearly in every sector
only efective demand
can lift the boats
and by accelerators
restart rapid capacity expansion

my conjecture
japan was doing the right stuff
only the political balance required
the budget deficit to stay barely adequate
much as the fdr deficit
between 35 and 38 in retrospect
can be seen to have been agonizingly too small

as is well repeated by enemies of the new deal
the deficit only reached correct proportions
in 1940
ie
arsenal of democracy time

too bad the new deal didn't go directly to the 40 level
in 33
with a peace time basic industry and infrastructure plan
a plan for rapid restoration of prosperity
is far more then morally equivalent to war

[paine]

let it be noted

sweden sufferedfor a cople years before pulling off its
state ownership intervention in the bank sector
unemployment reached un heard of levels
again we prolly will not do things
at least the correct things
either fast or big enough

[anne]

Though I have been wishing otherwise, wishing is not enough, and I call general recession now along with the labor market recession. Labor starting poorly to begin with, is worrying.

Me, I would look to Sweden, though you think the Swedish model does not easily scale up, and Japan. Japan now seems the choice, and Mark Thoma has wanted New Deal style spending for possibly a year.

[paine]

anne its not the scale up

its the role of global hegemon
among "private" trans national corporations
these team amerika hi fi outfits play
note the wallenberg great escape
from the state drag net

[Ryan]

I don't see a FED cut as being very likely.

[kharris]

Tim Duy,

My criticism was not that you guessed wrong, but the tone you took in doing so. When an economist resorts to prose without numbers, tone replaces confidence interval. Your tone in conveying mistaken claims about the short-term future of the economy has suggested a high degree of certainty. Your tone also conveyed at times something approaching disdain for views that have since proven more correct than your own. Admitting to being wrong now doesn't go very far if the next time out, you go right back to pretending to know more than you actually do. Everybody likes there own opinions best. You need to stop selling and start analyzing. Training in economics gives you tools to point out how things work and what issues are likely to matter. There is little reason to think it gives you an advantage in predicting the future, and you should not try to give the impression that it does.

[calmo]

Ok kh, somewhat toney takedown of Tim and all those economic tools at his disposal (including that experience at the Fed) [we plebs just want to 'tap into' a certain VP hopeful and 'Drill baby drill'.].
Zo, mull this over:
Your tone also conveyed at times something approaching disdain for views that have since proven more correct than your own.
and recognize that this tonal conveyance may not be exclusively Tim's, but that eva-so sensitive kharris rendering...or are you about to deliver some numbers quantifying this "confidence interval"?

A pleasure to read you all.

[hari]

Calmo! Welcome back...how nice to read your stuff again.

[david]

cutting rates would only make it harder to raise them later, and long term, they are going to need to rise ...... the upside value of a cut is way more than offset by the downside given that the upside is a cheap high that won't last long and the downside is a terrible multi-year hangover