Let's go through it one more time. A simple truth: You can't get the right answer if you ask the wrong question.
The furious debate over how best to cut the deficit illustrates the point. The debate is about how we best enforce austerity. How do we bring the federal budget into "primary balance" by 2015 ("primary balance" is wonk for a balanced budget not counting interest payments on the national debt)? Pencils sharpen; green eye shades are donned.
This is a debate about who takes the hit. It is likely to turn ugly. There are progressive answers and regressive ones; some that make more sense, and some that make less. It is bizarre, for example, that at a time of Gilded Age inequality, the co-chairs of the President's Deficit Commission release a report that starts by lowering tax rates and creating a more regressive tax code than under Bill Clinton. Or that after financial gamboling and speculation has blown up the economy, they omit any mention of a tax on financial speculation or a tax on the banks, as even the International Monetary Fund recommends. Or that after Americans have lost some $11 trillion in savings and home values, the co-chairs would feature cuts in Social Security benefits.
A valuable alternative submitted by Rep. Jan Schakowsky, a member of the deficit commission, shows that it is possible to balance the budget by taking more from the Pentagon, hiking corporate taxes, and preserving Social Security. A Citizen's Commission convened by the Campaign for America's Future (which I help direct) will release a report next week arguing strongly that we need greater investment for jobs and growth, and can still bring the deficits down with progressive tax and spending reforms.
This debate rises from what has become a bipartisan elite consensus, reinforced by a multimillion dollar public relations campaign seeded by Pete Peterson, a Wall Street billionaire, who has been rousing alarms about deficits for decades, and is intent on using the current crisis to enforce the turn to austerity. But if there is one thing we should have learned over the years, it is that Americans should be particularly wary about bipartisan elite consensus. It was bipartisan consensus that drove us into Vietnam, trumpeted the corporate free trade regime that left us borrowing $2 billion a day from abroad to cover soaring trade deficits, celebrated financial reform and self-regulating markets, promoted lower tax rates feeding ever greater inequality, and much more. When elites of both parties agree, Americans should take another look.
Today's elite consensus -- that deficits are at crisis levels, that budgets must be brought into balance immediately -- is equally wrong-headed. It slights the real crisis we face, and is foreign to the spirit that made America great.
What is the crisis we face today? We have an economy scarred by mass unemployment, falling wages, and growing insecurity. In the downturn, a staggering 40 percent of American households have been afflicted by unemployment, negative home equity ("under water homes" worth less than their mortgages), mortgage payment arrears, or foreclosure. In November 2008, one quarter of Americans aged 50-59 reported that they'd lost more than 35 percent of their retirement savings.
But this devastation caused by the collapse of the financial bubble and resulting recession is but the foul expression of an economy that has suffered long-term decline. We were hemorrhaging manufacturing jobs when the economy was growing before the bubble burst. Wages fell for most Americans over the course of the last decade, which suffered the worst job creation of any period since the end of World War II. The imbalances were obscene before the recession, with finance capturing 40 percent of corporate profits, the wealthiest 1 percent capturing half of the benefits of economic growth, the US running soaring trade deficits, even in high technology products, with China and the world. Our decaying infrastructure, broken health care system, declining educational performance in relation to the industrial world all preceded the fall.
So if we now turn to balancing our budget and succeed, what then? We will have had a brutal fight that will turn us one against another without addressing the fundamental challenges facing the country.
The right question we need to ask, I would argue, is what is the new strategy, the new foundation for an economy that offers hope for rebuilding America's economic vitality in the competitive global market place? This requires a clear and bold strategy for revitalizing American manufacturing. It requires investments in areas vital to our future -- in modern infrastructure, in education and training, in research and innovation. We need to capture a lead in the green industrial revolution that is sweeping the world. It requires new trade strategy, shackles on financial speculation, empowering workers to capture a fair share of the productivity and profits they help generate to help rebuild America's middle class. We have to figure out how to afford this, financing what we can, changing priorities and raising revenues where needed. But this is a far different question than just how we get our books in order.
Far-fetched? Consider our own history.
In 1937, after years of growth, Roosevelt made the mistake -- one that President Obama and Congressional Republicans seem intent on repeating -- of turning to austerity prematurely, cutting spending to bring the budget towards balance. The result was another downturn. America finally came out of the Depression with the mobilization of World War II, what economists would see as military Keynesianism on steroids. We stopped worrying about deficits and focused instead on what needed to be done to win the war, mobilizing citizens and industry to that cause. Annual deficits ran up to 25 percent of GDP as industry converted to wartime production, workers became GIs and women went to work. Full employment brought families out of debt and depression.
By the end of the war, the federal debt surpassed 120 percent of GDP, about twice what it is today in relation to the economy. Needless to say, it was a major concern. But leaders of both parties did not focus on paying down the debt.
Instead they asked, what do we need to do to create a vibrant peacetime economy? They passed the GI bill to educate a generation of Americans; subsidized the conversion of industry to peacetime production; subsidized housing and the building of the suburbs; sent, at its height, 2 percent of GDP to Europe in the Marshall Plan; set up the Bretton Woods system to control currencies, police financial flows and gin up trade.
They worried about deficits. Eisenhower, a conservative Republican president, put a lid on military spending, kept top tax rates at wartime levels of 90 percent, but also built the interstate highway system and passed the National Defense Education Act.
They were making it up as they went along. Their success created the foundation for the most successful economy the world has seen, building the first broad middle class, making America the envy of the world. The debt kept rising, but the economy grew faster. By 1980, before Ronald Reagan was elected and blew the lid off, it was down to 32 percent of GDP and was not a problem.
This was, of course, the expression of a unified nation, victorious in war, confident that it could forge its future.
Compare that to now. We have an economy desperately in need of new strategy, of restructuring. But divided and cowed, uncertain of our capacity, we worry about getting our books in order for approval by global financiers. Surely this is a recipe for more division and continued decline.
It is hard to get the right answer when you ask the wrong question.
From Fed Governor Elizabeth Duke: Foreclosure documentation issues. She didn't provide any specifics although she noted that the report will be published early next year. She also mentioned some foreclosure data:
The Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve are conducting an in-depth review of practices at the largest mortgage servicing operations. ... The regulators expect the initial on-site portion of our work to be completed this year and currently plan to publish a summary overview of industry-wide practices in early 2011.Duke discusses some of the potential risks from foreclosure issues, and she noted the Fed expects the number of foreclosures will stay elevated for several years:
The number of foreclosures initiated on residential properties has soared from about 1 million in 2006, the year that house prices peaked, to 2.8 million last year. Over the first half of this year, we have seen a further 1.2 million foreclosure filings, and an additional 2.4 million homes were somewhere in the foreclosure pipeline at the end of June. All told, we expect about 2.25 million foreclosure filings this year and again next year, and about 2 million more in 2012. While our outlook is for filings to decline in coming years, they will remain extremely high by historical standards. Currently, almost 5 million mortgage loans are 90 days or more past due or in foreclosure.Note: We will have some updated delinquency data tomorrow. For Q2, the Mortgage Bankers Association (MBA) reported that 9.11% of first-liens were 90 or more days delinquent or in the foreclosure process. That was about 4.8 million loans.
Tomorrow morning the MBA will release the Q3 National Delinquency Survey at 10 AM ET - and I'll be on the conference call at 10:30 AM.
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Michael M Thomas Says:
November 12th, 2010 at 11:33 am
In the first big art boom, back in the late ’80s-90s, some one observed, “It isn’t that the art isn’t worth the m oney, it’s that the money isn’t worth the money.” – MM Thoomas
Friday screencast: artflation Abnormal Returns Says:
November 12th, 2010 at 1:36 pm
Easy money and the red hot art market. (Big Picture)
Mike in Nola Says:
November 12th, 2010 at 2:27 pm
When I saw the Lichtenstein story on the BBC yesterday, was going to send BR a note that he might use as the start of a blog post.
The point of my note was that such big prices tend to mark tops in stocks because it’s a sign of overconfidence combined with spending paper profits. The example that first came to mind yesterday was the Japanese investor who bought one of Van Gogh’s Sunflowers for $80M – in 1990 just after the Japanese market peak.
http://www.highbeam.com/doc/1P2-1126944.html
Of course there are other indicators. Remember reading about one of the well known players in the very early 1900′s who, when he saw $10k bet on the turn of a card, went out and correctly sold everything.
An illustration of what some art investments are worth in hard times is that some segments of the art market were down 75% during the depths of the crash. The only reason art is booming again is because Ben B has repumped the liquidity bubble, allowing the banksters to make plenty instead of having their sorry asses thrown out on the street as they deserved.
grlampton Says:
November 12th, 2010 at 2:37 pm
A lot of what this post says about the art market can also be said about the rare coin market. Granted, rare coins are not unique in the same way a single piece of artwork is (though some are close to unique).
Although I do not know what the long-term appreciation figures are for artwork, classic American rare coins have outperformed the S&P over the lon g haul, and, in my view, thwey are a lot more fun.
gms777 Says:
November 12th, 2010 at 3:39 pm
And for the 99.99 percent of us who don’t have millions to throw at art, when you buy art, buy it because you like it and think you will continue to enjoy looking at it in your house for years.
Something like 95+% of all art never appreciates in value or if it does, it does so below the rate of inflation.
obsvr-1 Says:
November 12th, 2010 at 4:30 pm
seems this is just the .1%-ers keeping up with the Rockerfellers
Perhaps the FED should be buying up rare art during distressed markets — then sell to the Fraudsters and elitist when they have nothing better to do with their money but buy high priced art; then recycle the profits back to the taxpayer (reduce nat debt) — or substitute SSA for the FED to bolster the Trust Fund for self sufficiency.
ToNYC Says:
November 12th, 2010 at 5:07 pm
If you’re very rich, you can ship your art to Switzerland, London or Singapore to be stored in a state-of-the-art facility and not have to worry about the Feds tracking it as funds.
Believe it or not, that’s where the majority of art ends up these days, sitting in storage waiting for the right time and place to be shown or sold.
great point you make:
rich or just smart…keeping all invested in Intellectual Property keeps you free. Hard assets are more like anchors and chains and locks and guns.
Long term Says:
November 12th, 2010 at 5:12 pm
The problem I see with art, as an investment or even as a store of value, is that BOTH the insurance AND storage costs of pieces in the $10M+ range are significant. And reoccuring. And a drag on ROI unless a large mark-up is achieved.
Mannwich Says:
November 12th, 2010 at 5:27 pm
Then there’s this. Sure doesn’t sound worth it to me.
http://www.nytimes.com/2010/11/14/realestate/14cov.html
philipat Says:
November 12th, 2010 at 6:44 pm
I’d also recommend fine wine for similar reasons. Also more liquid (Double entendre intended!)
pintelho Says:
November 12th, 2010 at 7:33 pm
Now this is an excellent educational piece…thank you Marion
Long term Says:
November 12th, 2010 at 9:06 pm
i consider this very interesting from the perspective of how chinese billionaires will benefit high-end american exports.
VennData Says:
November 12th, 2010 at 11:13 pm
What’s good for Damien Hirst is good for the global economy — Charles Wilson
YourPortlandFinancialAdvisor Says:
November 12th, 2010 at 11:30 pm
“Blue-chip art is no different from gold.”
It’s actually a lot different. People collect art to feel good about themselves, to feel intellectual, worldly, ect. Watch “Gone With the Wind”, Tara, the plantation is filled with paintings from Europe because that was the equivilant of the time. Plus anyone who fancies themselves a contemporary art collector must have and be judged by works of certain artists. Warhol would be one. No Warhol, no collection.
Julia Chestnut Says:
November 13th, 2010 at 5:52 am
The distinction here is between art as a store of value and art as an investment that is expected to create appreciation. The big jump in the value of a piece of art occurs when the artist dies, and thus the supply ends. People who build a fortune in art do so by having good taste and developing a relationship with the people who create (and/or sell) the kind of art that they love. It is about enjoyment and communication – about beauty and provocation. I have found in my limited experience that people who see art as an investment don’t pick the right artists: someone has to do their choosing for them.
But the pieces that we’re talking about in this article are investment grade – blue chips, as you said. Those are a store of value, alright. But as someone noted, the price of keeping something like that is extremely high. There are some pieces of such extreme value to certain unscrupulous people that you don’t insure them if you own them – because you are afraid that the appraiser or the insurance company might tip someone off about where the piece is. I wish I were being alarmist. Often these pieces are kept in professional storage in vaults because you don’t want to keep it where your family lives for these reasons. As old Priam found out long ago, possessing a thing of legendary beauty invites certain problems, especially if you are using it as a store of wealth.
contrabandista13 Says:
November 13th, 2010 at 8:25 am
And just to think, I bought a “Melvin Cruddy” last week for $2.77 at Resales for the Retarded.
It kinda looks like a Modigliani of Bugs Bunny and Daffy having breakfast at a Milwaukee coffee shop.
BuffaloBill Says:
November 13th, 2010 at 8:35 am
A.) If bought at auction, there are also buyer’s and seller’s commissions. You’ll need to add these into your investment computations. These commissions are not insignificant.
B.) If bought at auction, the hammer price (plus commission) is the single highest worldwide valuation for that piece.
C.) To quote the late Lawrence Fleischman who headed Kennedy Galleries in NYC for many years. “Art makes a lousy investment for almost all buyers except for dealers as we work hard to maintain a rolodex of likely customers. ”
D.) To quote the late Horace Solomon of Holly Solomon Galleries, “The painting hanging behind me is worth $125,000 – mostly because I say so.”
contrabandista13 Says:
November 13th, 2010 at 8:41 am
The BIG MONEY plays in the art market are all about vanity… Oh….! Such refined and subtle sophistication…
Having said that, It’s worth remembering that a trophy such as a Pollock or a real Modigliani, never grows old, never makes you carry it’s purse and will always comfort you in sickness and in heath….
Greg0658 Says:
November 13th, 2010 at 9:13 am
interesting thread .. I’ll add my pov (thats point of view) not (privately owned vehicle :-) … while waiting for the pumpkin pie to bake
I collect art – not blue chip art (I can’t) .. music 1st books 2nd clocks 3rd (why I started that with the dang time change twice a year) .. add general stuff to cover the walls, shelves and corners .. why I started that or continue that operation (as we slip back into a hunter gatherer society) (produced in mass production) I don’t know … I guess I’m a well trained consumerist .. worked all my life to turn green TP into stuff – because what good is scratchy green TP .. so coming up on the Thanksgiving season I’ll just ask for your thanks .. so thank you in advance … ie thanks for working to build stuff and then turn excess wages into stuff so people who can’t turn stuff into stuff can flip it for a living
ps – the other pov – wish I could earn enough to have one of those fancies I loved to take pictures of – but then again – I might hit a deer with it or get it k@/@d
ToNYC Says:
November 13th, 2010 at 9:30 am
Art as investment works for the smart players who realize that over time their judgment of the intellectual perspective which is IP, and what it is that the artist presents will be a Call on an increasing statement of value over time (and transferred stored savings). The ones that see the artist’s vision and help bring that awareness public do the very best and are the lifeblood of our culture as well.
Saturday links: cleaner coal Abnormal Returns Says:
November 13th, 2010 at 10:08 am
What is driving the art market? Easy money.* (Big Picture)
philipat Says:
November 13th, 2010 at 11:31 am
VennData Says:
“What’s good for Damien Hirst is good for the global economy — Charles Wilson”
IMHO, the new Warhol? And I mean that not kindly. Both take advantage of art as culture as fashion as Ladt Gaga to make money. No problem with that, and good luck to them. But is it art?
Howard Lindzon » Blog Archive » Printing Money…I Mean Quantitative Easing Says:
November 14th, 2010 at 2:07 am
Today I am thinking about my Sotheby’s $BID indicator. I wrote about it a lot up until 2008 and have just forgotten about it until this fantastic post about the art market.
Record Art Prices… Are the Rich Worried? Says:
November 14th, 2010 at 3:34 pm
Today I am thinking about my Sotheby’s $BID indicator. I wrote about it a lot up until 2008 and have just forgotten about it until this fantastic post about the art market.
Abnormal Returns on Art Says:
November 15th, 2010 at 1:02 am
To read the post mentioned in the video, click here: What’s Driving the Art Market? Easy Money.