The Gun-Shy of August

Martin Wolf characterizes the present economic circumstances with great precision:

What has the market turmoil of August been telling us? The answer, I suggest, is three big things: first, the debt-encumbered economies of the high-income countries remain extremely fragile; second, investors have next to no confidence in the ability of policymakers to resolve the difficulties; and, third, in a time of high anxiety, investors prefer what are seen as the least risky assets, namely, the bonds of the most highly rated governments, regardless of their defects, together with gold. Those who fear deflation buy bonds; those who fear inflation buy gold; those who cannot decide buy both. But few investors or corporate managers wish to take on any longer-term investment risks.

What is to be done?

Yet all is not lost. In particular, the US and German governments retain substantial fiscal room for manoeuvre – and should use it. But, alas, governments that can spend more will not and those who want to spend more now cannot. Again, the central banks have not used up their ammunition. They too should dare to use it. Much more could also be done to hasten deleveraging of the private sector and strengthen the financial system. Another downturn now would surely be a disaster. The key, surely, is not to approach a situation as dangerous as this one within the boundaries of conventional thinking.

I think it’s far more likely that, when facing the enemy, which Wolf correctly notes are debt and risk-aversion, the leaders will turn and fire their guns at the wall next to the enemy, fully justifying investors’ lack of confidence in them.

11 comments… add one
  • Drew Link

    I think Wolf is full of crap. It was the “yield chase” resultant from QE that drove money from low yielding assets to risky assets (stocks.)

    The current volatility is just a reflection of the tension and uncertainty surrounding the real economic environment and the question of whether QE3 will materialize.

  • Ben Landon Link

    I think the second paragraph is where many of us would disagree. The spending madness needs to stop. From a purely economic point of view, transfer payments must be reduced or eliminated altogether. Taking money out of one person’s pocket and putting it into another person’s pocket produces no net economic gain. In fact, it produces an economic loss, because money is diverted from a productive use to another, perhaps unproductive, use, through a government filter which drains off some portion of that money for bureaucracy. If the money spent is borrowed, the problem is even worse because now it requires payment of interest on the resulting obligation and drains even more money away from productive use in the future.

    If government wants to do something productive, it should focus on tax and regulatory certainty. It should create an environment that enables business to predict with some accuracy what cost structures are going to look like next year and thereafter. Much of the reason business is not spending money or hiring right now is based upon a lack of certainty regarding future costs. The health care legislation and the myriad new regulations are a major part of this. A company simply is not going to hire a new worker when it does not know whether health care costs will increase by $500 or $5,000 next year because the health care regulations have not yet been written. Everything from new environmental regulations to the proposal that farmers be required to get commercial driver’s licenses has created an enormous amount of uncertainty. Pivate enterprise cannot be expected to engage in economic activity when it does not know what the rules will be in the next few years.

  • steve Link

    “A company simply is not going to hire a new worker when it does not know whether health care costs will increase by $500 or $5,000 next year because the health care regulations have not yet been written.”

    I will assume you do not have your own company. This is what I have been dealing with for the last 15 years. Premium increases have varied from 7% to 42% per year.

    Steve

  • Drew Link

    “I will assume you do not have your own company. This is what I have been dealing with for the last 15 years. Premium increases have varied from 7% to 42% per year.”

    Well, here’s a guy who has 5 right now, and has had over a dozen in recent years. Further, I speak directly with about a hundred owners a year. Call me crazy, but that seems a decent sample. And almost without exception, I can say people would agree with Ben Landon. I think you would have more credibility, steve, if you told us about your ability to pass through those uncertain costs in your health care business, because, as we all know, health care expenditures have been skyrocketing almost without bound – its a subsidized business sector.

    And I must remind you, please don’t go back to your comment from awhile back that you would just “invent” procedures to make up profit gaps.

  • Ben Landon Link

    For what it’s worth, steve, you assume incorrectly. I am a business owner, an elected official at the local government level, and a board member of several non-profits. Over the last several years, I had have a hand in budgeting for a for-profit business, a governmental entity and several non-profits. Health care cost containment has been a problem across the board. In addition, I am involved with numerous other for-profit businesses, not-for-profits and governmental entities. Almost universally, the view of the people I deal with is that the so-called “Affordable Health Care” law is that health care will become considerably less affordable. Very few of these entities are hiring precisely because they don’t know how much their employees will cost them in the next few years.

  • Ben Landon Link

    That one sentence toward the end doesn’t make much sense, but I suspect people know what I mean: The “Affordable Health Care” law is making employers less willing to employ people because they don’t know how much employee health care will cost them, while suspecting that there will be enormous increases.

  • steve Link

    ” I think you would have more credibility, steve, if you told us about your ability to pass through those uncertain costs in your health care business, because, as we all know, health care expenditures have been skyrocketing almost without bound – its a subsidized business sector.”

    Since you asked, we are having to either cut costs or increase revenue. The hospital pays us for our call coverage and for covering procedures that net them money but lose money for us (Cath Lab, IR, OB, Trauma). They are cutting our reimbursement for those procedures. Since one of my partners was inconsiderate enough to have premie twins, and another employee’s husband thoughtlessly developed a nasty cancer, we faced the 42% increase this year. Unexpectedly I might add. How do you plan for it?

    We are pursuing a combination of cost cutting and increasing revenue. Having written on health care economics for years, I am finally getting my group to go along with some major changes. We will be using docs and nurses in new ways, ignoring some old roles. We are also taking on new work, which pays a lot better, but which we had not wanted to do before. That will increase revenue a lot.

    Still, neither you nor Ben seem to face what I face. How do you manage to not have these huge swings in insurance costs? I have been through this with our broker many times. Joining the group that the state medical society sponsors or that the small business group offers would cost us more.

    Steve

  • Ben Landon Link

    steve,

    We have pursued a number of strategies in an attempt to deal with the problem. Included among them were shopping around with different insurance vendors and self-insuring up to a large deductible. None of this, however, detracts from my central point that the “Affordable Care” law is widely believed to make matters considerably worse. Health Insurance cost containment is a problem, but that doesn’t mean that the solution is to make the problem even harder to address.

  • Drew Link

    steve –

    You do understand the thrust of my point, right?

    10-40% increases per year, let’s split the number, 25%, means that costs double every three years. If health care costs were 15% of yours 6 years ago, they are now 60% under your scenario. That would wipe you out. Either your assertion has a problem, or you can pass it through.

    I can’t imagine that anyone on this forum does not agree that health care cost escalation is a problem. My long, and strongly held, view is that the root cause is separation of buyer and seller through price: its the third party payer system. But that’s old news.

    I do observe that the Obama Justice Department is objecting to a certain high profile merger in the news currently. Said Justice Dept is making arguments that without competition and choice consumers will be harmed, prices will rise and service will decline. Well, sheeee-it.

    And yet when it comes to single payer/provider in health care……….all will be sweetness and bliss.

    Hypocrisy knows no bounds……

  • steve Link

    Drew- I guess I should have been more clear. We have been faced with these large premium increases. We have responded by increasing deductibles, co-pays and now having employees pay part of the premium. We cut that 42% premium down to 15%. It has also meant changing insurance companies almost every year. Which, consumes a large amount of my time and my MBA administrator.

    What I would like, running my corporation, is to have more predictable increases. This extreme variability is difficult to plan for. The constant changing of carriers also puts my employees at increased risk for worse care (recent paper just out on this) and at increased financial risk as they are more likely to accidentally go out of network and incur extra costs.

    Steve

  • steve Link

    Oops, accidentally hit submit. So, while I have kept the direct costs of insurance down some, it has cost me elsewhere. I had to give our employees a raise last fall. In this economy! Our competitor raised his salary, so we had to match. I cannot afford to lose my best staff. I am fairly good friends with the guy who runs that group. When we met at a meeting, I gave him a little good natured ribbing over hurting us. He said he had to raise salaries because medical insurance costs were up enough that it was difficult to pass on. So, in one way or another, I am paying for these costs in the long run, for the most part.

    Steve

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