Christopher Thornberg
Principal at Beacon Economics
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This week Bruce is joined by Dr. Christopher Thornberg. Dr. Thornberg is the founder of Beacon Economics, and he is one of California’s leading economic forecasters. He is one of the only economists who accurately predicted the crash and the recession that followed.
During the last show, Christopher discusses the proposal to allow a bankruptcy judge to determine what they should owe on their home. Bruce mentions that banks are not foreclosing on homes because if they did then their losses would be incredible. Thornberg says the proposal for bankruptcy judges was being pushed for a while, but it came to an end because the right side of Congress was strongly against it. Thornberg thinks that most homeowners, whether they were in trouble with their home or not, would not have been supportive of that proposal. A large number of the people in financial trouble today are in trouble, not because they bought homes at the peak, but because they refinanced at the peak. People took money out of their home to buy toys, like cars and televisions. If you walked into a bankruptcy court, and showed the judge everything you’ve done with your finances, he would allow you to keep your home, but you would lose everything else. Also, a lot of people committed fraud on their mortgage applications, so they would certainly lose their home. Realistically, people should be happy that we still have non-recourse loans, because they can take your house but they can’t take everything else.
Christopher says there are no smart economists claiming that the U.S. has potential for deflation. The deflation in Japan is being caused because of their tight monetary policy. The potential for inflation is driven by the money supply. The government pursues a tight money policy, which means they don’t expand the money policy very much. Japan had problems with inflation in the 60s, and that scarred their national psyche. They have become so scared of inflation that they have allowed deflation to occur. If Japan wanted to get rid of deflation, all they need to do is start printing money.
Japan has huge national debt, but they don’t want to inflate because that would make their cost of borrowing increase dramatically. If the United States started to inflate, and that inflation coincided with a $20 trillion federal debt, we would be in trouble. However, our existing debt would become much cheaper, because the interest rates are fixed.
In 2009, banks changed the way they deal with distressed debt. They don’t need to be aggressive about how they value loans, even though many of their loans are under water. As long as the bank can keep the loan current, they don’t have to acknowledge the potential loss in that loan. If we forced a mark-to-market mentality on banks today, we would probably collapse the banking system. There would probably be at least 6,000 banks going out of business if we forced banks to comply with their actual Tier 1 capital needs. We do not have the man power or the money necessary to bail out all the depositors in those institutions.
This is similar to what Japan allowed to happen in their bank system, but it is not the same. Japan created what Christopher calls “zombie banks”, and they made it difficult for anyone to raise debt. Our banks do not have to worry about that problem as much.
One of the nice things about the American economy in comparison to Japan, is that we still have a competitive market. Christopher has some friends who have become employees of different companies due to bank buyouts. Eventually, they quit and decided to start their own bank. These people are becoming new entrepreneurs who pick up the slack for banks who will not lend. Christopher thinks that these kinds of people will be our saviors.
A little inflation goes a long way. The U.S. could easily inflate the economy, which would pick up the asset values, and that would take a tremendous amount of pressure off of our banking systems. The Federal Reserve has made the stance that they are anti-inflation. Christopher believes that Bernanke needs to think more realistically, because a little inflation would be a huge relief for our financial system.
When we have inflation, we usually have an increase in wages. However, wage increases do not usually occur quickly.
In 1982, Bruce refinanced his house to be an investor at 17.5%. That is the long run consequence of that kind of activity.
Bruce asks Thornberg if he foresees the United States having positive GDP growth over 1 percent. Thornberg feels very confident that this will happen. The U.S. economy still has a lot of problems to deal with. However, if the government backs off the stimulus and allows the economy to re-grow and if we have less consumer spending, and more exports, then we will have a great opportunity to grow as a country.
When we talk about GDP, we are talking about the fundamental ability for an economy to produce goods. Our ability to produce goods and services increases by about 3 percent per year, and we’ve been maintaining this growth for decades. The question is, “What are we losing that productive output for?” Thornberg thinks we’ve been using that output poorly. We have been using our output to supply consumer spending and to bring in imports. Also, we have lost our focus on exports and business spending.
We have had a demand shift from less consumer spending to more exports. It takes a while for supply mechanisms to restructure themselves to meet those new demands. It is incorrect to say that demand creates supply. The question is, “How is the supply being altered by the basis of demand?”
The U.S. GDP growth was supported by a lot of equity extraction. Now many people must to save for their retirement. Bruce wonders how much that hurts that which represents 70 percent of GDP engine. This is the point that Christopher has been trying to make. If we hadn’t had the big equity bubble, and if we hadn’t seen an extreme increase in consumer spending, then our ability to supply would have shifted to exporting and business spending.
California has a $1.9 trillion economy, and a $20 billion deficit. Our problems are political and not economic. Christopher thinks we simply need our leadership to make some basic decisions on how California will finance the ending of our debt problem. We don’t have a government that spends a lot of our money. The problem is that we spend it in the wrong places. At the same time, we are not a high tax state. We put high taxes on small bases, which makes us an unfriendly tax place for specific constituencies. Christopher thinks that we simply do not have the political will to get rid of our debt problem.
Christopher thinks that Prop 13 is a fiscal injustice. It amazes him that Prop 13 was even allowed to exist. Prop 13 under the fairness clause, which states that if you are receiving similar services then you should be paying similar dues. Prop 13 should have been rejected in the California Supreme Court. Thornberg thinks we need to get people to vote against this proposition, but we probably won’t make this happen.
Christopher does not currently know, for sure, if we have positive or negative migration in California. However, based on some of the recent reports he has read, California is seeing negative migration. This is largely due to the weak state of the labor markets. The good new is that once we get out of our mess, we will have a weak dollar and lower home prices. Christopher is optimistic that once we are done with this mess, California will show outstanding growth.
The United states has becomes the world’s largest debtor nation. The good news is that the dollar has to go down at some point in time. China, India, Russia and Brazil have made an explicit policy to keep the U.S. dollar strong. They do this by taxing their citizens in order to buy U.S. treasuries. This is a strategy that will someday end, and this will cause the U.S. dollar to fall. This means that they will buy a U.S. treasury, but they will probably lose at least 15 percent of the value in their investment, because of the decline of our value. They are taxing Chinese peasants to subsidize American consumption. They could stop investing like this if they wanted to, but that would immediately severely damage their currency. People keep saying that China is overcoming us, but that just isn’t true. If you owe the bank $10,000, the bank owns you. If you owe the bank $1,000,000, you own the bank. This is exactly what is going on with China. We own them, not the other way around.
Bruce asks what privileges we have as the world reserved currency status. Thornberg says that we get what is called “seniorage”. This means that we can print money, and other people will want to hang onto that money. As a result, we get a subsidy kick out of it. In reality, this is not that important of a status.
We’ve left our worries of private bank debt behind. The new worry in the financial markets is sovereign debt. A lot of nations have increased their spending to levels that aren’t sustainable. People are worried that we will see similar losses in sovereign debt as we saw in banking debt. As a result of this, more people are investing in the U.S. dollar, which is causing the U.S. dollar to improve. Unfortunately, Christopher does not believe this will help us recover.