November 2004 Archives

The WTO approved sanctions on the US for a little known trade regulation called the Byrd Amendment. The Byrd Amendment allows the US to impose "anti-dumping" tariffs on goods that are sold here at low prices (dumping=pricing below cost). By itself that would not be quite as objectionable to the WTO, but the Byrd Amendment goes one step further in giving the proceeds of those tariffs (that is, tax revenue) to the American companies competing with the offending foreign firms.

Tariffs are seldom a good thing for the economy as a whole, but the benefits are concentrated in the hands of a few while the costs are diffused over everyone. This makes them politically difficult to remove. How much more so when the benefits are so tangible and physically handed over from government to firm? Sorry, but I don't see how giving corporations a cut of our spending on imports (isn't that what tariff revenue is?) will help them in the long run. It's windfall profit. It's not going to change their behavior.

The retaliation will be significant and could come early in 2005. Not that we haven't had warning. According to the article linked above, the US has had 2 years to comply.

The major beneficiary of the policy has been steel (which means that anyone who buys steel in their manufacturing process has been subsidizing the troubled US steel industry , but pasta producers and candlemakers have also benefitted.

Ah, the candlemakers. Read here, please. This one's over 150 years old. Time to move on, Congress.

I saw the Chevy commercial again (the one with Suze Orman). Apparently it is for 2005 models, but the 0% is not available for all lengths of the contract. My guess is it would be 0% for 3 years on 2005 models with the option to buy your next car at the same terms.

So really it's not that different from the 0% for 6 years that someone else is touting.

Still...

When Alan Greenspan spoke last week, the media heard only one thing: a warning about the trade deficit.

Case in point: (entire article from Forbes.com here)

Stocks fell substantially Friday as Federal Reserve Chairman Alan Greenspan sounded a warning over the nation's spiraling trade deficit, while rising oil prices raised fresh worries about energy costs heading into winter. The Dow lost more than 104 points in afternoon trading.

Wall Street paid close attention to Greenspan's unusually frank assessment of the trade imbalance and its effect on the U.S. economy. The Fed chairman said the economy was resilient thus far, but would be vulnerable to foreign influence should the deficits continue to build.

"Certainly that has investors worried, though I'm not entirely sure why Greenspan chose to make a case out of this," said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston. "The lower dollar will eventually force importers to raise prices, and that'll help cut the trade deficit. But nonetheless, it was unusual for him to speak out on it like that, and it's having an effect."

"Unusually frank?" "Make a case out of this?"

Read the whole speech.

A little out of the usual territory for a Greenspan speech? Maybe. But I think the media overreacted. The stock market definitely overreacted. Nonetheless, there's really nothing in Greenspan's speech with which I would take issue. I say pretty much the same thing in my open economy macro course, and have for some time. I wouldn't call his comments "unusually frank." I've seen central bank speeches that were unusally frank, and in my opinion, this wasn't.

At best it was a little curious that he chose to talk about the US trade deficit at a panel discussion on the euro. However, I think most economists can make the connection here. I've lectured to my students until I am blue in the face that the US trade deficit could lead to a weaker dollar, that is, a stronger euro (which is exactly what is happening). And an abnormally strong euro is a bit uncomfortable for Europe... ok, "brutal" is one word that has been used. Sometimes I wonder whether the Europeans are more upset with our appetite for cheap Chinese goods or with our foreign policy. Some days it's a tossup.

...that 4 years ago tonight was the last time I visited the top of the World Trade Center. And the last time I ever would.

I just saw an ad tonight for auto financing at 0% for 72 months. Chevy is rolling out a program (endorsed by Suze Orman, no less) where you can lock in a low rate not only for the car you are buying now, but your next Chevy as well. You must buy your next car within the term of your current loan, and I seriously doubt that it would be very easy to qualify for a 0% for 60 month loan under this program on a 2005 model, but probably on the 2004 models that they are trying to get rid of.

If you're willing help them dispose of their inventory, you might be able to essentially lock in 0% for 10 years. At least that's my understanding from their web site. See my update here (after I saw the commercial again).

Am I the only one who is a little worried about all this? Read this recent story on the decline in auto sales. The last company to get too aggressive with financing didn't fare so well. Remember when Mitsubishi was giving 0% and no down payment and no payments for a year to just about anyone? Well, the Big 3 aren't exactly being that silly, but still, it gives one pause.

Now, here's a thought. These 0% deals might just be the new normal. We've been at this level since shortly after 9/11. That's a long time, and people are used to it. No one wants to be the first to raise those financing rates, especially in an auto market that is lukewarm at best. (Think: kinked demand curve model of oligopoly.) In that case, 0% is here to stay, at least for the forseeable future. It will almost take another shock (e.g. a bout of inflation) to dislodge us away from this equilibrium.

Take notes, folks. This could get interesting.

The indoor football team in Peoria used to be called the Pirates. Now that's a name. But alas, the team left the af2 league and the league had the rights to the name, so Peoria had to come up with a new one.

Peoria's football team is going to be the Muntineers.

So, the question is, who would want to be the coach of a team called the Mutineers? Sounds dangerous, doesn't it?

From the article mentioned in the previous post.

Just the increase in the debt ceiling over the past three years is nearly 2 1/2 times the entire federal debt accumulated between 1776 and 1980.

I could give you a laundry list of reasons why this sentence is potentially misleading to the uneducated reader and ultimately irrelevant to the matter at hand, but I won't.

First of all, it's closer to 2 1/4 than than 2 1/2 times more, but now we're splitting hairs.

The appropriate comparison for the first Clinton administration is as follows: The debt ceiling rose by 2.9 times the total amount of federal debt accumulated from 1776 to 1972 (eight years earlier).

The second Clinton administration was much better. The debt ceiling only rose by 70% of the total amount of debt accumulated from 1776 to 1976. However, all told, the 8 years of Clinton added as much to the debt ceiling as the entire amount of federal debt accumulated from 1776 to 1985.

Before you ask why I'm comparing all 4 years of these terms and the article says they are only looking at the last 3 years, that's because they really are looking at the whole 4 year Bush term. There was no increase in the debt limit during the first year, only in the last three. They don't tell you that. I did.

The point here is not to put down or raise up the Clinton presidency (or for that matter the Bush presidency). As you can see, his two terms were like night and day when it came to the budget (for a number of reasons).

Can you see that playing these sorts of games with statistics doesn't tell you anything and could be very misleading?

I wouldn't accept this lame excuse for analysis from a college freshman. If you don't understand compound growth, you'll be sucked in by statements like those above.

This is barely worth mention, but here goes. Congress raised the debt ceiling and the president signed it into law. This has so many people from both sides of the aisle up in arms. Read here.

From that article:

By passing such a huge increase in the debt limit, with no strings attached, Congress has effectively given the Bush administration a blank check to continue running large deficits, said Stephen S. Roach, chief economist at Morgan Stanley. "An open-ended license for this kind of fiscal irresponsibility is a recipe for disaster," he said.

Ok. Let's tell it like it is. The debt ceiling is like the credit limit on your credit card. Of course, you have control over how much you borrow on that card, but suppose you also had the authority to control your own credit limit. Now, tell me what significance that credit limit has (other than perhaps being symbolic)? The debt limit is meaningless!

I have always hated the fact that we have to go through this business of raising the debt limit all the time. It takes the focus off the real problem. The mere mention of the debt limit puts the focus on an arbitrary number and takes the focus off of the budget priorities. Finger pointing about who is to blame for the arbitrary number is not productive at all. Why don't we get back to work figuring out how to reduce that number?

But we won't have that debate today, and that should disappoint concerned people of either party persuasion. Democrats and moderate Senate Republicans should push hard to restore some sanity to the budget process which is spinning out of control. Deficits, in and of themselves, are not necessarily a big problem. However, a process that allows things like the prescription drug bill to pass without any discussion about how to pay for it in the long run is a process that is broken. I favor some discretion in the budget, but in the current economic environment, you cannot ignore long term implications. Health care continues to grow as a percentage of GDP, and any discussion thereof must take that into account. If we want prescription drug coverage, we need to figure out how to pay for it or we shouldn't do it.

Demographics, the saying goes, is destiny. In a simpler time, Congress didn't really need to worry about its implications for budgets. Those days are over. But please, let's have a rational discussion and not repeat what happened this week.

I posted on this earlier but didn't have time to finish the thought. One of my first thoughts was, "With hindsight, was this predictable?" Yes. Now, let me address whether this is a good idea.

I think some people are more optimistic than I. This isn't going to increase "synergy" or any other buzzwords like that. What we have here are two old-style retailers who have been marginalized by Wal-Mart. If Sears sold off its Craftsman tools and DieHard batteries, they could pretty much pack it in. These stores, like Woolworth's and Montgomery Ward, are a product of another time. The way I see it, they have one more chance to change their business model before it's (blue?) lights out.

Sears used to be the "World's Largest Store" (Ever wonder where the call letters for Chicago's radio station WLS came from? Click here.) Those days are gone, and they aren't going to be able to beat Wal-Mart at that game, not even after merging with Kmart. I'm not going to make any suggestions about what they have to do to save themselves. Such suggestions are a dime-a-dozen. But whatever they do had better be good or it's over for them.

All those Kmarts are sitting on some nice real estate that I'm sure Wal-Mart would be interested in. And I'm sure that some mega-specialty stores are salivating at all those mall anchors that Sears owns. Think about it.

Sears announced a merger with Kmart. If you had some money in either stock, you are a little richer today. I have wondered for a while what would become of Kmart. The old "blue light" model no longer works, and they have faced stiff competition from Wal-Mart. The subtle change in the design of the stores and the new greenish colored logo just didn't seem like it was enough to help them turn the corner. I think a lot of people, myself included, are not really surprised that they are merging with someone.

But Sears? Well, Sears is another "old school" retailer that is going to have to change to be competitive in the post Wal-Mart environment. And there was an article in the Wall St. Journal on November 8th that might have given an alert investor a sign that something was afoot. The headline was "Vornado Realty Takes 4.3% Stake In Sears Roebuck" and reads in part:

In applauding the Vornado investment, Sears shareholders may be eyeing the success of Kmart Holding Corp. in selling off locations and amassing an enormous pile of cash....

Kmart and Sears have their largest shareholder in common: ESL Investments Inc., the Connecticut hedge fund run by Edward S. Lampert. But while ESL holds more than half of Kmart shares and Mr. Lampert serves as the discounter's chairman, he has not taken a public role in Sears....

An ESL spokesman declined to comment on Vornado's stake in Sears.

Don't feel bad, I missed it too. At least now we know what Kmart did with that pile of cash.

November 17th and it's 67 degrees and sunny. No jacket required today. Of course the downside is that these days are really tough on the climate control systems in university buildings. Seems that the central heating plant thinks that November is cold and so the heat should be on. This is the case with every college or university I know. It was once explained to me this way: once the boilers are turned on, they are on until April. Today, our building is faring better than most. It's noticeably warmer, but not hot where I have been. However, this evening I teach in a room that is always a little warmer than necessary. We'll have to see how it is in there.

As I walked across the quad in such stellar conditions, I couldn't help but hum that little tune by U2.

It's a beautiful day
Don't let it get away
It's a beautiful day

Enjoy it while it lasts.

Floyd is back home in Iowa tonight. Floyd is, of course, the bronze pig statue that is the prize of the annual Minnesota vs. Iowa football game. In 1935, the Iowa fans were upset about the way that Minnesota had roughed up one of their players the year before. The game that year was in Iowa and there was a lot of what modern sports types would call "trash talk" leading up to the game. Even the governor of Iowa got into the act. To calm the fans, Minnesota's governor Floyd B. Olson proposed a friendly bet which the Iowa governor accepted. Minnesota won the game; there was no violence. Iowa presented Minnesota with a champion pig, which was then named after the Minnesota governor. The pig was a brother of the pig in the movie "State Fair." From then on, they played for a bronze statue of the pig rather than the real thing. Read more about Floyd of Rosedale here for the Minnesota perspective, here for the Iowa perspective. This is the fourth year in a row that Floyd has come home to Iowa.

Aren't college football rivalries great? Paul Bunyan's Axe, the Old Oaken Bucket, the Little Brown Jug, Floyd of Rosedale--of this list, only the Old Oaken Bucket doesn't involve Minnesota. They must have one of the largest number of prizes up for grabs each year. I wonder when (or if) they ever had the Axe, the Jug, and Floyd all in one year.

According to this timeline of the events of November 10, 1975, those were the last words from the Edmund Fitzgerald. Sometime between 7:10 and 7:30pm EST on that date, she slipped beneath the waves taking 29 men with her. The story is as fascinating as it is vexing. Why did it happen? We will never know. Like most tragedies, there was a long chain of events that led up to it. If the chain had been broken, the Fitz might still be plying the lakes or sitting dockside next to a museum. But the chain wasn't broken. Everything seemed to go wrong.

The wreck of the Edmund Fitzgerald gets a lot of attention because of Gordon Lightfoot's song and because it happened in our own time. Stories of shipwrecks often evoke images of bygone days, before the advent of modern navigational equipment. The Fitz had two radars. Both failed. There was a light and a radio beacon nearby. They failed. Ships in the area, such as the Arthur Anderson, were powerless to help. In the end, she succumbed to the gales of November like so many before her.

In her day, though, she was the pride of the fleet. For more than a decade she was the largest on the lakes and was the first to carry more than a million tons of ore through the Soo Locks. Thanks to Gordon Lightfoot and so many others who keep the story alive, the Edmund Fitzgerald will never be forgotten.

In memoriam

They that go down to the sea in ships, that do business in great waters; These see the works of the LORD, and his wonders in the deep. For he commandeth, and raiseth the stormy wind, which lifteth up the waves thereof. They mount up to the heaven, they go down again to the depths: their soul is melted because of trouble. They reel to and fro, and stagger like a drunken man, and are at their wits' end. Then they cry unto the LORD in their trouble, and he bringeth them out of their distresses. He maketh the storm a calm, so that the waves thereof are still. Then are they glad because they be quiet; so he bringeth them unto their desired haven. Psalm 107:23-30

The Concordia Cobbers are MIAC (Division III) football and volleyball champs! Go Cobbers!

This is a no brainer. Purely as a matter of getting it on the record ahead of time, I'm predicting a 1/4 point increase tomorrow.

At this point in time, another 1/4 point in December is almost a sure thing. I wouldn't have said that last Thursday, but things are really moving in that direction.

I promise a longer post on this later.

Taggert Brooks posted this before the election.

I'm inclined to agree. Polls probably do influence voters. It is a lot like the Heisenberg Uncertainty Principle.

Let's apply this to exit polls. We'll probably never know, but I'd like to know whether Republicans came out later in the day after they heard early exit polls saying that Kerry appeared to be leading or that it was going to be really close. For more on this story, read here. Here is part of the article:

That said, Harris believes that the media and the campaigns misuse exit polls.

"It got on Drudge (Report), it got to the campaigns," Harris said of Tuesday's early exit polls. "You looked at President Bush (Tuesday) morning and he looked sick. Exit polls are a wonderful advantage in providing context and texture. But for trying to make a call, we've learned in two elections in a row that they lead to confusion."

Bill Schneider, a CNN analyst and former Harvard University political science professor, agreed.

"The lesson here is put not your faith in exit polls ... particularly if the exit poll is close," he said. "Exit polls are designed for analysis. ... They are not very good, nor really is any poll very good, for being an absolute, exact prediction."

But Karyn Barker, a fellow at the American Enterprise Institute, believes the exit polls are getting a bad rap. It's not the polls, she says, it's how the people use them.

"Anyone who follows exit polls should not use them as a prediction of the turnout of certain groups," she said. "To assume that these numbers were spot-on was foolish. It seems some people, including me, wildly misinterpreted what they meant."

Zogby said Tuesday's exit-poll problem would probably send pollsters back to the drawing board to figure out whether they need to apply different formulas, models and weights to their surveys.

"There was a time you could go to the bank with the early exit polls," Zogby said. "Now we have a problem."

I think they are missing the point as to what the real problem is.

The election has been decided. There's still more to talk about, and I might post links to interesting things I read. Voter turnout is going to be a hot topic. The errors of the of exit polls (and other polls) are going to be hot topics. And of course we can always talk about the role of the new media in politics. That should keep us occupied for 4 years.

Lots of economic news in the wings. More posts on that in the future.

The Fed meets on Tuesday Wednesday. To be continued...

The title of this CNN article should be "Stock Market Rallies on News of a Clear Winner." It would have gained 100 points for Kerry too. Only a recount would have sent it down.

The Iowa Electronic Market, which I have referenced often on this blog, did one thing very well. It consistently predicted Bush receiving the majority of the two party vote. Polling data had some problems this time around, that is for sure. Alan Bjerga mentions the polls among other things in his post-election reflection. But you never really heard much about nationwide polls this time. The polls were all focused on the battleground states. Maybe next time the IEM should do a battleground poll.

The winner-take-all market reflected the uncertainty in that prediction. Even though the vote share was dead-on, the winner-take-all made a big swing back and forth at the end, indicating Kerry before the polls closed, but then very quickly--and I mean you could watch it changing before your eyes--switching to Bush as the returns came in.

All in all, not bad for the IEM. I think it worked a little better than in 2000. In fact, this sort of result (51-49 or 52-48) seems to be where it is a really useful tool.

If you listen really carefully, you can sometimes hear the NBC chimes (G-E-C) in the background before a state is called for one of the candidates. For the history of the NBC chimes, go here. Besides being a symbol of the network, the chimes are an internal signal in the newsroom at NBC of a news bulletin.

Dan Rather is throwing out homespun sayings at a rate of about two per minute. "Just because a chicken has wings doesn't mean that chicken can fly," for example. (I may not have gotten the quote exactly, but you get the idea.) I have no idea what he meant.

I've really enjoyed NBC and MSNBC though. The analysts have personalities, and the panels have been pretty balanced--those are two things I like in election coverage. They put together a nice production overall.

I'm about to call it quits, but I have been studying the numbers for the last hour or two. It is hard to imagine Ohio switching to Kerry unless there is some sort of fraud allegation that hasn't yet been made. New Mexico and Nevada are leaning toward Bush. We'll probably wake up to see them in his column.

Now then, if NV and NM go to Bush and Ohio somehow goes to Kerry, then Bush would have to pick up Wisconsin to force a tie. Iowa (which has suspended their counting for the night, but Bush leads with Republican areas yet to be counted) would not be enough.

Wisconsin plus Ohio would be enough for Kerry at this point, and it looks like he'll get Wisconsin. That's why there will probably be some kind of challenge in Ohio, or at least the exploration of his options. For Kerry, it's that important.

Ohio.

Unless there turn out to be major accusations of wrongdoing in Ohio (and no one has reported anything like this yet), this one is over.

By my estimation, the final result will look a lot like it did in 2000. NH will turn blue while NM and IA will turn red. (Though technically all three of those are too close to call--my predictions.)

I love this stuff no matter who wins. I've been glued to the TV to see Reagan, Bush, Clinton, and Bush hit the magic 270. It never gets old. It never will. It is just fascinating to watch.

I'm going to watch until Tom Brokaw signs off. This will be the last election that he covers as an anchor. Get some sleep, Tom! Thanks for the memories.

Hilary Rosen on MSNBC says that Bush shouldn't declare victory until the votes are counted in Ohio.

Agreed.

I had forgotten that I made this trade back in January. I bought 15 shares of Bush vs. Kerry at between 16 and 17 cents each. They will pay off at about 52 cents.

That'll buy my lunch tomorrow!

But hey, it's fun.

Things seem to be breaking in favor of Bush. It will be interesting to see how close the big states (OH and FL) are to see if there will be any challenges. It will depend on the provisional ballots, absentee ballots, and so on. I'm watching NBC and MSNBC mostly tonight. Their analysis of Ohio has been absolutely fascinating. This will keep people talking for a long time.

The real story here is that the exit polls all night have been wrong. Theories abound.

Even so, I don't think Kerry will concede tonight unless Bush absolutely runs away with Ohio, and maybe not even then.

Bush and Cheney might address the nation tonight (this morning), this prediction based off of seeing the VP motorcade heading to the White House on one of the networks as I flipped around.

I'm ready to call it, but it is not exactly the way I expected to.

Tim Russert just said that is going to be very hard to put together a winning coalition of states without Ohio and Florida.

Indeed.

The title is the message.

Too early for me, but they are doing it.

Challenges are likely.

I like Tim Russert's new technology (notebook computer rather than whiteboard). When you listen to him run the numbers, he sounds like he is going through some internal struggle not to call this for Bush. I guess that's because he all but has Ohio in the Bush column. If that turns out to be true, Kerry would (almost) have to run the table. But I'm not convinced.

People are still voting in Ohio! Anyone in line when polls closed will vote, at least by provisional ballot. Here's to participation!

MSNBC called Florida for Bush

MSNBC reports from their decision desk that they may not call Florida tonight because of the absentee ballots.

Here is the current quote from the IEM website.

Quotes current as of 22:45:04 CST, Tuesday, November 02, 2004.
Symbol Bid Ask Last Low High Average
DEM04_G52 0.007 0.009 0.007 0.006 0.950 0.211
DEM04_L52 0.111 0.198 0.112 0.110 0.500 0.354
REP04_L52 0.671 0.693 0.693 0.000 0.700 0.277
REP04_G52 0.161 0.187 0.188 0.033 0.220 0.107

This is from the winner-take-all market. The most likely outcome according to the market is Bush with less than 52%. Seems a little high. Time will tell.

Florida is 97% in, but there are a lot of absentee ballots out there. Dee Dee Meyers on MSNBC thought there were a million of them. So it's clearly not over, even in Florida. I don't think I'm saying anything controversial here when I say that had it not been for 2000, they would have called Florida by now. But obviously no one wants to go through that again.

I'll say it again. Ohio is a must win for Kerry. But that one is far from over. I don't think we'll know the answer tonight. Lots of provisional ballots to count in Ohio.

Judy Woodruff on CNN just reported an unnamed Kerry source is pessimistic about Florida.

Taggert Brooks quotes Fed governor Ferguson's excellent speech from last week. The topic of the speech is the equilibrium real interest rate--at least that's the title. But the real message of the speech is about the speed of adjustment back to equilibrium. Very relevant stuff.

Nothing. Absolutely nothing firm to report.

Looks like Florida is tipping toward Bush (as I was expecting), but Ohio is really too close for anyone to even think about calling. With apologies to Tim Russert...

Ohio
Ohio
Ohio

And maybe Iowa, Minnesota, and Wisconsin. Very interesting indeed. The total on MSNBC is currently 193 to 112 in favor of Bush. Oops.. check that... news coming....

PA for Kerry
AZ for Bush

203-133 for Bush as of now.

And still no surprises.

Blogging into the night...

Dixville Notch voted. Bush 19-Kerry 7.

The rest of us do it in the morning.

The story goes like this: if the Washington Redskins win their last home game before the presidential election, the incumbent wins, and if they lose, the incumbent loses. It has correctly "predicted" the outcome since 1936.

It's amusing, and meaningless, of course. The two events have nothing to do with one another. But it does give us an opportunity for a little statistical fun.

Suppose the probability of the two events happening together (Redskins win/incumbent wins or Redskins lose/incumbent loses) is 1/2. It's not exactly, but it's a reasonable approximation for starters. The probability of it happening twice in a row is 1/4. The probability of it happening n times in a row is (1/2)^n. There have been 17 elections since 1936, so (1/2)^17=0.0000076. Impressive indeed!

Or maybe not. Open challenge (I might try to analyze this if I have time): argue that the success of this indicator of elections is not as impressive as the above paragraph suggests. I have the beginning of an argument started, but it's already way too long to put here.

It's kind of like the observation that an old NFL or NFC team winning the Super Bowl tends to coincide with a rising stock market that year. Historically, the NFL or NFC has won more Super Bowls (they have had better teams) and the stock market is up more years than it is down (for reasons that have nothing to do with football). Note that this predictor seems to work well only because the Pittsburgh Steelers (4 Super Bowl wins) are an old NFL team and correctly predicted bull markets! If the Steelers were counted with the AFC (their current conference), the predictor would not do much better than pure chance.

And that's the beauty of looking for these patterns. People just search around until they get something that works! That's why I am always so skeptical of stuff like this. Big deal! It's amusing--nothing more.

Bottom line: The world is full of improbable events. Improbable events are literally happening all the time. Each one is so unlikely, but there are so many opportunities for unlikely things to happen. Sometimes a coincidence is just a coincidence!

I have an academic paper on the subject of conditional probabilities, so this is more than just a passing interest. I might write more on this after the election--no matter who wins.

The Economist has a rather pessimistic article on the dollar this week. Are they right?

Unfortunately, the answer is, "possibly, yes," and there is a very real chance that they could be right on. Economists started looking for a dollar slide a few years ago. From 2002 to the start of this year, it looked to be proceeding apace. Then, this year, the downward trend stopped, prompting some to think it was over. It's not. Asian central banks are buying up dollars to manage their own exchange rates. As a result, we in the US haven't been getting the proper price signals to tell us to slow down the borrowing. There are two scenarios possible: 1) the dollar slide resumes after the election (regardless of the result), interest rates start to rise slowly and steadily, economic growth causes tax revenues to rise and the deficit is brought under control or 2) the trade deficit continues to rise every month, GDP growth stagnates, and Asian currencies revalue. Scenario 2 isn't pretty, and it could happen.

It doesn't have to though. What we really need is for foreign investors to invest in productive assets rather than government bonds. In the last few years, they have been financing our deficits rather than engaging in direct investment. If you look at the trends in the balance of payments in the last few years, the picture is quite dismal, though the second quarter shows a tiny glimmer of improvement. I'll update this story when the 3rd quarter numbers come out (in mid December) if not before. This is the real story, and the real source of trouble if things start to turn south. Keep an eye on this developing economic story.

As I write, it is 8 1/2 hours to midnight in the east. 8 1/2 hours until the voting starts (and ends) in Dixville Notch, NH. The tiny town has a tradition of voting first in the nation. Some 20 hours later, the real fun begins.

I don't have a real prediction in the sense of saying that I think one candidate is sure to win. I do think that the popular vote will be decided by less than 2 percent in either direction and that a tie in the electoral vote is more possible this year than at any time in our past. I would put the probability of an electoral vote tie at about 20% right now. What, you ask, yields a tie? Among other things, Kerry takes PA, OR, WA, HI, OH, MI, ME, NH, and IA while Bush takes, CO, AZ, NM, FL, and WV. Notably missing from this equation are MN and WI. They would need to split those two (10 votes each) to end in a tie.

I don't think Bush can win without Florida, and with FL and Ohio he's unbeatable. Kerry can't with without PA, but I also don't see how he can lose his wife's home state. Iowa is also crucial for Kerry. Only 7 votes, but I think that the vote in Iowa will representative of what is happening in other battleground states. If Bush wins Iowa, he has a landslide. If Kerry wins Iowa, it's not over. Likewise, another small benchmark state will be WV. If Kerry can win there, he'll have the landslide. If Bush takes it, he's still in the game. Look for these kind of indicators tomorrow night to gauge where things are going.