Inflation, Oil Prices, and the Trade Deficit

World oil prices are going up just on the idea that the Fed’s latest money-boosting tricks will lead to inflation. If inflation actually occurs, oil prices will go up more. You may have noticed gasoline prices going up about 7 percent in the last two weeks. This is not the result of oil companies trying to influence the election, but speculators betting that the U.S. dollar will fall, anticipating the Fed move before it was officially announced. As long as the United States is the largest oil importer, its money will have an inverse relationship to oil.

But the declining dollar and increasing prices for energy make it more important to reduce our national dependence on imported energy. Energy is the biggest of category of imports in the United States, sometimes exceeding all other imports combined, and the United States is running a persistent trade deficit, importing too much compared to the amount of money we have available to spend. The trade deficit is the main reason the U.S. economy is chronically out of balance. The U.S. economy won’t be right until the trade deficit is smaller. The declining U.S. dollar, though, will tend to make the trade deficit larger.

To counter this, we need to find more ways to use less energy. Replacing the old CRT televisions with flat screens was the right idea. The new trend of replacing light bulbs with LED light bulbs will have a similar effect. There must be other ways in which we can do what we’re doing without importing so much energy.

This Week in Bank Failures

Wilmington Trust posted a quarterly loss of $370 million, mostly from sagging commercial real estate in the bank-heavy Wilmington, Delaware, metro area. It may have found an answer, though, in a deal to be acquired in a stock swap by M&T bank. Wilmington Trust shareholders will get approximately 2 M&T shares for every 39 shares they hold. The deal will move M&T into the top 20 in the United States in size of deposits, with 800 branches, including some in Ontario. The deal is subject to regulatory approval and won’t close until next year.

Separately, Allied Irish Bank, which owns a 22 percent stake in M&T, is considering selling its shares. It may need the cash to avoid a takeover by the Irish government.

The divided Congress that follows from this week’s U.S. elections virtually eliminates any chance of further bank rescues. Even if the whole banking system were facing a sudden difficulty, it is hard to imagine that the House Republicans could agree among themselves, or with Democrats, on any quick fix for the problem. This creates possibly the best opportunity for shrinking the size of the banking system, if some of the giant banks sell assets and close operations to avoid financial collapse. To date, the largest banks have only grown larger, in spite of their financial woes.

Tonight’s bank failures started with K Bank, which had $500 million in deposits and 7 locations, mostly in Baltimore County, Maryland. It was one of the larger banks in the county, and the largest bank to fail in Maryland in the current run of bank failures. It was founded in 1961 and was known as Key Bank prior to 2004. It had been reporting losses since 2008 as its commercial loans steadily deteriorated.

M&T bank is acquiring the deposits and assets. It will be keeping the former K Bank branch offices open for just one week.

Three small state-chartered banks, each with a single location, failed on the West Coast.

• Western Commercial Bank, Woodland Hills, California, with $101 million in deposits. First California Bank paid a 0.5 percent premium for the deposits and is also acquiring the assets.
• First Vietnamese American Bank, Westminster, California, with $47 million in deposits. Local bank Grandpoint Bank is acquiring the deposits and assets.
• Pierce Commercial Bank, with $194 million in deposits and one location in Tacoma, Washington. Heritage Bank paid a 1 percent premium for the deposits and is also acquiring the assets.

A week ago, also in Washington State, The Union Credit Union was closed by state regulators. It had $12 million in assets and 3,000 members. The NCUA transferred the member accounts to two other credit unions.

San Francisco Moves to Make Restaurants Less Unhealthy

Two new measures in San Francisco are meant to reduce restaurants’ contributions to health problems.

1. A smoking ban at restaurants now extends to outdoor seating areas. This measure was approved in March and went into effect November 1. It makes sense in San Francisco, where virtually any outdoor seating area is going to be immediately adjacent to at least one building.
2. The “Happy Meal ban” enacted yesterday bans toys in children’s restaurant meals that are more than 35 percent fat. This is not a difficult threshold to meet. A normal meal is 10 to 30 percent fat, so restaurants can still bribe kids with toys to sell them high-fat food, as long as they stay reasonably close to the idea of healthy food. McDonald’s Happy Meal, though, falls conspicuously outside the new San Francisco rules, and so far, McDonald’s has only said that it disagrees with the nutritional science that the new rule is based on. The “Happy Meal ban” takes effect December 1.

Post-Election Notes

Desperate times call for desperate measures. I’ve been poring over exit polls and other recent polls and analysis, and it’s fair to say that the old political axiom, “All politics is local,” didn’t apply yesterday. Voters were mostly thinking of national issues. If the Democrats saw large losses, it’s largely because voters weren’t happy with the Democrats’ response, or lack of response, to the economy. The Democrats’ measured approach to economic matters, trying to dole out favors to big-money interests according to someone’s idea of a fair proportion in order to push the economy forward, has struck voters as more casual than desperate.

This does not mean that voters have confidence in the Republicans. You have to be desperate to pick out a group of people who are old, fat, rich, and comfortable and ask them to shake things up. Voters felt that there was nowhere else to turn, but realistically, they are not hoping for much.

A new Rasmussen Reports national telephone survey finds, in fact, that 59% of Likely U.S. Voters think it is at least somewhat likely that most voters will be disappointed with Republicans in Congress before the next national elections. That includes 38% who say it is Very Likely.

(That survey was taken in the last two days, just before and during the election.)

If Republicans aren’t gloating as much you would expect, it may be because they are already worried about the federal budget. I am sure no one really expects the House Republicans to “work to balance the budget,” as many of them promised during the campaign, but they will have to rein in their deficit-happy tendencies. It would be an embarrassment to deliver a budget that is obviously dysfunctional, like the PowerPoint-on-paper “budget plan” the Republicans introduced last year, and a different kind of embarrassment to just rubber-stamp the White House budget proposal, but it will be politically impossible for the Republicans to agree among themselves on any spending cuts, so they are forced to work with some Democrats to deliver a budget.

Exit polls hint at an electorate still fuming over the Wall Street bailout — another point that defies traditional political wisdom. Voters supposedly have short memories, but more than two years later, they remembered to vote out some of the deal-makers behind that disastrous legislation.

In comparing the polls to the election results, we have learned that there is a systematic problem in political polling. Depending on the polling approach, the polls lean Republican by 2 to 7 points, which is quite large in political terms. This is why the huge Republican sweep that all the major media were predicting didn’t materialize — the predictions were based on polls with an inherent bias. This polling divergence would be higher in a presidential election or any other election with higher voter participation.

The problem with political polling is that it selects polling subjects based on wireline (or land-line) telephone service, which is declining rapidly, and more rapidly among voters under 40, Democrats, and liberals than among voters over 60, Republicans, and conservatives. This gives all political polls an inherent conservative Republican bias that will only get worse as wireline telephone service declines further. Pollsters will, I am certain, continue to look for ways around the decline in wireline, but it may very well be a problem we will have to live with for the foreseeable future.

Money by itself is not enough to buy an election. In California, two failed corporate executives spent a fortune trying to buy their way into political office — officially $162 million in the U.S. Senate race. The money did get voters to take the candidates seriously, and that’s nothing to sneeze at, but it apparently didn’t go much farther than that. Nationally, the Republicans surely got some advantage from the roughly $75 billion spent on their behalf by businesses (unofficially; official figure are much lower) but the effect was not as great as you might have imagined.

Mustering the Energy to Vote

Disillusioned voters. That’s the conventional picture you’ll get from the mass media to explain why voter participation is as low as it is. Voter turnout is recorded as a percent of registered voters, but the real measure is the percent of eligible voters, and it is an extraordinary occurrence when 50 percent of eligible voters cast ballots.

Voter turnout goes up when political rhetoric turns more hopeful, down when it is more fearful, but that is not the main reason voters stay home. The bigger issue is rarely mentioned because it isn’t so colorful. People don’t necessarily have the energy, or the basic vitality, to get out and vote. It’s the same problem that has people losing their car keys and buying fast food instead of cooking. One of the great challenges in economics is to find ways to improve people’s vitality in general. With more vitality, people take more action and do better work. If voter participation started to trend upward, it would be a sign that we are making progress in terms of action and vitality in general.