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Archive for January, 2008

2008-01-31 US Economic Releases

Posted by Sada Mosler on 31st January 2008

2008-01-31 Personal Income

Personal Income (Dec)

Survey 0.4%
Actual 0.5%
Prior 0.4%
Revised n/a

2008-01-31 Personal Income TABLE

Personal Income TABLE

A bit better than expected, holding up reasonably well, as declining interest rates reduce interest income component.

2008-01-31 Personal Spending

Personal Spending (Dec)

Survey 0.1%
Actual 0.2%
Prior 1.1%
Revised 1.0%

2008-01-31 Personal Spending TABLE(1)

2008-01-31 Personal Spending TABLE(2)

Personal Spending TABLE

OK number after last month’s large increase.

Also holding up reasonably well, but trending modestly downward.

2008-01-31 PCE Deflator YoY

PCE Deflator YoY (Dec)

Survey 3.5%
Actual 3.5%
Prior 3.6%
Revised n/a

Too high for the Fed, but hopefully it will come down to core.


PCE Core MoM (Dec)

Survey 0.2%
Actual 0.2%
Prior 0.2%
Revised n/a

Actual was 0.23%

2008-01-31 PCE Core YoY

PCE Core YoY (Dec)

Survey 2.2%
Actual 2.2%
Prior 2.2%
Revised n/a

Fed OK with this number and should be OK next month as January 2007 was up 0.2%. After that, the 2007 numbers are 0.1%’s for a while; so, there’s a better chance of YoY increases after that.

2008-01-31 Initial Jobless Claims

Initial Jobless Claims (Jan 26)

Survey 319K
Actual 375K
Prior 301K
Revised 306K

Big jump up as expected by Karim.

4 week average about 325,000 likely return to pre-January trend of about 350,000 (See Karim’s report).

Not yet the stuff of recession.

2008-01-31 Continuing Claims

Continuing Claims (Jan 19)

Survey 2685K
Actual 2716K
Prior 2672K
Revised 2669K

Moved back up some.

Also not yet the stuff of recession.

2008-01-31 Employment Cost Index

Employment Cost Index (4Q)

Survey 0.8%
Actual 0.8%
Prior 0.8%
Revised n/a

2008-01-31 Employment Cost Index YoY

Employment Cost Index YoY

Survey n/a
Actual 3.3%
Prior 3.3%
Revised n/a

As expected, Fed is OK with this, but may be giving it too much weight, as it may be the last inflation indicator to move in this cycle.

2008-01-31 Chicago Purchasing Manager

Chicago Purchasing Manager (Jan)

Survey 52.0
Actual 51.5
Prior 56.6
Revised 56.4

Still above 50, not the stuff of recession yet.

2008-01-31 Help Wanted Index

Help Wanted Index (Dec)

Survey 20
Actual 22
Prior 21
Revised n/a

Very small uptick from a very low level.

2008-01-31 NAPM-Milwaukee

NAPM-Milwaukee (Jan)

Survey n/a
Actual 58.0
Prior 62.0
Revised n/a

No recession here, yet.


Posted in Daily | No Comments »

Re: ECB funding Spanish mortgage banking system

Posted by Sada Mosler on 31st January 2008

(an interoffice email)



In the case of a bank failure, Spain still is the entity that would
repay depositors. To get the funds Spain would somehow liquidate the
failed bank. If the loss was large enough so that Spain couldn’t
raise the funds to pay off the depositors (via both liquidating the
bank and attempting to borrow in the credit markets) payment to the
depositors would be delayed until Spain did raise the funds.

The ECB would either return the mtg collateral to Spain for payment,
or, if Spain would not or could not receive the collateral vs payment,
the ECB would liquidate the collateral and hold Spain responsible for
any deficiency balance.

This makes the ECB much like any other depositor, but with collateral
as security.

It does not reduce the risk of loss to bank shareholders should the
mtgs not perform.

It does not remove ultimate liability from Spain.

It does not involve risk to the ECB beyond that of Spain paying for
any deficiency, and presumably the ECB isn’t loaning at 100% of market

It does not create a ‘moral hazard’ issue as bank shareholders and
Spain are still in first loss position for any loan losses.

It does prevent a disruptive ‘fire sale’ from ‘technical volatility’
of forced liquidations.

It does provide bank funding at the ECB’s target rate for interbank
lending, which is what the target is all about, so that seems ok?

I have no problem with institutional structure that doesn’t use the
liability side as a source of ‘market discipline’ and instead uses
capital requirements/ratios/gap rules, etc. and regulates the asset
side as well?

And with the right haircuts and regs funding non bank mtg production
can likewise suit public purpose.

>Spanish banks funding mtgs at the ECB
> Shortcut to:
> in128.xml

Posted in Email | No Comments »

Claims, ECI

Posted by Sada Mosler on 31st January 2008

From Karim:

  • True to the past 5yrs pattern, claims seem to be reverting to trend after the first few weeks of January.

Right, good call!

  • IJC climbed from 306k to 375k; the trend before the January drop was around 340-350k; this number was for MLK holiday week, so an adjustment issue here as well; bottom line is I think trend is still around 350k.
  • Continuing claims rose from 2685k to 2716k.
  • ECI (both headline and wage component) up 0.8% q/q

Data below is for Dec, so was largely known in yday’s GDP number.

  • Personal income up 0.5%, with wage and salary component up 0.4%
  • Core PCE up 0.2% m/m (2.2% y/y)

Most meaningful data here was continuing claims (little to no hiring taking place) and ECI (wage gwth still tame).

And Fed still looking at this as an indication of ‘inflation expectations’.


Posted in Daily, USA | No Comments »

Monoline proposal

Posted by Sada Mosler on 31st January 2008

Fed by itself or working with AAA counterparty offers to sell supplemental bond insurance to investors. (AFLAC concept)

Maybe charge a point and insure up to a price of maybe 99, or whatever combo works.

Worst case the current insurers are downgraded to AA, so they should still be able to cover losses, so risk is minimal to the new insurer, and fees will likely be profits.

Only investors who care would buy it.

Bonds would remain AAA rated.

The key is the current insurer’s capital is still in first loss position, and the current insurance is probably still money good, or they’d be talking about a downgrade way below AA.

And not all bond holders care about AAA vs AA. Only those who care buy the supplemental insurance.

Posted in Bonds, USA | No Comments »

EU data

Posted by Sada Mosler on 31st January 2008

stagflation there too

Actual Forecast Previous
6:00am EUR CPI y/y (p) 3.2% 3.1% 3.1%
6:00am EUR Consumer Confidence -12 -10 -9
6:00am EUR Unemployment Rate 7.2% 7.1% 7.2%


Posted in EU | No Comments »

Poland cutting demand

Posted by Sada Mosler on 31st January 2008

This has been much the same for new members that previously had higher budget deficits.

It firms the Euro and keeps unemployment higher than otherwise.

[Before the euro, tight fiscal was 'offset' by the national CBs bought $ (I call that 'off balance sheet deficit spending') which supported employment and net export growth. While exports are a real cost, and this process thereby came at a real cost to the domestic standards of living, it did make the numbers (GDP, employment) look good.]

Poland likely to slash deficit in euro convergence plan

(Thomson Financial) Poland is likely to lower the public sector deficit in its new convergence programme for joining the euro, targetting a cut in its deficit to 1 pct of gross domestic product by 2011, a deputy finance minister said today.

He also said the government would aim to cut the 2009 deficit by several billion zlotys from the 27.1 bln zlotys planned for this year.

“From the convergence programme which should be approved by the government and sent to Brussels, it is possible that in 2008 the general government deficit will be 2.6-2.7 pct (of GDP), and in 2009 2-2.5 pct,” Stanislaw Gomulka, one of Poland’s four deputy finance ministers, said today. “In 2010 it may be around 1.5 pct and in 2011, 1 pct. I think the discussion will concern these levels,” Gomulka told reporters on the sidelines of a conference in Warsaw.

Asked by Thomson Financial News about next year’s deficit, he said: “The government may assume in its work on the 2009 budget, a deficit of several billion zlotys lower than the 27.1 bln zlotys planned for 2008.” The government normally lodges its initial budget assumptions in the middle of year after several months of consultations with other ministries.


Posted in EU | No Comments »

Oil comments

Posted by Sada Mosler on 31st January 2008

Iraqi Oil Minister Sees No Output Change from OPEC

(Reuters) Iraq’s oil minister Hussain al-Shahristani said on Thursday there was no sign of any shortage of oil in international markets and he did not expect OPEC to change its output levels at a meeting this week.

Saudis might like letting prices sag in front of meetings to stave off production increase talk.

“Quite frankly, the data we are looking at do not show any shortage of oil on the market. The prices are not really affected by any fundamental market forces,”

Right, just the Saudis (and probably Russians as well) setting price and letting the quantity they pump adjust, aka acting as swing producer.

Shahristani said ahead of the meeting on Friday of OPEC oil ministers in Vienna.

Twin themes continue – moderating demand and inflation.

So far, the Fed is directing all its efforts to the demand issue, including support for the coming fiscal package.

Posted in Oil | No Comments »

Valance Weekly Economic Reports: Global News Highlights

Posted by Sada Mosler on 30th January 2008

Same twin themes taking hold – weakness and inflation.

US Mixed data
EU Softening data could change ECB’s inflation rhetoric
JN CPI Higher on food, energy prices; Mixed data continues
UK Housing Market Continued To Show Weakness
AU Businesses Less Confident About Q1 economic outlook


Posted in News Highlights | No Comments »

Saudi production up to 9.2 mbpd

Posted by Sada Mosler on 30th January 2008

Opec reported Saudi production was up to 9.2 million bpd.

This means demand has increased at the current posted prices probably making further price hikes are more likely than not.

Bloomberg should have updated production numbers around February 5 for confirmation.

Posted in Oil | No Comments »


Posted by Sada Mosler on 30th January 2008

From Karim:

  • GDP slows from 4.9% to 0.6%
  • Personal consumption slows from 2.8% to 2.5%
  • DGO strength in Dec shows up in modest positive in equipment and software (+3.8%)
  • Residential FI (housing) down 23.9%
  • Core PCE up 2.7% annualized for quarter and 2.1% y/y
  • Net exports add 0.4% to gwth
  • Inventories a drag by 1.25%
  • Inventory/shipment ratio still at recent highs, so unlikely that inventory drag is over yet
  • ADP gain of 130k signals upside risk to consensus 65k advance in nfp; while usually reliable, adp has also had some spectacular misses
  • In light of decline in jobs hard to get component of conference board survey and adp, will call for 90k gain in nfp Friday.
  • Pretty long period between jan and march fed meetings (next meeting march 21). So by next meeting, will have 2 nfp reports to look at as well as decent idea on Q1 gwth. Bernanke testimony likely on 2/27.


Posted in USA | No Comments »

2008-01-30 US Economic Releases

Posted by Sada Mosler on 30th January 2008

2008-01-30 MBAVPRCH + 4 Wk Ave + 12 Wk Ave

MBAVPRCH Index + 4 Wk Ave + 12 Wk Ave

From Karim:
very volatile series-see chart-white line is purchase index-purple line is 4wk avg and green line is 12wk avg-latter is probably best indicator of trend and looks like still heading lower. Of course this series also reflects multiple applications for same home purchase, which is more likely over the past few months in light of tighter standards for many borrowers, so probably have to adjust for that compared to same series a year ago.

2008-01-30 MBAVREFI

MBA Refinancing Index (Jane 25)

Survey n/a
Actual 5103.6
Prior 4178.2
Revised n/a

Refi index positive for ‘market functioning’, but purchase index could be softening.

As before, winter housing numbers are volatile.

2008-01-30 ADP Employment Change

ADP Employment Change (Jan)

Survey 40K
Actual 130K
Prior 40K
Revised 37K

Not the stuff of recession. While not a reliable predictor of Friday’s payroll report, it is a ‘real’ number as it’s ADP’s report of 392,000 business it services.

2008-01-30 GDP Annualized

GDP Annualized (4Q A)

Survey 1.2%
Actual 0.6%
Prior 4.9%
Revised n/a

Lower than expected but still positive, consumer up 2% which is far from recession, and final sales for domestic purchases were up 1.4%, and the Dec export number won’t be reported until Feb 14. The durable goods number yesterday may portend a higher than estimated export number for the next Q4 GDP revised report. Inventories were burned off by 1.25% of GDP, which is also generally not indicative of recession.

2008-01-30 Personal Consumption

Personal Consumption (4Q A)

Survey 2.6%
Actual 2.0%
Prior 2.8%
Revised n/a

Down but not terrible, and not the stuff of recession

2008-01-30 GDP Price Index

GDP Price Index (4Q A)

Survey 2.6%
Actual 2.6%
Prior 1.0%
Revised n/a

Not good.

2008-01-30 Core PCE QoQ

Core PCE QoQ (4Q A)

Survey 2.5%
Actual 2.7%
Prior 2.0%
Revised n/a

Very troubling to the Fed. Mainstream theory says you can’t let core elevate. The cost to bring it down is much higher than any possible losses due to near term weakness caused by keeping rates high.

2008-01-30 FOMC Rate Decision

FOMC Rate Decision (Jan 30)

Survey 3.0%
Actual 3.0%
Prior 3.5%
Revised n/a


Posted in Daily | No Comments »

U.K. mortgage approvals drop to least since 1999

Posted by Sada Mosler on 30th January 2008

U.K. Mortgage Approvals Drop to Least Since 1999

By Jennifer Ryan

(Bloomberg) U.K. mortgage approvals dropped in December to the lowest in at least nine years, and consumer credit fell, threatening the outlook for economic growth.

Lenders granted 73,000 loans for house purchase, down from 81,000 in November and the least since records began in January 1999, the Bank of England said in London today. The median forecast in a Bloomberg News survey of 24 economists was 79,000. Lending on personal loans and overdrafts fell to 265 million pounds ($530 million), the least in 15 years.

Banks are tightening credit standards after contagion from the U.S. subprime mortgage market collapse, the Financial Services Authority said yesterday. Less access to credit for Britons with record debt may further slow consumer spending and a weakening housing market, adding to the case for an interest rate reduction by the Bank of England as soon as next week.

“The household sector was clearly under some kind of pressure at the end of 2007,” James Shugg, an economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. “The U.K. housing market is embarking on a much slower growth period.” He predicted further interest rate reductions after a quarter-point cut last month.

In a separate statement, Prime Minister Gordon Brown reappointed central bank Governor Mervyn King to serve another five-year term. King accepted the position, saying in a statement that he looks “forward to working hard with my bank and MPC colleagues on the economic and financial challenges that face us all.”

Consumer Credit
The central bank’s report today showed consumers borrowed less on unsecured credit as they faced repaying a record 1.4 trillion pounds in debt and banks curbed lending to them. Net consumer credit fell to 557 million pounds in December, less than half the previous month’s total.

“A significant minority of consumers could experience financial problems because of their high levels of borrowing,” the FSA, the U.K.’s financial regulator, said in its risk outlook report yesterday. “A growing number of consumers are likely to experience debt repayment problems in 2008.”

The average cost for a fixed-rate mortgage maturing in the next 12 months and switching to a variable rate will rise by about 210 pounds per month, creating a “serious impact on the affordability of the loan,” the FSA said. The increase will affect about 1.4 million home loans.

Subprime Losses
Britons face higher home loan costs after banks around the world posted at least $133 billion in losses from the collapse of the U.S. subprime mortgage market.

The average rate offered by lenders on a mortgage for 95 percent of the price of a property, fixed for 24 months, rose to 6.53 percent in December from 6.44 percent, the central bank said Jan. 10. The central bank’s credit conditions survey showed banks plan to limit access to all debt in the first quarter.

“There is a risk that some consumers could find it difficult to meet their credit commitments due to tighter lending standards for both secured and unsecured credit,” the FSA said.

All 30 economists in a Bloomberg News survey forecast the Bank of England will cut interest rates a quarter point to 5.25 percent on Feb. 7 as growth slows and the housing market stalls.

U.K. retail sales rose at the slowest pace in 14 months in January, the Confederation of British Industry said yesterday.

House prices fell for a fourth month in January, Hometrack Ltd. said Jan. 28. U.K. real estate professionals said December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992, according to a Jan. 16. report by the Royal Institution of Chartered Surveyors.


Posted in UK | No Comments »

FOMC preview

Posted by Sada Mosler on 29th January 2008

My guess is the GDP forecast the Fed is now getting from it’s staff is not a downgrade from previous forecasts, and may even be an upgrade due to:

  • The blowout durable goods numbers
  • The drops in claims following the high unemployment number
  • The private forecasts on average show 65,000 new jobs and unemployment falling to 4.9 on Friday
  • Anecdotal reports from big cap old line corps show no recession in sight
  • But still data dependent with ADP, GDP, and deflator tomorrow am

Yes, it has been about domestic demand, but they now realize exports have taken up the slack and are holding up employment and real gdp, as well as contributing to inflation.

Staff inflation report will show deterioration of both headline CPI and core measures, along with tips fwd breakevens moving higher and survey info showing elevating prices paid and received. And food/fuel/import and export prices all trending higher, risking core converging to headline CPI.

Higher crude prices are now attributed to higher US demand by the markets and the Fed.

Many ‘financial conditions’ have eased:

  • LIBOR has come down over 150 bp since the Dec 18 meeting even as FF are down only 75. mtg rates way down as well, and at very low levels.
  • Commercial mortgage rates somewhat higher, but from very low levels previously
  • Equities have firmed up since the soc gen liquidations (and look very cheap to me)

The last bit of system risk is from a downgrade of the monolines and that risk seems to be diminishing.

The ratings agencies have been reviewing them intensely for 6 months, and both the capital of the monolines and the credit quality of the insured bonds must still be adequate for the AAA rating. And in any case the risk is to go to AA, not to junk, meaning that credit per se isn’t the issue at all. The issue is forced selling by those who can’t legally hold insured bonds if the rating drops. That’s a very different issue.

Wouldn’t surprise me that if tomorrows numbers are as expected, and the fed cuts 50, markets start to look at that as possibly the last move, and reprice accordingly, with FF futures trading closer to a 3% trough than a 2% trough.

An unchanged decision may also result in a near 3% FF futures trough, with a couple of 25 cuts priced in.


Posted in Fed, Interest Rates | 2 Comments »

Crude just traded over $92/barrel

Posted by Sada Mosler on 29th January 2008

The markets and the Fed now look at higher crude as evidence of higher demand.

Posted in Oil | No Comments »

ISM revised upward

Posted by Sada Mosler on 29th January 2008

Seems most of Q4 was revised up, and Q3 as well.

TABLE-U.S. ISM non-manufacturing index revised to 54.4 in Dec

(Reuters) The Institute for Supply Management on Tuesday released annual seasonal adjustments to some of its monthly non-manufacturing indexes.

Dec Nov Oct Sept Aug July June May Apr Mar Feb Jan
Bus Activity 54.4 54.6 55.5 55.7 56.3 55.9 59.7 58.4 56 53 54.9 57.9
New Orders 53.9 52 55.4 53.9 55.8 53.1 56.7 56.7 54.7 54.2 55.2 55.6
Employment 51.8 51.4 52.4 52.5 48.6 51.9 53.5 53.5 51.9 51.3 52.1 52.9
Prices Index 71.5 73.7 66.1 65 60.1 63.1 65.6 64.3 63.2 62.9 53.9 56.1
Dec Nov Oct Sept Aug July June May Apr Mar Feb Jan
Bus Activity 53.9 54.1 55.8 54.8 55.8 55.8 60.7 59.7 56 52.4 54.3 59
New Orders 53.5 51.1 55.7 53.4 57 52.8 56.9 57.4 55.5 53.8 54.8 55.4
Employment 52.1 50.8 51.8 52.7 47.9 51.7 55 54.9 51.9 50.8 52.2 51.7
Prices Index 72.7 76.5 63.5 66.1 58.6 61.3 65.5 66.4 63.5 63.3 53.8 55.2


Posted in USA | No Comments »

Inflation expectations update

Posted by Sada Mosler on 29th January 2008

As of 1pm today – this is what the Fed is looking at for today’s meeting.

Most say if you let expectations elevate it’s too late. Others think they can be allowed to elevate a little bit and then brought down.

2008-01-29 5Y Tips Implied Inflation Rate 5Y Forward


Posted in Fed, Interest Rates | No Comments »

2008-01-29 US Economic Releases

Posted by Sada Mosler on 29th January 2008

2008-01-29 Durable Goods Orders Total

Durable Goods Orders Total (Dec)

Survey n/a
Actual 226,601
Prior 215,433
Revised n/a

2008-01-29 Durables Ex Transporation Total

Durables Ex Transportation Total (Dec)

Survey n/a
Actual 155,206
Prior 151,303
Revised n/a

2008-01-29 Durable Goods YoY % Change

Durable Goods YoY % Change

Survey n/a
Actual 5.0%
Prior -0.6%
Revised n/a

Doesn’t look much like recession to me. November revised up to where last month’s number might have changed impressions as well.

This also increases the chances that the December employment number gets revised up this Friday, along with a lower unemployment number for January.

From Karim:

The 5.2% rise in DGO is a bit of a mixed bag
–81% rise in aircraft orders (likely to help exports)
–ex-aircraft and defense still up 4.4%;

Yes, that’s what an export economy looks like.

but looks like making up for lost ground as 3mth trend (annualized) falls from -1.2% to -2.8%
–more troubling is shown in chart attached; inventory/shipments ratio threatening multi-year highs (inverted on chart); suggests more downside for industrial production in period ahead

Or it could mean larger shipments being readied.

Unfilled orders up 2.5% month over month; up 18.5% year over year,

Johnson-Redbook and ICSC chain store sales reflect weak January; sales about flat to December.

Yes, that’s what an export economy looks like. Decent employment but weaker domestic real consumption, as more of the output gets shipped abroad rather than getting consumed domestically.

Case-Shiller Index falls from -6.07% y/y to -7.74% y/y. 10 largest metro-areas fall from -6.67% to -8.42% y/y.

Yes, a November number. Real estate in largest areas was still falling back then.

2008-01-29 S&P/CS Composite-20 YoY

S&P/CS Composite-20 YoY (Nov)

Survey -7.1%
Actual -7.7%
Prior -6.1%
Revised n/a

2008-01-29 S&P/CS Home Price Index

S&P/CS Home Price Index (Nov)

Survey n/a
Actual 188.8
Prior 192.9
Revised 192.9

2008-01-29 Consumer Confidence

Consumer Confidence (Jan)

Survey 87.0
Actual 87.9
Prior 88.6
Revised 90.6

2008-01-29 ABC Consumer Confidence

ABC Consumer Confidence (Jan)

Survey -24
Actual -27
Prior -23
Revised n/a

Still looking weak. But with CNBC turning more positive on the economy, this might turn up soon.

Posted in Daily | No Comments »

Responses to comments on the ‘Comments on Brian Wesbury article’ post

Posted by Sada Mosler on 29th January 2008

Post: Comments on Brian Wesbury article

Comment by ‘Hoover Printing Press‘:

Warren congrats on your new website.


I keep reading that the bond insurers have let banks keep lots of “accounting issues” off the books – thus affecting tier 1 capital requirements – currently to the banks advantage. Without the bond insurers and their AAA rating by moody and sp (fitch has already lowered ratings down from AAA) the banks will have to scramble for lots of capital without the insurance, barclays recent estimate upwards of 150 billion. I remember Buffet referring to Financial WMD’s.

Yes, but that’s a matter of institutional structure. The government has several options.

For example:

  • The government could change bank ‘haircuts’ to capital by allowing AA insured bonds to have the same or only marginally higher capital charges as AAA bonds. The capital requirements are somewhat arbitrary to being with and meant to serve public purpose.
  • The government could offer some for of supplemental insurance at a fee to investors holding the AAA insured bonds in question. Again, for example, the fee could perhaps be 1%, and the government could guarantee a price of 97 to any investor who paid the fee. The government will probably make a profit on this type of program, as the monolines’ capital will still be in first lost position, and even if they are downgraded to AA, the implication is they will have more than sufficient capital to cover all losses. That is what AA means.

I read articles that NY is in a mad scramble to get buffet and others to bring some assurances to the bond insurance industry because the muni debt market is going to seize up without bond insurance and what the AAA ratings of that insurance lends to capital requirements and “accounting issues.”

Yes. There are some institutional ‘land mines’ in place that the government can either prevent from being tripped or defuse directly (for a fee), as above.

In hoover’s time I remember reading from Rothbard’s great depression I believe that he printed but the banks used the money to shore up their reserves, they did not want to lend and spur the economy at the cost of their own survival.

Under that gold standard regime, the government was limited in what it could do. Deficit spending carried the risk of loss of gold reserves, for example. And, in fact, the US was forced off the gold standard in 1934 domestically and devalued for foreign holders of $. This was the only actual default in US history.

So why is Bush and congress giving joe six pack 150B when he could have used that to back the bond insurers and the banks?

No comment.. You must be new here??? :)

Possibly getting the ratings agency to save some face and for fitch to bring AAA ratings back to the bond insurers?

Or the supplemental plan, above, that doesn’t bail out the insurers.

On another point, you claim a large difference between hoover’s problems and our problems today is the gold standard and floating exchange rates. Unfortunately I must press you as to how that is so when the folks at the top of this chart (china) have fixed exchange rates relating to the folks at the bottome of it (USA). Soros is claiming the USA will soon lose reserve currency status.

A fixed exchange rate ‘forces’ you to run a trade surplus to sustain sufficient reserves of gold or the reserve currency of choice. It also limits the ability to conduct countercyclical deficit spending as that leads to loss of reserves and default/devaluation/etc.

China has a ‘dirty float’, which means the currency is not convertible, but instead they intervene at various prices.

Not at all the same thing.

I am not so sure the Euro will be able to weather a global financial meltdown and perhaps in economic warfare, keeping reserve currency status is worth fighting over.

What is it, and why do you care?

With bush selling lots of scatter bombs to the house of Saud, at least we are trying to keep friends who have control over oil.

Still with the USA’s current account balance the worst of any country on the planet,

Imports are real benefits, exports real costs. In general, the larger your trade deficit, the higher your standard of living.

40K nukular bombs and a war machine that eats up large domestic resources, and a consumer base whose only skill is to shop till princess drops,

Consumption is the only point of economics.

I am not so sure what you are trying to save to get USA to deficit spend even MORE?

Right now, more deficit spending of the type proposed will mainly increase inflation.

Would it be so bad if that guy “dfense” from the mike douglas movie “FALLING DOWN” gets put out of a missle building job and starts fishing on the dock of the bay wasting time?

Comment by Scott Fullwiler:

Wesbury’s basically a monetarist (everything that goes wrong is the Fed’s fault for creating either too much or too little “liquidity”) operating with a gold standard model.

Yes, that’s where we don’t agree on causation and risks. But interesting that even in that paradigm, he doesn’t see the risks the Fed does, as they are in the same gold standard paradigm.

That said, he’s been bullish on the economy since 2002, and he’s been mostly right in that, except that he’s also been saying inflation is right around the corner since then, too, given weak dollar, strong gold.

And I’ve seen inflation underway due to Saudis acting as the swing producer and hiking price continuously.

And I see the weak $ as a change in preferences of non-resident holdings of financial assets.

Until a year and a half ago he was also claiming that the large spread b/n st and lt Treasuries was another a sign of inflation,

And I say it’s a sign of what investors think the Fed will be doing next. So to that extent, the curve reflects investor expectations. But there is also a lot of institutional structure that steers maturity preferences; so, the result is a mix of the two.

though he decided bond markets were being irrational once the yield curve inverted (again, if inflation is right around the corner).

Again, that reflects investor expectations.

I’ve used him in my classes for several years as a “balance” to the Levy view of “debt deflation’s around the corner.” Interesting to see that you and he are on the same page now at least regarding state of the economy, since you’ve been pessimistic (at least in long run, given small govt deficit) while he’s been a non-stop bull.

Yes, I’ve been expecting lower domestic demand since the financial obligations ratio go to where it go in Q2 2006, due to the shrinking budget deficit. What I missed was how strong exports would be, mainly on our three pronged weak dollar policy that has been scaring foreigners away from holding $US financial assets.

This includes calling CB’s currency manipulators if they buy $US, aggressive Middle Eastern policy, and the Fed’s apparent lack of concern for the value of the currency (inflation). Fundamentally, the falling budget deficit is good for the $US, but technically government policy has triggered an ‘inventory liquidation’ over seas that is causing exports to boom.

And now we are learning the hard way (or should be) what an export driven economy looks like – weak domestic demand due to high prices and full employment as we build goods and services for others.


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Comments on Brian Wesbury article

Posted by Sada Mosler on 28th January 2008

He’s got the data right, and I agree with all he concludes from it. All he’s missing is the difference he points two between now (unlimited funds available) and The Great Depression (banks short of lendable funds), including what the Fed presumably ‘did’ each time, are the differences between the constraints of the gold standard of that time vs today’s floating fx policy.

The Economy Is Fine (Really)

by Brian Wesbury

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.

It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.

A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year — real GDP expanded 4.4% at an annual rate between April and September.

With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.

Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications.

Some large companies outside of finance and home building are reporting lower profits, but the over-reaction to very spotty negative news is astounding. For example, Intel’s earnings disappointed, creating a great deal of fear about technology. Lost in the pessimism is the fact that 20 out of 24 S&P 500 technology companies that have reported earnings so far have beaten Wall Street estimates.

Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%. This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.

Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire “house of cards,” otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.

For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire.

This outlook is both perplexing and worrisome. Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets.

Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.

In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover’s tax hike passed in 1932, and then FDR’s alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.

But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.

These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.

Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.

Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.

The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it’s the development that investors should really worry about. It reads just like the 1970s.

The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is
still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It’s a wonderful buying opportunity.

Mr. Wesbury is chief economist for First Trust Portfolios, L.P.

Posted in Articles, Fed, USA | 2 Comments »

Re: exports and the $

Posted by Sada Mosler on 28th January 2008

On Jan 28, 2008 4:26 PM, Mike wrote:
> bottom line if trade deficit shrinks via export strength that has to be
> extremely dollar bullish-which has all sorts of implications (both of
> you are saying the same thing in that respect)…

sort of. it is shrinking as they are puking $ financial assets to
people who will take them to buy our stuff. so the dollar doesn’t go
up until they use up some of their $ assets and slow down their desire
to get out of them. think of it as an inventory liquidation of $
assets held abroad that drives the dollar down far enough to be able
to sell their $ to someone who wants to buy US goods and services or
US assets.

that’s the exit channel for $ held by non residents. for the US the
process is inflationary and expansionary- good for earnings and gdp.
But the inflation keeps the US domestic real consumption lower than

When the ‘$ inventory liquidation’ by foreigners starts to slow the $
starts to bounce back.


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