Something went wrong in July


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Something went wrong in July. Most of the charts look like this:

2009-01-26 Capacity Utilization, ISM Manufacturing

It might have been the fall off of the q2 fiscal adjustment, the Olympics, the Lehman collapse, and/or, of course, the GMIL (Great Masters Inventory Liquidation).

2009-01-26 Capacity Utilization, ISM Manufacturing

And inventories also took a dive, from not all that high levels, adding to the slowdown.
Low inventories also mean the slow down need not last long when demand picks up with the coming fiscal adjustments.

2009-01-26 Capacity Utilization, ISM Manufacturing

What the car companies need is higher sales. Capital injections won’t go far with demand looking like this.

2009-01-26 Capacity Utilization, ISM Manufacturing

Notice personal income turning south with the Fed rate cuts, as interest income takes its toll. Yes, I know correlation doesn’t prove anything, but that’s my story and I’m sticking to it! Households are net savers and rate cuts eliminate income. Also, rates for savings have fallen a lot more than rates for borrowing this time around.

2009-01-26 Capacity Utilization, ISM Manufacturing

It’s been a long, slow dive, recently accelerating, since q2 06 when we pointed out the federal deficit was too small to sustain output and employment growth, due to the financial burdens ratios getting too high:

2009-01-26 Capacity Utilization, ISM Manufacturing

Looks like batteries have finally been recharged some over the last few years, even with personal income sagging.

2009-01-26 Capacity Utilization, ISM Manufacturing

All these look like household ‘balance sheets’ are improving.
And with rising federal budget deficits providing additional net financial assets this should continue.

Yes, the housing graphs, not shown look terrible, there are some signs it could all turn quickly:

2009-01-26 Capacity Utilization, ISM Manufacturing

2009-01-26 Capacity Utilization, ISM Manufacturing

Actual new home inventories are very low and probably picked over, as affordability continues to pick up.

2009-01-26 Capacity Utilization, ISM Manufacturing

Also, home ownership is low, and rental vacancies under control.

All indicating the coming fiscal adjustment could act more quickly than expected.

2009-01-26 Capacity Utilization, ISM Manufacturing

No let up here, however.

Unfortunately some of the latest Congressional incentives reward delinquency, anecdotally causing some otherwise good paying borrowers to not make payments to qualify for assistance.

2009-01-26 Capacity Utilization, ISM Manufacturing

It’s government to the rescue, as the automatic stabilizers do their thing to increase federal deficit spending and add income and savings of financial assets to the non govt. sectors.

2009-01-26 Capacity Utilization, ISM Manufacturing

Might be the output gap cutting down the rise in prices, and might be the GMIL (great Masters inventory liquidation). It’s too soon to tell- probably some of both.

2009-01-26 Capacity Utilization, ISM Manufacturing

Opec cuts seem to have stemmed the tide, and pave the way for the Saudis resuming their role of price setter. Demand has dropped very little. This is not the 80’s when demand dropped by over 15 million barrels per day after natural gas was deregulated in 1978 and it and coal replaced crude oil for most power generation.

2009-01-26 Capacity Utilization, ISM Manufacturing

Talk is cheap- supporting their exporters is a priority!

2009-01-26 Capacity Utilization, ISM Manufacturing

Cautions about the coming Obamaboom.

2009-01-26 Capacity Utilization, ISM Manufacturing

Hints of credit spreads stabilizing.

2009-01-26 Capacity Utilization, ISM Manufacturing

The eurozone is fading quickly, and it could all go bad here again if (when?) their financial structure melts down.


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16 Responses to Something went wrong in July

  1. Scott Fullwiler says:

    I think you’ve got it. Just to be precise, the proceeds stay in accounts that are liabilities for the banking system, and thus there is no net change in bank reserves. I think you said essentially that, but just wanted to be clear.

    Of course, none of this clears up your original question, but I do commend you on digging into NIPAs and Flow of Funds accounts. If more economists understood those, much of what is said on this website wouldn’t be considered controversial.

    Reply

  2. Scott Fullwiler says:

    Matt–don’t know in this case, because I haven’t looked, but the balances would have been held in tax and loan accounts in that case, not the Tsy’s account at the Fed. You’d have to look at the Tsy’s total balances, which includes account at Fed and then tax and loan accounts. Actually, I doubt this is what happened in this case since I don’t recall them ever building up such total balances in the past, but you never know. At any rate, my larger point is that the Tsy doesn’t allow its bond sales to be a net drain of reserves, instead, they transfer them to these tax and loan accounts in the private banks on the same day and restore the reserves. Then they call the balances back in as they spend so that the spending doesn’t have a net add effect to reserves. It’s all a monetary policy operation at the core . . . absent these rather convoluted operations, the Fed would have to do the exact same thing itself to hit its target (as long as the target’s above the rate paid on reserves). Indeed, for a brief period in the mid-1970s, the Tsy stopped doing this on orders from Congress (which was worried about the tax and loan accounts “subsidizing” banks–Jeffersonianism runs deep!), but the complexity of the Fed’s operations increased so much that the tax and loan account system was restored.

    Reply

    Matt Franko Reply:

    Scott thanks for the reply.
    I interpret your response as follows: That the Treasury has a policy to not effect reserve balances in conduct of Treasury auctions, they leave the proceeds from the sales on account in the banking system where they can still be counted as reserves.
    The Treasury leaves the management of reserve balances strictly to the Fed as the Fed conducts its monetary policy. ?

    resp,

    Reply

  3. Matt Franko says:

    For this thread:
    The Monthly Treasury Statement for July/Aug/Sept qtr shows a collective deficit for the qtr of $167B (July deficit 102, Aug Deficit 111, Sept Surplus 45). ( 3w.fms.treas.gov/mts/mts1208.pdf )
    The Feds z.1 report “Flow of Funds Accounts” (pls note that I am just starting to familiarize myself with the z.1) seems to state that at the beginning of that quarter, total US treasury securities out was 5250B and at the end of this qtr it was 5777B, implying that $520B of Treasuries were issued in the qtr?
    ( 3w.federalreserve.gov/releases/Z1/current/accessible/l209.htm )
    If true, does this imply a reserve drain of 520B vs the 167B Fed deficit spending in that qtr? Could such drain result in a short term hit to the economy?
    Resp,

    Reply

  4. warren mosler says:

    maybe, but i attribute the $ shortage to lower crude prices via a falling US import bill

    Reply

  5. William Naphin says:

    yes, a competitive deval on their part. it just reminds for me that the fed is perhaps not in control of short-term rates as the mkt presumes it is. china, by halting the yuan reval, created one helluva $ shortage which was a de facto tightening

    Reply

  6. warren mosler says:

    agreed. which is why they stopped letting it get stronger and started buying $ again?

    Reply

  7. William Naphin says:

    but remember that chinese exports have been hurt not because the yuan is expensive, but because there is a bonecrusher of a global recession taking place. the yuan is still fundamentally undervalued by most reckonings.

    Reply

  8. warren mosler says:

    True. Their financial assets were not hurt. But their exports got hit hard, and most of their imports are pass throughs to exports so what matters to them is volume and margins.

    Not sure what happened to their domestic consumption but doesn’t look good from what i’ve seen.

    Reply

  9. William Naphin says:

    perhaps that set it off as well, but look at who is the only winner since july: china. they rolled their agencies into tsys at that time and suffered no meaningful losses on their $ reserve balance while just about everyone else (the petrodollar countries) got killed. as well, they engineered sharply lower prices for the things they need the most: hard assets and crude oil. sure, they have domestic issues that are beyond my ability to handicap. but they are still growing, albeit more slowly, while the rest of the world is in a bonecrushing recession.

    Reply

  10. warren mosler says:

    or maybe the Mike Masters liquidation set all the rest in motion, to be reversed about now as inventories stabilize?

    Reply

  11. William Naphin says:

    think about it in an even simpler context: at its most basic, the bid for hard assets and crude oil over the last several years was largely a bid for the “chinese growth template” funded in dollars. as a so-called carry trade it depended upon a currency tailwind, which the ongoing yuan reval gave you. thus, when the yuan reval stopped your cost of funding that position exploded on you. i think that’s what happened in july. which begs the question: why did they stop it?

    Reply

  12. William Naphin says:

    to be honest, i suspect it’s more sinister than pure mercantilism on their part. by creating a shortage of $ (which the halt in the yuan reval did) the chinese engineered a $ rally vs nearly all currencies (the yen excepted) as $ funding dried up (as it will whenever there’s a capital call on a funding currency) in a global financial marketplace that’s dependent upon $ liquidity. i think you have to look at what this accomplished for them, namely cheaper oil.

    Reply

    jcmccutcheon Reply:

    Interesting. Wasn’t it recently reported that Chinese oil demand(or imports) was YOY up?

    Reply

  13. warren mosler says:

    scared of losing exports?

    Reply

  14. William Naphin says:

    what happened in july is that the yuan stopped revaluing vs the $. sudden, unexpected strength in funding currencies (which the $ certainly was at the time given the rate diffs with the rest of the world) is never good for financial stability. what motivated the chinese to halt the revaluation is unclear and beyond my scope. but the sudden halt in the yuan revaluation cut the heart out of the $-denominated commodity bid.

    Reply

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