Some new wides and the stock market hits new lows.
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Valance Chartbook update Mar 7, 2009- The Automatic Stabilizers are Quietly doing their Job
Q2 08 was the last up quarter (real growth up 2.8% annually), supported by the $170 billion fiscal adjustment.
Looks like all the last Congress had to do was keep doing a fiscal adjustment each quarter as needed to sustain positive output and employment growth.
Doesn’t seem like a lot to ask of them- spend more or cut taxes?
The subsequent declines could have easily been avoided.
Interesting the auto execs didn’t blame Congress for the falling car sales and the financial crisis.
Almost all of the indicators look like this. Demand that had been slowly weakening for a long time fell apart sometime in July 2008.
Like all recession’s I’ve seen, this one seems to have been characterized by inventory liquidation. Inventories now look to be very low.
The bulge in existing home sales was from the supply from foreclosures, which is also part of the inventory liquidation process.
In addition to crude oil, the entire commodity basket was subject to the Great Mike Masters Inventory Liquidation. The charts seem to indicate that liquidation had run its course by late December 2008.
The Saudis and OPEC had to let the inventory liquidation run its course before regaining control of price late in Dec 08. Price is now going back to wherever they want it to be, as they set price to their liking and let output adjust. And with the latest data showing US gasoline consumption up 2% year over year it looks like demand for Saudi output may actually climb even as prices rise.
These commodity currencies have also gone sideways.
Coincident with the precipitous inventory liquidation and economic weakness, the automatic stabilizers kick in just as hard, increasing federal deficit spending via falling tax revenue and rising transfer payments.
This adds to private sector ‘savings’ of financial assets to the penny-
The accounting identity is government deficit = non-government ‘surplus’ of financial assets. (non-government includes residents and non-residents)
Less debt is mathematically the same as more savings.
Think of it this way. At the macro level, government deficit up= non-government net debt down.
Meanwhile, the government deficit spending works to sustain personal income which works to support spending.
That’s how the automatic stabilizers work to keep recessions from turning into depressions.
There is some evidence beginning to surface, in addition to the above income and spending data, that maybe suggesting we are starting to move sideways rather than down.
While unemployment will most likely continue to grow, as it takes at least maybe 2% real GDP growth for total hours worked to increase, there is some evidence at the margin that the rate of decline has peaked after a post year end spike from businesses that didn’t want to cut staff before the year-end holidays.
There is also some marginal evidence that the worst of the housing setback is behind us.
While the deflationary forces remain elevated by excess capacity in general, there is some evidence prices are selectively firming.
With low inventories prices get supported by replacement cost, which include costs of raw materials and unit labor costs, as well as productivity gains.
The new fiscal package isn’t my first choice, to be polite, but it isn’t ‘nothing’ either, and will further act to support demand and end this down cycle.
But it does nothing for near term energy consumption, and therefore risks rising commodity prices and rising CPI, even as unemployment remains unacceptably elevated.
This can put us back to where we started from- some growth but both weakness and inflation, this time with a backdrop of a much larger output gap, along with policy makers who don’t understand monetary operations and reserve accounting.
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(email exchange)
>
> Here are some comments — this was interesting reading, and I do think it
> makes sense on strictly a macro level (which is obviously what he’s going for).
>
yes!
>
> #1 explanation is interesting, especially regarding the example of parents and
> children with coupons. I do feel, however, that the author doesn’t give much
> consideration to the inflationary results of the ‘govt check don’t bounce’ thesis
> (I’m referencing the debate the author describes at the Australia conference).
> While it’s probably true, I do think inflation has a material impact (at least at
> the micro level, which I suppose isn’t really the point of this article).
>
Right, the point is inflation is the issue, not solvency or sustainability. But critics of deficit spending never even attempt to quantify the inflationary aspect.
Instead, they seem to focus on ‘money supply’ for their inflation forecasting and ‘inflation expectation’ issues, both of which are not causal, but that’s another story.
>
> Under #2, I think the rhetoric about do we have to send goods and services back
> in time to pay for historical debt is a red herring and not applicable (and I’m not
> surprised the Senator couldn’t really say much about it off-hand while his wife ‘got
> it’). It’s the debt servicing that people worry about, and that is in current terms
> (no time machine required). However, the thesis of gov’t checks not bouncing
> speaks to how the debt can be serviced.
>
yes, and that distribution is entirely in the hands of the living who are in no case ruled from the grave.
>
> Paying off China — to book a Treasury Note sale, the gov’t on its own books would
> debit cash (for the receipt)
yes, and the Tsy’s account at the Fed is debited. right now we have a self imposed constraint that says the tsy’s balance at the fed can’t be negative.
but that is not an operational constraint, just a self imposed constraint
> and credit the liability (to book the obligation).
again, via the Fed.
> The buyer’s accounts mentioned wouldn’t really be booked by the gov’t I don’t think,
> but I get the point.
the buyer’s funds go to the fed where they are ‘accounted for’ as owning the securities.
>
> #3 and #7 go together in what is really being discussed is the use of leverage
> (spending more than what you have). As long as the discussion stays at the macro
> level, that’s fine as the gov’t can just keep printing money (again, ignoring any effects
> of inflation).
>
and by printing you mean simply ‘spending’ as that’s all there is- changing numbers on bank accounts. using the word ‘printing’ rather than ‘spending’ is used by the mainstream to color thinking in a fixed fx direction that no longer is applicable.
>
> But, it is quite a slippery slope to intertwine micro-level examples such as a hybrid car
> factory and such as once you leave the gov’t level, leverage can have catastrophic
> results (see the current deleveraging in the economy and how that’s affecting people on
> a micro level). All this is fine as long as you have no monetary constraints, but for anyone
> with no access to a US$ printing machine, it falls apart.
>
Included with my 3 current proposals to reverse the current situation is the govt funding an $8 hr job for anyone willing able to work.
The other two are a full payroll tax holiday and $300 billion to the states on a per capita basis with no strings attached. Together they restore demand, output, and employment.
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Obama’s safety net: the teleprompter
by Carol E. Lee
March 5 (Politico)
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A tad more evidence consumption started moving sideways after year end?
Given the savings rate/budget deficit got through 5% this is not impossible.
(0% GDP growth still means rising unemployment as productivity continues to increase)
Consumer Spending and Tourism
Consumer spending remained very weak on balance, albeit with slight firming noted by many Districts, particularly compared with holiday-season sales that were very disappointing. About half of the Districts reported that consumer demand was softer than during recent reporting periods or fell significantly below levels twelve months earlier. However, compared with the preceding reporting period that included the holiday season, retail spending was described as “mixed” in the Boston and Richmond Districts, “nearly steady” in Philadelphia, and slightly improved in Cleveland and Dallas, while New York reported a reduced rate of decline compared with the “steep” pace in December. But San Francisco characterized retail sales as “anemic” and pointed to double-digit sales declines relative to twelve months earlier for many retail outlets. As reported by Richmond, Chicago, and San Francisco, discount chains fared much better than traditional department stores and specialized retailers, recording sales gains in many cases as consumers continued to switch away from discretionary spending and luxury items and toward basic necessities.
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Looks like it’s working out as foreign banks find other ways to fund their USD liabilities?
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>
> On Thu, Mar 5, 2009 at 2:05 PM, EDWARD wrote:
>
> Though at 0.50% there’s not much more room to fall in any event and he is trying to
> establish support for the new quantitative easing policy announced today.
>
*KING SAYS WE’VE SEEN SUDDEN, SEVERE DOWNTURN ACROSS THE WORLD
*KING SAYS `WE’RE VERY CLOSE TO ZERO’
*KING SAYS BOE IS INJECTING MONEY DIRECTLY INTO THE ECONOMY
>
> This perhaps is ‘injecting money’ but only by narrow definitions of ‘money’ that do not
> include the securities purchased by the BOE.
>
> They are simply buying financial assets, which is the exchange of one financial asset
> (balances at the BOE) for another- securities held by the private sector.
>
> Net financial assets held by the private sector remain unchanged.
>
> While these purchases can put downward pressure on interest rates for the asset class and
> maturity purchased, any ‘profits’ the BOE makes from interest earned on the securities it
> buys vs its cost of funding represent interest income removed from the private sector.
>
> Note his interest in helping ‘savers’ which means higher rates:
>
*KING SAYS KEY RATE IS AS LOW AS IT’S SENSIBLE TO GO
*KING SAYS HE’S KEEN TO GET BACK TO POSITION TO HELP SAVERS
*KING SAYS VERY UNLIKELY U.K. INTEREST RATES WILL GO ANY LOWER
*KING SAYS VERY UNLIKELY INTEREST RATES WILL GO ANY LOWER
*KING SAYS SAVERS SEEM TO BE SUFFERING THROUGH LOW RATES
*KING SAYS HE HAS ENORMOUS SYMPATHY FOR SAVERS
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Sub prime delinquencies still headed north.
Some of it attributable to government assistance that requires borrowers to be delinquent?
Also, while 20% is certainly a high delinquency rate, and includes several years with 2006 higher and others lower,
it is still substantially lower than markets seem to be discounting, as evidenced by the discounts on very senior AAA pieces.
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Saudi price hikes should continue until they get to their price target, whatever that might be.
Saudi’s formula changes which effectively raise prices. Aramco’s formula changes for April sales basically amounted to a price hike. Sales to US refiners are set against WTI prices. European refiners get priced off of Brent and Asia buyers are priced off a spread to Dubai and Oman. Essentially Saudi Arabia made it more expensive on a relative basis with the goal of taking crude off the market to counter the effect of weak demand.
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Lots of fiscal adjustments being implemented all over the world will help stop the slide in world aggregate demand.
Look for more evidence emerging that things are going from down to sideways.
Except unemployment which both lags and will probably keep going up until positive gdp growth exceeds productivity gains.
Canadian Lawmakers Approve Flaherty’s Budget, Stimulus Package
by Alexandre Deslongchamps and Greg Quinn
Mar 4 (Bloomberg) — Canadian lower house lawmakers voted to approve Finance Minister Jim Flaherty’s budget, which projects C$84.9 billion ($66.6 billion) in deficits over the next five years.
The plan passed by a vote of 204 to 78, after legislators from the Liberal Party, the biggest opposition bloc, supported it. The other opposition parties voted against the budget. The bill now goes to the Senate, where it will likely be approved as the unelected upper chamber rarely blocks legislation.
It was the third and final vote on the budget in the lower house. A defeat on a budget bill would trigger an election under the country’s parliamentary tradition.
Prime Minister Stephen Harper’s Conservatives hold 143 of the legislature’s 308 seats and need opposition support to pass laws and stay in power. The Liberals haven’t tried to bring down the government, saying Canadians want legislators to deal with the economic crisis.
The budget projects a C$1.1 billion deficit for the current fiscal year. The deficit will widen to C$33.7 billion in fiscal 2009-10 and C$29.8 billion in 2010-11 as the government provides funding for infrastructure, low-income families and tax credits for home renovation.
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