Tuesday, February 8, 2011

Today's links

1---Consumer Credit increases in December, Calculated Risk

Excerpt: Consumer credit increased at an annual rate of 2-1/2 percent in the fourth quarter. Revolving credit declined at an annual rate of 2-3/4 percent,
and nonrevolving credit increased at an annual rate of 5-1/2 percent. In December, consumer credit increased 3 percent at an annual rate.

Revolving credit (credit card debt) is off 17.8% from the peak. Non-revolving debt (auto, furniture, and other loans) is now slightly above the old peak. Note: Consumer credit does not include real estate debt.

Both revolving and non-revolving credit were up slightly in December. This was the first increase in revolving credit since August 2008 following 27 consecutive months of declines. This fits with the recent Senior Loan Officer survey that showed:

Banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving consumer credit card applications.

2--Bond Market Flashes Inflation Warning, Mark Gongloff, Wall Street Journal

Excerpt: The U.S. bond market has begun sending a message that inflation risks are rising and the Federal Reserve may be too slow to act, potentially marking a significant turning point in the economic recovery.

In the past week, Treasury-bond yields have jumped to their highest levels since last spring. Yields on 10-year Treasurys surpassed 3.5% and 30-year yields broke through 4.7%, which makes some worry could mean rates will march even higher.

Long-term rates have been gradually moving higher in response to an improving economy and rising commodity prices. But in recent days the increases in yields accelerated, a move many say is due to the worry that the Federal Reserve may be underestimating inflationary pressures in the economy, and may act too slowly to tame them. Inflation is bad for bondholders, eroding the value of their fixed returns and sending the prices of their bonds lower.

While raising alarm bells about inflation, the bond market is also indicating it sees no signs that the Fed will intervene. Short-term rates, which are most sensitive to Fed moves, have held relatively steady, causing the difference between two-year and 10-year notes to reach its steepest level since February 2010....

The yield on the 30-year Treasury bond ended Friday at 4.732%, its highest since last April. Adding to the almost-panicky feel in the bond market on Friday, traders circulated a chart of 30-year-bond yields showing that the yields had broken out of a 30-year trendline—a sign that the decades-long bull market in Treasurys may be drawing to a close....

The Fed isn't even halfway through the second round of its quantitative-easing program to buy $600 billion of bonds, commodity prices are much higher, and the economic recovery has been in progress for a year.

3-- Bernanke's speech to the National Press Club, Business Insider

Excerpt: The economic recovery that began in the middle of 2009 appears to have strengthened in recent months, although, to date, growth has not been fast enough to bring about a significant improvement in the job market....More recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. Notably, we learned last week that households increased their spending in the fourth quarter, in real terms, at an annual rate of more than 4 percent....

...with output growth likely to be moderate for awhile and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established....

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months.1 To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.8 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy....

Monetary Policy

In sum, although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate. However, the target range for the funds rate has been near zero since December 2008, and the Federal Reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period. As a result, for the past two years we have been using alternative tools to provide additional monetary accommodation.

4--Bernanke succeeds in driving investors to junk bonds and stocks, Bloomberg

Excerpt: The Federal Reserve’s Treasury purchases already have succeeded in driving investors to junk bonds and stocks. Now, policy makers are focusing on benchmark government securities, helping contain rising yields that set rates on everything from corporate debt to mortgages....

The Fed purchases are helping keep a lid on borrowing costs for companies and homebuyers as the economy recovers. Yields on corporate bonds have averaged about 4.84 percent since the buying began in November, below the 5.48 percent for all of 2010, according to Bank of America Merrill Lynch indexes...

Quantitative easing has boosted demand for Treasuries as President Barack Obama’s budget deficits exceed $1 trillion, adding to the nation’s $8.96 trillion in marketable debt. Investors bid $3.04 for each dollar of bonds sold in the government’s $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg....

Since Nov. 3, when Fed Chairman Ben S. Bernanke announced the plan to buy government debt to keep the economy from falling into deflation, 10-year yields have increased about one percentage point as expectations for inflation rose. The purchases and signs that the economy is recovering have reduced demand for the safety of government debt in favor of riskier assets and the Standard & Poor’s 500 Index has risen 9.4 percent....

While the Fed’s purchases have helped boost confidence, bigger deficits and speculation that inflation may accelerate have sent yields higher, said Larry Dyer, a U.S. interest-rate strategist in New York with HSBC Holdings Plc’s HSBC Securities unit. Treasuries lost 3.7 percent since the beginning of November, including reinvested interest, after returning 8.59 percent in the first 10 months of 2010, Bank of America Merrill Lynch data show.

“The Fed has monopoly control over front-end rates,” Dyer said. “But in bringing down long-term interest rates, the Fed is having a much tougher time.”

5--10 Things Conservatives Don't Want You to Know About Reagan, Alternet

Excerpt: 1. Reagan was a serial tax raiser. As governor of California, Reagan “signed into law the largest tax increase in the history of any state up till then.” Meanwhile, state spending nearly doubled. As president, Reagan “raised taxes in seven of his eight years in office,” including four times in just two years. As former GOP Senator Alan Simpson, who called Reagan “a dear friend,” told NPR, “Ronald Reagan raised taxes 11 times in his administration...

2. Reagan nearly tripled the federal budget deficit. During the Reagan years, the debt increased to nearly $3 trillion, “roughly three times as much as the first 80 years of the century had done altogether.” Reagan enacted a major tax cut his first year in office and government revenue dropped off precipitously. Despite the conservative myth that tax cuts somehow increase revenue, the government went deeper into debt and Reagan had to raise taxes just a year after he enacted his tax cut. Despite ten more tax hikes on everything from gasoline to corporate income, Reagan was never able to get the deficit under control. (Much more on the Gipper's 100 b'day)

6--Is the consumer re-leveraging?, Pragmatic Capitalism

Excerpt: Today’s consumer credit report was in some ways very bullish and in other ways extremely bearish. The Federal Reserve reports that consumer credit increased by $6.1B in December compared to November. Not surprisingly, the analysts were looking for a $2.4B increase so their losing streak on predicting economic data continues. Credit card debt rose for the first time since August 2008. This is all consistent with the better economic data we’ve been seeing lately, however, from a 30,000 foot macro view this is not a good sign.

The US consumer is still sitting on a lopsided balance sheet and needs to de-leverage. The US government and actions of the Federal Reserve have successfully halted this process. While continued spending in excess of incomes is likely a near-term positive, it is certainly a long-term negative as these trends simply cannot persist. At some point the US consumer’s balance sheet must come back to equilibrium. Re-leveraging will likely lay the foundation for a repeat of some sort of economic disruption in the years ahead. The government has halted the market’s natural healing process, but in doing so you have to wonder if they are now making things worse? This is not the foundation from which a healthy secular economic recovery is built...

7--Toxic' Assets Still Lurking at Banks, Michael Rapoport, Wall Street Journal

Excerpt: During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.

But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.

In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.

Unrealized losses are just one way in which the troubled assets obscure banks' true financial condition, accounting experts say....Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line.

Making the picture even murkier, the value of many risky assets are based solely on the banks' own estimates—leaving valuations uncertain and, some critics say, overstated....

One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify.

8--Strong Growth Has Its Drawbacks, Kelly Evans, Wall Street Journal

Excerpt: The trouble with success is that it can ultimately breed failure....The U.S. economy looks healthier than it did six months ago. Growth could top 4% this year, some economists reckon, as opposed to the 2% to 2.5% range initially feared. Investors are flocking back to stocks. Even the labor market is showing signs of life.

Such a return to "normalcy" also has drawbacks. Federal budget figures due Thursday should serve as a reminder that this is still a time of great urgency. The U.S. is expected to run a deficit of close to $1.5 trillion this fiscal year. Despite bold austerity talk from the new Congress, near-term spending cuts look limited. No real plan has emerged to tackle the yawning debt—of which the portion held by the public could reach about 77% of GDP by 2021, compared with about 62% today, according to the Congressional Budget Office.

Strong economic growth should, in theory, make those problems easier to solve. In reality, it often fosters complacency and allows officials to avoid unpalatable choices...

But the greater danger, perhaps, is that markets don't get worked up about it—and politicians aren't forced to make real fixes. Americans should know by now that growth isn't a cure-all for the nation's challenges. If anything, it can prove part of the problem.

9--The Tunisian Catalyst, Joseph Stiglitz, Project Syndicate

Excerpt: The whole world celebrates Tunisia’s democratic revolution, which has set off a cascade of events elsewhere in the region – particularly in Egypt – with untold consequences. The eyes of the world are now set on this small country of ten million, to learn the lessons of its recent experience and to see if the young people who overthrew a corrupt autocrat can create a stable, functioning democracy.

First, the lessons. For starters, it is not enough for governments to deliver reasonable growth. After all, GDP grew at around 5% annually in Tunisia over the last 20 years, and the country was often cited as boasting one of the better-performing economies, particularly within the region.

Nor is it enough to follow the dictates of international financial markets...Even providing good education may not suffice....If, in a world of scarce jobs, those with political connections get them, and if, in a world of limited wealth, government officials accumulate masses of money, there will be justifiable outrage at such inequities – and at the perpetrators of these “crimes.” Outrage at bankers in the West is a milder version of the same basic demand for economic justice that we saw first in Tunisia, and now across the region.

Virtuous though democracy is – and as Tunisia has shown, it is far better than the alternative – we should remember the failures of those who claim its mantle, and that there is more to true democracy than periodic elections, even when they are conducted fairly. Democracy in the United States, for example, has been accompanied by increasing inequality, so much so that the upper 1% now receives around one-quarter of national income – with wealth being even more inequitably distributed.

Indeed, most Americans today are worse off than they were a decade ago, with almost all the gains from economic growth going to the very top of the income and wealth distribution. And corruption American-style can result in trillion-dollar gifts to pharmaceutical companies, the purchase of elections with massive campaign contributions, and tax cuts for millionaires as medical care for the poor is cut.

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