Monday, March 21, 2011

Today's links

1--Number of the Week: Household Debt May Be Accelerating Again, Mark Whitehouse, Wall Street Journal

Excerpt: $822 billion: the amount defaults have lopped off U.S. household debt since mid-2008....U.S. consumers deserve some credit for getting their debts under control. But they still have a way to go.

One of the puzzles of the recovery has been how U.S. households have managed to shed some $658 billion in mortgage, credit-card and other consumer debt over the past two and a half years: Are they really paying it down, or are they just giving up and defaulting? The answer would say a lot about their ability to fuel an economic recovery, and help gauge the likelihood that they’ll get into trouble again.

The latest data from the Federal Reserve suggest defaults have played a big enough role that “paying down” would be a misnomer. By our own estimate, based on the Fed data, banks’ and investors’ charge-offs — the result of defaults — lopped $822 billion off households’ debt load from mid-2008 to the end of 2010. In other words, net of defaults, consumers actually borrowed an added $163 billion.

That calculation alone, though, doesn’t provide a full picture of consumers’ change in behavior. They may be adding debt, but they’re doing so at a much slower pace than during the housing and credit boom. Net of defaults, household debt grew at an average annualized rate of only about 0.5% from mid-2008 to the end of 2010. That compares to about 10.5% in the preceding decade, a difference of 10 percentage points.

Weighed against defaults, consumers’ relative frugality accounts for the lion’s share of the change in their debt position. From mid-2008 to the end of 2010, their combined debts fell at an average annualized rate of about 2%, compared to an average annualized rise of nearly 10% in the preceding decade — a difference of almost 12 percentage points. So the slowdown in borrowing accounts for more than 80% of the shift.

Lately, though, consumers’ vigilance appears to be easing as banks’ willingness to lend returns.Household debt growth, net of defaults, has stopped slowing, and the latest monthly data suggest it might accelerate again. That could be good for economic growth in the short term. But it would leave household debt at about 116% of annual disposable income — still much higher than the 100% level economists tend to consider bearable in the long term. Unless, of course, defaults keep grinding the debt down.

2--US Cost of Living Hits Record, Passing Pre-Crisis High, CNBC

Excerpt: One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while with deflationary forces keeping the cost of living relatively low. That’s not the case.

A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.

“The Federal Reserve continues to focus on the rate of change in inflation,” said Peter Bookvar, equity strategist at Miller Tabak. “Sure, it’s moving at a slower pace, but the absolute cost of living is now back at a record high in a country that has seven million less jobs.”

The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed’s preferred measure, CPI excluding food and energy, increased by just 0.2 percent.

“This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs,” said Stephen Weiss of Short Hills Capital. “Perhaps the best way to look at this is to calculate a moving average over a certain period of time in order to smooth out the peaks and valleys.”...

Still, states will be cutting back services drastically this year at the very same time they are raising taxes in order to close enormous budget deficits and avoid a muni-bond defaults crisis. So while it may be the missing link to a perfect cost of living measure, one can assume that Americans will be paying more for unquantifiable services such as police enforcement and education, but getting them at a lesser quality.

Bottom line: The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.

3--Why Bill Gross dumped Treasuries, The Big Picture

Excerpt: A couple of revealing charts from the Fed’s Flow of Funds data. Both show net flows into Treasuries by creditor type and the Federal Government’s borrowing during each quarter. Note, the quarterly data is annualized.

The first chart illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4. The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.

Given that a large portion of the Rest of World category are central banks recycling BOP surpluses, it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks. You think this may have anything to do with what’s happening in the commodity markets? That is, the central banks’ printing presses providing the fuel for speculators?

Furthermore, we ask: who is going to finance the U.S. budget deficit when QE2 ends, especially at a sub 3.50 percent 10-year Treasury rate? Bill Gross knows!

4--Japan’s Meltdown and the Global Economy’s, Floyd Norris, New York Times

Excerpt: Four years ago, there were fears of a financial meltdown — a term borrowed from the nuclear power industry. Now there are fears of a real meltdown.

In the world of finance, the assumption that safeguards would prevent disaster led people to believe it was safe to borrow heavily. There had, after all, been a prolonged period in which markets were not turbulent and there were only profits, not losses, to be realized from taking on the additional risk of leverage. As the economist Hyman Minsky wrote years earlier, “stability is destabilizing” because it encourages confidence that benign circumstances will endure.

We learned from the financial crisis that the comfortable assurances that authorities knew what to do were misplaced. Central bankers had insisted that it was futile and unnecessary for them to look out for bubbles, since they knew how to deal with the results if one did burst. The 2001 recession after the collapse of the technology stock bubble was both short and mild. The Federal Reserve emerged triumphant, its wisdom and capabilities widely admired.

But this time it turned out that easing monetary policy was not nearly enough, and the United States will be dealing for years with problems caused by homeowners who are — to use another term that seems newly inappropriate — underwater. Many, but not all, of those once-confident central bankers now say they were wrong.....

If ever there was an economy that needed some stimulus, this is the one. The Bank of Japan now has a good reason to print money.

“Considering Japan’s limited capacity to take on more debt due to its already high debt/G.D.P. ratio, and impending pressures on domestic savings from an aging population,” Mr. Darda wrote, “reflation and debt monetization seem like the most likely path forward.”

For now, it seems reasonable to think that ordinary Japanese may cut back on spending for nonessentials, much as Americans did after Sept. 11, causing further weakness in the economy. Hoarding of some goods — among them milk and gasoline — appears to be happening in areas far removed from the crisis.

5--Japan to ease monetary policy further: Roubini, Reuters

Excerpt: Nouriel Roubini, best known for predicting the U.S. housing meltdown, said he expects Japan's central bank to ease monetary policy further by buying more government debt in the wake of the earthquake.

The BoJ's future purchases of government bonds, also known as quantitative easing (QE), are likely to be larger than the amount that was unveiled this week, Roubini said on the sidelines of a conference in Beijing.

"They have already done QE I, QE II, now there will be a third round, and the third round might be larger than the smaller amount of quantitative easing that they have done so far," he told Reuters.

The BoJ doubled the cash it sets aside for buying assets such as government bonds on Monday to 10 trillion yen ($124.1 billion) in an emergency move to shore up confidence in crisis-stricken Japan.

That was the second round of quantitative easing unveiled by the BoJ since October, when it first set aside a pool of 5 trillion yen to buy assets to partly rein in the yen.

"They need their massive fiscal stimulus for rebuilding, but they are starting with a very large public deficit and with a very large stock of debt," Roubini said.

"Once their deficit becomes much larger, and they need it to build parts of the country that are damaged, then the BoJ is going to be starting another round of easing - QE III," he said.

6---Has the G7 got it wrong on the yen?, The telegraph

Excerpt: Up until the point of intervention, the yen had appreciated by close to 10 per cent within the space of a few days, and for the first time ever had breached the 80 yen to the dollar mark.

This might seem an odd response given the scale of the catastrophe, which logically you would expect to cause the currency to plummet. The reason it rose instead is because it’s expected that Japanese investors will repatriate overseas money to pay for the distaster. Actually there’s not much evidence of this so far. As ever in markets, it’s the anticipation rather than the actuality which is doing the damage....

Yet there is an alternative view. Here it is being put by Professor Geoffrey Wood, Emeritus Professor of Economics at Cass Business School, London.

“The G7 are making a grave mistake by intervening to control the volatility of the yen. Japan benefits from a strong yen as it will help them to increase imports, which is exactly what they need to do.”

He’s not alone. Here’s Brian Reading of Lombard Street Research making much the same point.

“The disaster has reduced potential supply and increased demand. Almost certainly it will eliminate Japan’s current account surplus. Excess savings, which have dogged Japan for decades, will be eliminated for some time. Both import demand and export supply will be inelastic. Can’t export more, can’t import less. Now is the time to cash foreign currency reserves to keep the yen up. Not only will improved terms of trade benefit Japan, but also reserve sales will help pay for the disaster without raising government debt. “

Yes, and maybe they should jack up interest rates while they are about it. That might get this high savings economy spending again – not. Personally, I find Prof Wood’s argument too clever by half. Yes, in the very short term, Japan is going to struggle to export very much at all, and the cheaper it can import everything it needs for renewal, the better. But the idea that if imports are cheaper (because of currency appreciation) Japanese households will all of a sudden change the habit of a lifetime and spend all their way back to economic growth, thus rebalancing the economy away from exports to internal demand, strikes me as most unlikely.

Actually, what a high yen will do is severely crimp the recovery in Japan’s export industries, which will eventually lead to rising unemployment and therefore lower consumption. The effect would be to add a further burst of deflation to an already seriously deflating economy.

Lack of domestic demand in Japan is not something that can be corrected through currency appreciation, as Japan’s already long history of currency appreciation amply demonstrates. Up and up the yen has gone, but it’s not boosted consumption. On the whole, the Japanese don’t buy foreign goods, however cheap they are, and an earthquake isn’t going to change that reality.

7--Gallup Finds U.S. Unemployment at 10.2% in Mid-March, Gallup

Excerpt: Unemployment, as measured by Gallup without seasonal adjustment, was at 10.2% in mid-March -- essentially the same as the 10.3% at the end of February but higher than the 10.0% of mid-February and the 9.8% at the end of January. The U.S. unemployment rate is about the same today as the 10.3% rate Gallup found in mid-March a year ago.

The percentage of part-time workers who want full-time work was 9.7% in mid-March -- essentially unchanged from the 9.6% in both February measurements and higher than the 9.1% at the end of January. The percentage of the U.S. workforce that is working part time but wanting full-time work is the same now as was the case a year ago.

Broader Underemployment Was Unchanged in Mid-March

Underemployment, a measure that combines the percentage of part-time workers wanting full-time work with the percentage who are unemployed, was 19.9% in mid-March. Not surprisingly given the lack of change in its components, this is identical to the end-of-February reading, and is virtually the same as the 20.0% of mid-March a year ago.

Jobs Situation About the Same as It Was a Year Ago

The government's February report on the U.S. unemployment situation suggests that 192,000 jobs were created last month and the unemployment rate declined to 8.9%, down from 9.7% a year ago. Federal Reserve Bank of New York President William Dudley and others said they were encouraged by this report.

However, Gallup's unemployment and underemployment measures have not shown the same gains in early 2011. Gallup finds an unemployment rate (10.2%) and an underemployment rate (19.9%) for mid-March that are essentially the same as those from mid-March 2010.

In part, the difference between Gallup's and the government's current job market assessments may be due to the government's seasonal adjustments. Gallup's U.S. unemployment rate is also more up-to-date -- its mid-March data include jobless figures for much of March, whereas the government's latest unemployment rate is based on the jobs situation in mid-February.

Most importantly, a key reason the government's unemployment rate is dropping apparently has to do with the so-called participation rate: the percentage of Americans who are counted as being in the workforce. The government's participation rate in February was at its lowest level since 1984. In essence, this tends to suggest that the government's unemployment rate may be declining because many people are becoming discouraged and leaving the workforce -- not because they are getting new jobs.

If this is the case, then neither Gallup's unemployment report nor that provided by the government is good news for the economy. It is equally bad news if people are out of work and looking for a job or just too discouraged to say they continue to do so. Either way, a lack of sufficient job creation to increase employment among those who want to work remains a major obstacle to U.S. economic growth in the months ahead.

8--Supply Disruptions Pose Threat of Stagflation, Kelly Evans, Wall Street Journal

Excerpt: A scramble for supplies prompted by Japan's crisis may add to the specter of stagflation stalking the U.S. economy. Already, high oil prices and geopolitical uncertainty have taken some of the buzz out of 2011 growth prospects. The first quarter in particular looks like it will end on a much weaker note than initially thought. Morgan Stanley's tracking estimate of annualized real gross-domestic-product growth has dropped from 4.5% to 2.9% over the past six weeks. A similar one from tracking firm Macroeconomic Advisers has slipped to 2.5%.

Considering the fiscal and monetary stimulus in place, from the Federal Reserve's $600 billion bond-buying program to the package of tax cuts and extensions passed in December, that's hardly encouraging. "People got a little too excited," about the potential for strong growth this year, says Bank of America Merrill Lynch economist Ethan Harris. The economy's underlying growth rate, he says, looks closer to 2.5% than 3.5%.

That isn't much above stall speed. But even that level of growth would mean cost pressures are likely to persist, to the chagrin of businesses and households. Stagflation is persistent inflation combined with stagnant consumer demand and relatively high unemployment.

Commodity and raw-material prices have soared over the past year largely because of tight global supplies and strong demand. The loose-money policies of central banks world-wide also have encouraged the run-up. And now, Japan-related disruption threatens to further exacerbate price pressures.

9--Inflation Slowly Showing Signs of Life, Wall Street Journal

Excerpt: Inflation, once believed dead, is showing a pulse. While price increases are unlikely to become rampant, consumers are lifting their inflation expectations, and more businesses are marking up their selling prices to recoup input costs.

Signs of life for inflation come at a time when the Federal Reserve has to weigh the potential impacts from the Japan tragedy and Middle East unrest.

To be sure, Thursday’s data on the consumer price index showed inflation remains well within the Fed’s preferred target of about 2%. Total prices, pushed up by higher food and energy, increased 2.1% over the year ended in February, while core inflation — which ignores food and fuel — was up a milder 1.1%.

Even so, higher commodity costs are starting to influence the outlook.

For instance, inflation expectations for the next year, as measured by Thomson Reuters/University of Michigan, started to perk up when gasoline headed toward $3 per gallon and above. Consumers now think the inflation rate could reach above 4% a year from now.

Commodity prices have been trending up since the global recovery gained traction. But with U.S. consumers obsessed with bargain hunting, companies felt they had no choice but to absorb the higher expenses or else lose businesses.

Now, consumers are feeling slightly more upbeat about the economic situation. That’s thanks to improving job markets and the payroll tax holiday that lifted take-home pay. As a result, businesses are more confident that customers will pay the higher prices.

The factory surveys released this week by the Federal Reserve Banks of New York and Philadelphia support that idea. Both the New York and Philly prices-received indexes are at their highest readings since 2008.

Price increases have already spread beyond gas and food. The CPI report showed February gains in new vehicles, medical care, and entertainment. Airline fares increased 2.1% in February, the fourth consecutive monthly increase of over 2%, the CPI report said.

The supply disruptions caused by the Japan earthquake could fuel further mark-ups. Shipments of auto parts and computer components could be delayed, causing bottlenecks or product shortages that would embolden more businesses to raise selling prices. (The Institute for Supply Management said electronic components were in short supply in January and February before the earthquake hit.)

The first sign of a shortage effect would be in the producer price index that tracks the wholesale prices for capital equipment and consumer goods.

10--Liquidity Traps, Once Again, Paul Krugman, New York Times

Excerpt: Arnold Kling complains that I talk too much about the liquidity trap, but still doesn’t get the point. The economy is in a liquidity trap when even a zero nominal interest rate isn’t enough to restore full employment. That’s it.

There are, however, some consequences of that situation. One of them is that increased borrowing by the government — or by anyone else — does not push up interest rates. And that’s the sense in which the low level of interest rates now, lower than rates before the big deficits began, is evidence that the theory of the liquidity trap applies.

Really, this isn’t hard; you can read the words, or, if you’re a trained economist, work through the formal models. It’s only confusing if you really, really don’t want to understand.

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