Monday, May 9, 2011

Today's links

1--Volatile Prices Are Volatile, Paul Krugman, New York times

Excerpt: Commodity Rout Lends Credence to Bernanke’s Inflation Outlook, says Real Time Economics. Well, yes. Volatile prices are volatile, which is why they shouldn’t be used to determine monetary policy.

So will the inflationistas back off if the surge in commodity prices comes to an end? Of course not. They’re already getting ready to insist that any benign news on the inflation front is the result of bureaucrats at the BLS fudging the numbers. It’s a conspiracy, I tell you!

2--FOREX-US dollar soars as euro and commodities slump, Reuters

Excerpt: The U.S. dollar soared nearly 2.0 percent against the euro on Thursday as concerns about a global economic slowdown, reflected in a slump in commodity markets, prompted investors to flee risky assets and high-yielding currencies and seek refuge in the greenback.

The slide in commodities also hurt currencies from commodity exporting countries such as Australia and Canada. The Australian dollar fell 1.4 percent to US$1.0568 AUD=D4 after rising above $1.10 earlier this week, its highest level in nearly 30 years.

The plunge in the euro, which had its worst day against the U.S. dollar since August last year, was triggered by comments from European Central Bank President Jean-Claude Trichet suggesting that euro zone interest rates were unlikely to rise next month.

3--Jobs Report: The Age of Diminished Expectations, Paul Krugman, New York Times

Excerpt: Better than most people, myself included, expected. So good news, definitely.

But we really have defined good news down. April’s job gains roughly equaled the average monthly job gain under Clinton, so what was normal has now become exceptionally good. Bear in mind that we’re still almost 7 million jobs down from the previous peak, and something like 11 million down from where employment should be right now. It would take many years of reports this good to create anything that felt like full employment.

So, could have been worse. But not a reason to rejoice.

4--Flashing Yellow, Paul Krugman, New york Times

Excerpt: A few readers have asked what I make of recent economic indicators. The answer is, nothing good.

By my count we’ve had four adverse surprises lately: GDP, private-sector payrolls, service-sector survey, and new claims for unemployment insurance. Since there seem to be a fair number of Charlie Browns out there — people who keep expecting a housing recovery, even though Lucy keeps pulling away the football — I guess we should add weak housing numbers to the mix.

It looks like a sputter, not a crash, but it’s definitely not good.

The bond market agrees: 10-year rates are back down to 3.17 percent. (S&P? Never heard of them).

The tragedy is that even as the real economy disappoints, yet again, Washington is entirely focused on dire events that aren’t happening: fiscal crisis, runaway inflation, dollar collapse.

Lost decade, here we come.

5--Commodity Rout Lends Credence to Bernanke’s Inflation Outlook, Wall Street Journal

Excerpt: .... Oil prices, the most visible player in the commodity run-up, fell hard after a weak report on weekly jobless claims and signs the European Central Bank may not launch an extended campaign of rate hikes sent the market down sharply. Worries the U.S. recovery may not be as strong as expected signaled to many investors it was time to re-price oil for lower demand, and other commodities followed suit.

A respectable monthly jobs report Friday didn’t appear to change the calculus much, and renewed worries about the state of the European economy helped keep oil under $100 a barrel at the end of trading Friday.

All in all, it looks as if Bernanke’s oft-repeated view that the commodities surge, driven by supply shocks, political forces and overseas growth, may indeed be “transitory.” Of course, the issue goes beyond inflation, in that lower oil and food prices may help increase consumers’ spending power, which should help the recovery regain its step.

6--Consumers Increase Credit-Card Debt, Wall Street Journal

Excerpt: U.S. consumers in March increased their credit-card debt for the second time since the financial crisis flared, giving a sign of hope that consumer spending could boost an economic recovery that has lost some steam.

In its monthly report Friday on borrowing, the Federal Reserve also said overall consumer credit outstanding rose, up $6.02 billion to $2.426 trillion. The increase, the sixth in a row, was bigger than expected. Economists surveyed by Dow Jones Newswires had forecast a $4.8-billion rise in consumer debt during March....

Having to pay more to the pump has caused Americans to cut their spending elsewhere. The economy braked sharply in the first three months of 2011, partly because of lower consumer spending.

The Fed’s data Friday showed revolving credit, which is credit-card debt, rose $1.95 billion to $796.10 billion in March. Revolving credit has gone up only twice in 31 months–or two times since September 2008. That’s when the financial crisis flared, leading to consumers paying down debt and lenders writing off overdue balances.

7--Tri-party repo reform seen as helpful but will not avert 2008-style panic, Repowatch

Excerpt: no one has figured out a way to successfully counteract the run on the repo market that caused the credit crisis in 2007 and 2008 and could do so again the next time a major borrower like Countrywide Financial, Bear Stears or Lehman Brothers defaults, Liberty Street economists said.

From the Liberty Street report, “Everything you wanted to know about the tri-party repo market, but didn’t know to ask,” by Lucinda Brickler, Adam Copeland, and Antoine Martin:

… little progress has been made to address the problem associated with the liquidation of a large dealer’s portfolio.

… because some dealers fund such large portfolios of securities financed in the tri-party repo market, the failure of such a large dealer could lead to a fire sale, as investors try to sell their collateral in an uncoordinated fashion. In addition, many financial institutions have to mark their assets to market, so fire sales of securities financed in the tri-party repo market could spill over to other markets.

Tri-party, thought to represent about one-fourth of U.S. repurchase transactions, has about $1.6 trillion in outstanding repos daily, down from its $2.8 trillion height in early 2008.

An interesting factoid from the Liberty Street report, which includes an easy-to-understand explanation of how tri-party works, is that there are more than 4,000 repo lenders active in the tri-party repo market.

The largest provide more than $100 billion each in tri-party repo financing a day, according to the New York Fed.

The Liberty Street report does not give the number of repo borrowers, but it says most tri-party repo borrowing is done by the 20 primary dealers authorized to repo with the New York Fed, and 10 of those securities dealers do almost 80 percent of the tri-party borrowing......

From an industry study of the tri-party market after the crisis:

The potential for the tri-party repo market to cease functioning, with impacts to securities firms, money market mutual funds, major banks involved in payment and settlements globally, and even to the liquidity of the U.S. Treasury and Agency securities, has been cited by policy makers as a key concern behind aggressive interventions to contain the financial crisis....

But none of the recommendations will prevent the next run, and may even make it worse, the New York Fed reported. The task force tried to agree on a solution for panics, but they could not.But none of the recommendations will prevent the next run, and may even make it worse, the New York Fed reported. The task force tried to agree on a solution for panics, but they could not.

8--How the Fed made the rich richer, MSN Money

Excerpt: The 'QE2' project was supposed to ease borrowing and get consumers to spend again. Instead, it has benefited only a few while raising most people's cost of living.

There's a good reason for this: As inflation surges at the store and the gas pump, the economy is stalling. And the heart of the problem could very well be the Federal Reserve's $600 billion "QE2" money-printing initiative, which was implemented last November to great fanfare on Wall Street and is set to end in June.

While the program has helped push up the cost of living for all of us -- sending inflation into the red zone and damaging consumer confidence -- evidence suggests its benefits have accrued only to the top tier of the net-worth ladder.....

Cream to the top

Yes, the stock market has posted impressive gains since the idea of QE2 surfaced, with the Standard & Poor's 500 Index ($INX) up nearly 31% from its low last August. And that has pushed up household net worth by $2 trillion. The hope has been that this will translate into new spending and drive the economy forward.

But stock ownership is concentrated among the wealthy: On average, just 12% of households worth $100,000 or less own stocks and mutual fund shares outside their retirement plans -- a group that comprises 74% of the total population. While many more own shares through 401ks and IRAs, they're not in a position to easily tap that wealth for current spending.

At the same time, QE2 has pushed up borrowing costs, pressing down the prices of homes -- a much more widely held asset. The Case-Shiller Home Price Index started falling last summer as the idea of QE2 was floated, and it hasn't stopped since. The broad 20-city index now sits below 2009 levels.

This is a continuation of trends that have been in place since the recession ended in 2009. According to Credit Suisse equity strategist Douglas Cliggott, it suggests the improvement in net worth during the past two and half years "has been heavily skewed towards that relatively small part of the U.S. population that has significant equity holdings."

9--Obama Murdered bin Laden for a Fistful of Votes, Haim Baram, Haaretz via Information Clearinghouse

Excerpt: Since most of the political commentators here behaved like particularly rowdy soccer fans after a bloody and perhaps even undeserved victory, we, the leftists, are not exempt from expressing disgust about the millions dancing on the corpse of mega-terrorist Osama bin Laden. The man was contemptible, and his hands were sullied with the blood of innocents - there's no question about that. But the operation by the U.S. Navy SEALs was an act of licensed gangsterism, murder without trial, and a cruel operation that did not take into account the victims who fell around the main victim.

The humanist approach requires us to reject the act of terror against bin Laden for three reasons: ethical, legal and political-ideological. The president of the United States has no authority to operate in foreign countries arbitrarily and in contradiction to the principles of international law. Even inside his country, nobody authorized him to issue a death sentence, not to mention murdering people who were next to the victim.....

The legal aspect is also clear. Murder in cold blood (especially in a foreign country ) contradicts the principles of international law, but thanks to military, economic and political power - and not for reasons of principle - there is no chance that Obama will have to pay for it. The murder of bin Laden now enables many governments the world over, including the Israeli government, to continue to slaughter civilians and to explain the act by referring to the Obama precedent.

10--Number of the Week: Class of 2011, Most Indebted Ever, Wall Street Journal

Excerpt: $22,900: Average student debt of newly minted college graduates

The Class of 2011 will graduate this spring from America’s colleges and universities with a dubious distinction: the most indebted ever.

Even as the average U.S. household pares down its debts, the new degree-holders who represent the country’s best hope for future prosperity are headed in the opposite direction. With tuition rising at an annual rate of about 5% and cash-strapped parents less able to help, the mean student-debt burden at graduation will reach nearly $18,000 this year, estimates Mark Kantrowitz, publisher of student-aid websites Fastweb.com and FinAid.org. Together with loans parents take on to finance their children’s college educations — loans that the students often pay themselves – the estimate comes to about $22,900. That’s 8% more than last year and, in inflation-adjusted terms, 47% more than a decade ago....

Still, the growth in student debt marks a shift toward a form of obligation that can be a lot more onerous than credit cards or home loans. Student debt can carry interest rates as high as those on subprime mortgages, and it’s much harder to shed in the event of trouble. There’s no house to give back to the bank, and even bankruptcy rarely offers relief. As of December 2010, total student debt outstanding stood at $530 billion in the U.S., up 29% from December 2007. Other types of household debt shrank 8% over the same period. Given the state of the job market, many degree-holders will face a long slog to get debt-free: The Collegiate Employment Research Institute estimates that the average salary for holders of new bachelor degrees will be $36,866 this year, down from $46,500 in 2009.

In the near term, the debt burden could weigh on both the housing market and the broader economy. College graduates struggling to pay off debts are more likely to put off major milestones such as leaving home, getting married and buying a house, at a time when the creation of new households in the U.S. remains well below its long-term average.

11--Gaddafi Gold-for-oil, Dollar-doom Plans Behind Libya 'Mission'?, RT via Information Clearinghouse

(Video report) More speculation has been raised on the reasons for NATO's intervention in Libya. As RT's Laura Emmett reports, the organization may have been trying to prevent Gaddafi from burying the American buck.

12--The Inflation Monster Under the Bed, Paul Krugman, New York Times

Excerpt: (must see chart) As you can see above, wages have gone nowhere. Commodity prices, on the other hand, have gone up a lot lately (although they crashed last week).

So here are a couple of questions.

First, do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?

Second, do you any sign that employers are getting ready to make more generous wage offers?

Third, have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs?

The answer to all three questions is clearly no. So what we have is a rise in raw material prices, which will largely get passed on the consumers, but no hint that this is spreading into a wider rise in prices; and with labor costs flat, that means we get a one-time jump in consumer prices, but no persistent rise in inflation.

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