Tuesday, November 23, 2010

notes & comments on the week ended Nov 20th

the debate about the effects of the 2nd round of quantitative easing, which had been ongoing among the financial & economic blogs, became partisan this week...it was almost as if that obama's defense of QE at the G20 meetings last week prompted a knee jerk reaction from the right...first, a number of republican economists published a letter in the WSJ attacking QE, then pence of indiana & corker of tennessee introduced bills to have the Fed stripped of its mandate to strive for full employment, then even sarah palin suddenly became a monetary policy wonk, criticizing bernanke for inflating the price of groceries...of course, the chinese have also continued their attacks on QE; one effect of the weaker dollar in combination with the approximate chinese peg to it is to raise costs in china, and since food is a larger part of the typically chinese budget, their inflation rate has been increasing accordingly...as a result, this week food price controls were announced accompanied by penalties against those caught hoarding...also caught by the weakening dollar are other countries with similar large dollar reserves; both the thai prime minister & the asian development bank came out favoring using the yuan instead of the dollar for trade in asia, while a UN report advocated switching to IMF drawing rights..

one of the stated aims of QE is to bring down long-term interest rates, ostensibly to encourage borrowing demand, but those lower rates arent whats happening at all: yields on the benchmark 10-year treasuries rose during the first week of QE by the most since last december, up 26 basis points, or 0.26 percentage point, to 2.79 percent...so what's really happening? the NY Fed publishes its buying schedule, the primary dealers in Treasuries, which are the mega banks, front run the Fed schedule, then profit by selling to the Fed, & then the bonds sell off...just more evidence that all QE is just another stealth bailout; all its about is recapitalizing the still insolvent banks...

the simpson-bowles deficit plan which was released last week has spawned a number of other budget plans and has been taken up by two major papers a well; first the NY times published an interactive budget game, where readers could pick their own fiscal choices, a combination of spending cuts and tax increases, and later in the week the Economist ran the US budget as a cover story...another bipartisan plan was also released, this one by alice rivlin and pete domenici, & paul ryan's medicare plan resurfaced for further discussion...one libertarian tax plan, called the fair tax, proposes across the board sales taxes of 23%, eliminating the income tax altogether...according to wage stats for 2009 from the SSA, 66% of all Americans made less than $40,000, while half actually made less than $26,261...these are the people who live paycheck to paycheck, who spend all they earn, so rather than being fair, such a tax system would be diminish the standard of living most people could afford after paying those taxes; & thus the so-called "fair tax" would effectively put 1/2 the population below the federal poverty threshold...

here's an earlier much more detailed interactive of the proposed 2011 budget: http://www.nytimes.com/interactive/2010/02/01/us/budget.html; it came in at about $1.4 trillion above expected revenues...i remain unabashedly in favor of soaking the rich...i'd let the bush tax cuts expire & then some...the bush tax cuts, mostly for the rich, are scheduled to EXPIRE; they cant be renewed without support from the democrats & obama...it's clear that tax cuts, especially for the rich, dont do much to stimulate the economy, on the other hand, each dollar spent on the expiring unemployment rations, which were defeated in congress in the first vote this week, would generate about $1.60 in new economic activity...never before this year have we allowed extended unemployment benefits to expire when the unemployment rate was above 7.2 percent...

what had started as a congressional investigation into foreclosure fraud when the robo-signers scandal erupted several weeks ago ended up in hearings before the banking committees in both the house & senate this week, and more evidence that the notes were not properly conveyed to the RMBS trusts came to light...there was a lot of talk about systemic risk if the MBS market collapses, so i'm getting a sense another retroactive re-write of the laws or similar bailout is in the works...on foreclosure fraud itself, there are class action lawsuits against the banks now ongoing in at least a half dozen states (scroll down to my notes in red for links to videos of robo-signer depositions and the flowchart of the securitization of just one mortgage) ...the mortgage bankers assoc reported that 13.52% of all loans were either delinquent or in foreclosure in the 3rd quarter; the delinquency rate actually declined, in part because of the increase in the number of houses foreclosed on...

the euro-mess became harder to follow this week; one day, a statement would made suggesting that ireland was on the way to accepting a bailout, the next day, or even the same day hours later, there would be an denial of the same; but near the end of the week it became clear a bailout was on the way; a financial swap team from the IMF, the ECB, & the european commission was said to have "parachuted in" to ireland to negotiate (read impose) terms of a bailout...it's estimated that $650 billion is at stake in terms of loans from german & british banks to ireland & it's banks...earlier in the week, 60billion euros was being mentioned, now it appears the bailout figure will be 100 billion euros, or $136 billion dollars, with 13% of that supplied by the UK...100B euros is about 60% of ireland's GDP; so its roughly the equivalent to the US getting a bailout of $9 trillion; almost lost in the irish shuffle was that greece had failed to meet its targets under its bailout, with a deficit of 15.4% of GDP, and another restructuring was being discussed there, and the OECD said that poland and slovakia needed a similar deficit reduction to greece & ireland; also, a bloomberg analysis showed that 33 eurozone companies are less risky than their governments, including six each in italy & spain... both simon johnson and roubini have been reading the tea leaves to see the underlying patterns here; and it appears that portugal will be next to need a bailout, and spain, still with 20% unemployment & a housing crisis worse than ours, is the elephant in the euro-room; if spain goes, europe would have to ask for help, and johnson believes it wont come from the US, that only china has a big enough pile of reserves to bailout a crumbling europe and impose its terms...there are at least 5 dozen links to euro-mess stories at the end of this week's blogpost...

other news notes, just listed:

early in the week, the NYTimes ran a front page story by ocean studies experts that due to rising ocean levels, major coastal infrastructure should be planned anticipating a sea level rise of 2 meters (7 feet) this century...you can argue about whether its anthropogenic or not, but it now seems certain that glacier melt, especially in greenland, is having an impact on ocean levels...

the one year boom in solar and wind power projects may be coming to an end, as the stimulus money, which supplied outright grants of up to 30% of the cost of such projects, is running out...

the NY Fed manufacturing survey recorded the sharpest drop since 9-11: the new orders index fell 37 points to -24.4; prices received have turned negative

possibly due to euro contagain, or a big california bond issue, a full year of gains in the municipal bond market has been wiped out over the past 2 weeks...

the october inflation rate was reported as 0.6% annualized, the lowest since '57...i have a feeling that the declining cost of housing skewers that, but i havent seen those figures broken out...the price impact of the new model cars is incorporated in the october index each year as well, so even though new car prices rose last month, they rose by less than in previous years..under the seasonal adjustment process, that translates into a lower price.

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

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