Monday, April 25, 2011

notes on the week ended April 23rd

as if the senseless budget bickering of the congresscritters werent enough for our troubled nation to endure, insult has been added to the ongoing injury this past week with the announcement by standard & poors that our country's debt now has an outlook of "negative", meaning there's a chance that they'll lower our credit rating from AAA sometime in the future...and although many economists lampooned the S&P move, & the markets completely shrugged it off (10 year Treasuries hit a high for the month this week), the action itself gave the mindless media fits & the deficit hawks new ammunition in their ongoing attacks on entitlements...but if you read the press release of the S&P warning, you'll see that it really has nothing to do with our ability to pay our debt, but it's concern is that "policymakers might not reach an agreement on how to address" it...in other words, S&P is warning about politcal gridlock, not about the full faith & credit of the US...a country that prints its own money can't go bankrupt; it can always print more to pay off old debts (such printing may eventually debase the currency & cause inflation, but that's not within the balliwick of the S&P rating)

so what it has now come down to is that the main risk of default by the US Treasury is not big government, not spending more than we take in, but that a handful of faux fiscal conservatives in the house will hold the country hostage to an arbitrary debt ceiling, playing chicken with the full faith & credit of the country at the whim of some ideological ideas of what the country should look like...we can be certain this has nothing to to do with true fiscal restraint, simply because the house Republican budget passed late last week, the so-called ryan plan to privatize medicare & cut taxes for the rich, would actually add $6 trillion to the debt over the next decade...(btw, a talking point on ryan medicare is that "it's the same plan congress has" - except that the congressional plan is indexed to health care costs, & the ryan plan is indexed to the suspect CPI, and it wont cost the average congressman half his income to buy health insurance with his vouchers)...there is also a bi-partisan debt reduction scheme being planned in the senate by "the gang of six"..in that plan, social security is on the table, but tax increases are not...i also noticed that the Treasury intends to sell AIG at a loss this month, and also sell GM at a loss by the summer, and wonder if this debt ceiling stalemate is part of the motivation for these early sales...

let look at this idea of US debt...the barely readable pie graph i've included here shows who the holders of the debt are as of the end of the fiscal year; the big blue wedge, 42% of what is outstanding, is owed to US individuals & institutions...this could be banks, mutual funds, pension funds or wealthy individuals....the next biggest wedge is 18%, and that's money we owe to the social security trust fund..."all other countries" is 11.7%, followed by china & japan, other domestic retirement funds, OPEC & brazil...but those foreign holdings of US debt do not indicate that we need china, japan or OPEC to buy our debt, rather that they're pretty much stuck with dollars by virtue of their trade surpluses & our current account deficit...and china is going to continue to be stuck with dollars as long as they want to keep selling us trinkets through walmart...and although they may use some of those dollars to buy oil (which is priced in dollars) they still have 3 trillion dollars of foreign reserves they have to put somewhere...with the yen radioactive & the euro unraveling, there isnt really anywhere else to go...so rather than sticking them under the big chinese mattress, they buy Treasuries so they can earn a nominal amount of interest... & even if china buys brazilian reals, brazil just turns around & buys dollars to keep their own currency down...as long as all these countries continue to be interested in gaining trade advantage over us & one another, our capital inflows will continue, and our debt will be automatically funded...for them to quit accumulating dollars, trade would have to be rebalanced, & we'd replace imports with domestically produced goods, increasing employment and tax receipts, ultimately bringing our GDP to debt ratio down that way.... 

and speaking of domestic employment, new data from the commerce department's BEA showed that the cash-heavy US multinational companies have added 2.4 million employees overseas while cutting domestic employment by 2.9 million over the last decade...most of those jobs cut were of the better paying variety, while jobs being added this decade have tended to be in the low paying service sectors...employment in the US by foreign based multinationals also fell, with a half million jobs eliminated in 2009 alone...in more specific news, toyota announced it will extend its US production cutbacks through june due to parts shortages; employees will not be laid off; rather they'll work 4 hour shifts 3 days a week...toyota japan does not expect full production to resume until the end of the year...

a new type of legislation first enacted in michigan is starting to spread thru republican dominated state capitals, which gives state appointed emergency financial managers powers to take over municipalities, fire the elected officials, cancel worker contracts, & end municipal services they disapprove of, including safety net assistance to those in need; benton harbor michigan was taken over this week, and michigan is training state "SWAT teams" to take over other cities; scott walker in wisconsin has introduced a similar financial martial law... ohio and other states are sending companies who had previously received state development grants under precious administrations bills to claw back funds thus received...

we knew the Fed, the treasury and the OCC were going to be soft on the banks in re mortgage & foreclosure fraud abuses, but there now seems to be an explanation for why the 50 state investigation, which started out gangbusters on the case several months ago, appears to have gone soft & fallen apart; matt taibbi at rolling stone followed the money, and found that iowa attorney general tom miller, who was leading the negotiations for the 50 state AGs, has since received an 88 fold increase in campaign contributions from bank friendly donors...

at least there were two more judicial rulings against MERS this week, one in a california bankruptcy court, and another in PA; there were also 3 more home-price indexes reported the past week; the FHFA index, which tracks prices of of homes sold or guaranteed by Fannie & Freddie, showed home prices down 1.6% February over January and 5.7% YoY; the FNC index has single family homes down .7% in the same period, and radarlogic, which tracks home prices in 25 cities by price per square foot, was at its lowest since 2003, down 4.3% from last year and 36% from the peak...with distressed properties amounting to 40% of existing home sales, it doesnt seem the downward price spiral will let up anytime soon...new home starts were up slightly, but completions were at an all time low...moody's also reported commercial real estate prices were down 3.3% in February, and now down 44.7% from the 2007 peak...according to the analytics firm Trepp, CRE made up 77% of the non-performing loans at the recently failed banks, much as elizabeth warren warned about over a year ago..

there was a blog post this week on one of the new regional Fed blogs; the NY Fed's Liberty blog attempted to discover the reasons behind recent increases in inflationary expectations, and decided that people are too oversensitive to food and energy prices...right.  people are just too damn oversensitive to eating and heating their homes...people oughtta just stop eating & heating and then they'll see that inflation isnt a threat, just as the Fed & their apologists has always told them...

jim hamilton at econbrowser took another look at the WTI-brent spread this week, and we now have more details on why we're paying the Brent price for oil rather than the WTI price...as i mentioned previously, the keystone pipeline project, from the alberta tar sands through the north dakota bakken shale over the great plains ogallala aquifer and to the gulf coast is still a few years from completion, so much of our domestic crude is landlocked at the WTI storage terminal in Cushing OK...however, conoco phillips owns the seaway pipeline, which is bringing even more crude from louisiana to cushing...it turns out that a lot of US refiners are paying $17 over the WTI price because conoco-phillips refuses to reverse the flow on the seaway pipeline, because it would benefit their competitors more than it would them...so the price of willison sweet from north dakota is only $96 because of the added transport costs, while US coast refiners are paying $124 for imported oil...meanwhile, obama is blaming the high price of gas on speculators...

the european crisis continued to accelerate this week; it seems like i saw an article each day that greek borrowing costs had hit a new record...it started last week with a few german officials and IMF opining that greece would need to restructure its debt, meaning bondholders would not be paid back in full...and the prospect of a further bailout turned the tide in the finnish election, and it now looks like they'd opt out of any further package...at any rate, by the end of the week greek ten years bonds were near 15%, & their cost to borrow for two years was 23%...similarly, irish 10 yr debt hit a record 10.5% and portuguese a record 9.5%...credit default swaps, the cost to insure the bonds of both greek & portuguese debt, also hit records, with the price of CDS on greek debt said to be pricing in a 67% likelihood of a greek default within 5 years...rumors were that the restructuring might even occur this weekend, so as i write this i dont even know if its already underway or not...

the above is my weekly commentary 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, most coming from the aforementioned GGO posts, contact me...

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