Econ 2009

[ewmayer]

We had a major software-checkin deadline at work yesterday, so I got barely a 10-minute breather to pop in here and reply to davar55`s "Why do you vilify Greenspan?" query - a little catchup-playing today...

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It was widely (and dutifully uncritically) reported in the MSFM yesterday that Uncle Stupid somehow *made* a profit on his bank-bailout "investment" - Allow me to pour a little cold water of reality on that piece of incredibly disingenuous reporting:

As Big Banks Repay Bailout Money, U.S. Sees a Profit

“The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.”

My Comment: Barry Ritholtz` withering retort to this ludicrous claim is here

My definition of an investment profit is simple: You take the money you have invested, and if adds up to more that what you began with, well, then, you have a profit.

Let’s say on the other hand, you own 20+30 positions; 5 of them are higher than where you purchased them, and all the rest deeply in the red. Net net, your portfolio is down immensely. Most rational investors would hardly call that investment a “profit.”

Looking just at early TARP repayments means that we are ignoring a) the rest of the TARP; and b) the majority of other expenses, guarantees, loans capital injections, and outright spending that has taken place.

What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history.

And we would be remiss were we to omit Denninger`s similarly incredulous guffaw:

The problem is that this "accounting" is terribly misleading. It ignores the more than $100 billion passed through AIG to Goldman Sachs and others, for example - money that is almost certain to never be recovered.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

No really? Fannie and Freddie are a potential five trillion dollar bomb that the government has refused to take on its balance sheet for fear it may detonate on the US credit rating (yes, the rating of the NATION, not of a company.) This fear is not unfounded; with some 13% of all mortgages currently "non-performing" (either in default or foreclosure), a record, and a "cure rate" down from the 40% range to 6% for prime mortgages, there is every reason to believe that many of these losses will become realized.

“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.

The taxpayers aren't going to get their money back, and the government has done exactly nothing to force the disclosure of losses that are currently being hidden by accounting games and even outright fraud. Indeed, if anything, the government has encouraged and made possible even more games.

What's worse is that the largest banks now are operating in direct violation of laws intended to prevent "contagion" and systemic risk! Specifically, there are now multiple violators of the 10% deposit concentration rule, yet no demand for a break-up of that concentration of risk has been made. Instead the FDIC has conspired with these huge banks to get even bigger and has ignored the proscriptions in the law preventing this sort of concentration of risk! Yet Sheila Bair still has her job. Why?

This sort of misleading "reporting" is an outrage. It is one thing to be hopeful, but it is entirely different to publish things that you either know or should have known are absolutely false in an attempt to burnish the patina of a fraud-laced pair of Administrations in Washington DC along with the agencies that are their handmaidens.

[ewmayer]

Tuesday Link-o-Rama:

No new manufacturing jobs - survey: U.S. manufacturers will not add jobs in a significant manner in the near term despite higher demand reviving production, according to the Institute for Supply Management.

The housing recovery mirage: With home prices rising even in California, it might seem that the worst is over for the housing market. But the good vibrations may be short lived.

Madoff Liquidator May File `Clawback' Suits to Get Charities' Fake Profits: Irving Picard, the liquidator for Bernard Madoff’s investment business, said he might sue charities that took out more money than they invested with the imprisoned con man to force them to return the difference.

My Comment: Hmm ... wonder if a clawback counts as a kind of "reverse charitable contribution"...

China's Manufacturing Expands at Fastest Pace Since April 2008 on Lending: China’s manufacturing expanded at the fastest pace in 16 months in August, driven by record lending in the first half of the year, two surveys showed.

My Comment: See yesterday`s quote by the Chinese SWF manager about "addressing bubbles by creating more bubbles".

British Consumers Repay Debt, Rein In Spending as Manufacturing Contracts: U.K. consumers repaid debt by the most on record in July and manufacturing unexpectedly contracted, indicating the economy’s path out of the worst recession in a generation will be uneven.

My Comment: Like Americans, UK consumers are doing the painful-but-necessary thing, which is beginning the long, painful process of deleveraging. In the U.S., the government is of course doing everything in its power to "get spending going and credit flowing again" - that`s one symptom of the sickness which is long-term replacement of a productive, net-exporting economy with a Ponzi-finance-based one, in which a huge percentage of the "workers" are engaged in fundamentally unproductive economic activities. How many new-minted "realtors" and serial-house-flippers did the housing bubble create, one wonders. The number must be huge, because 43% of new-job creation during the bubble was directly related to housing, whether it be in construction, appraisal (fraud), (Ponzi) financing or (un)realty.


Pending home sales hit 6th straight increase: Index jumps by 3.2% in July, beating estimates and marking its longest streak on monthly increases on record.

Momentum in the housing market has clearly turned for the better, said NAR chief economist Lawrence Yun, in a written statement.

"The recovery is broad-based across many parts of the country," Yun said. "Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit."

My Comment: I have all confidence that we will be recalling Mr. Yun`s bullish words in the coming months - not that the NAR has a record of being excessively optimistic in its housing market predictions, or anything... :dripping_irony:


Commercial Real Estate Lurks as Next Potential Mortgage Crisis

Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.

Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn`t been pretty

My Comment: Denninger`s accompanying commentary here.


Humor: The perils of speaking too soon

Top headline on the CNN/Money homepage around 10:30 eastern this morning was the bullish

Stocks find their legs: Wall Street builds gains after housing and manufacturing reports top expectations. Dow, Nasdaq, S&P 500 flirt with fresh 2009 highs.

By Alexandra Twin, CNNMoney.com senior writer
Last Updated: September 1, 2009: 10:35 AM ET

NEW YORK (CNNMoney.com) -- Stocks rallied Tuesday morning, finding momentum after a choppy start, as investors welcomed reports supporting hopes for a recovery in housing and manufacturing.

The Dow Jones industrial average (INDU) gained 57 points, or 0.6%, nearly an hour into the session. The S&P 500 (SPX) index rose 7 points, or 0.7%. The Nasdaq composite (COMP) rose 22 points, or 1.1%.

Stocks had touched fresh 2009 highs last week but lost some steam Monday after a selloff in China sparked global stock losses. A spate of better-than-expected earnings reports Tuesday got the advance going again.

An hour later, the same CNN/Money writer posted this update:

Stocks tumble after climb: Wall Street gives up morning gains despite stronger-than-expected housing and manufacturing results.

By Alexandra Twin, CNNMoney.com senior writer
Last Updated: September 1, 2009: 11:37 AM ET

NEW YORK (CNNMoney.com) -- Stocks turned lower Tuesday morning, abandoning gains that were sparked by better-than-expected reports on housing and manufacturing.

The Dow Jones industrial average (INDU) lost 144 points, or 1.5%, around 2 hours into the session. The S&P 500 (SPX) index fell 15 points, or 1.5%. The Nasdaq composite (COMP) fell 27 points, or 1.3%.

Stocks had touched fresh 2009 highs last week but lost some steam Monday after a selloff in China sparked global stock losses. A spate of better-than-expected earnings reports Tuesday got an advance going in the morning, but trading was skittish and stocks collapsed before noon.

My Comment: The really amusing thing is that Ms. Twin has since redacted the "postversion=2009090110" version of the article to read like the 11:37 a.m. one, in effect expunging the record. I will see if I in the coming days/weeks I can capture the article-update history for the opposite-direction morning market gyration, to see if they similarly back-update early-morning-downturn articles if the market later rallies.

Anyhoo, ya probably should`ve waited until, oh, say, *two* hours into the session - Looks like the nearly 6-month-old Federal ban on the Dow dropping more than 100 points in a session has been lifted:

[Fusion_power]

An interesting summation of market risk today might include these items:
1. Real estate bubble still has not 'wound down' from too speculative highs.
2. Manufacturing capacity is drastically underutilized because of poor demand.
3. Job losses continue at a steady pace with true unemployment currently 20% or more.
4. unbelievable levels of borrowing by the govt threaten to crash the economy.
5. Commercial borrowing, especially real estate based loans, are approaching critical mass and explosion.

While many pundits try to downplay one or more of the above, taken in total, the only reasonable expectation is continuing market instability and volatility with an overall trend downward.

But that is not the most significant risk to America.


The single biggest economic risk we face today is the loss of jobs here at home to overseas manufacturers. In the last 40 years, we have exported about 60% of our manufacturing and technology jobs to places like China, India, Taiwan, Korea, Mexico, and even Guatamala. You add the names of other relevant countries. The net effect of this jobs loss is that the economy no longer has the resilience to recover from a massive blow like the current recession/depression. We can bemoan the loss, but we did it to ourselves. We went from an overwhelming exporter to an equally extreme importer of both goods and services. Given enough time, this country could easily become a 3rd world nation.

DarJones

[ewmayer]

Originally Posted by Fusion_power

Given enough time, this country could easily become a 3rd world nation.

In terms of our government finances and money-printing, we already *are* a Banana Republic ... really the only substantive difference between the U.S. and (say) Argentina and Zimbabwe on the currency-issuing front is that we have (as a result of the post-WW2 Bretton-Woods system) in a very real sense rigged the international monetary system in our favor via the designation of the US$ as the world's reserve currency. In effect that means no matter how large the trade and account deficits the U.S. runs and how much money the Federal Reserve prints, other nations cannot simply tell us to shove our increasingly-worthless dollars where the sun don't shine and demand payment in non-dollar assets (either other more-stable currencies or e.g. gold), or issuance of U.S. Treasury bonds (needed for net exporters to the U.S. to "sterilize" their accumulating surpluses of dollars) in their own currencies ... something China and Japan have recently begun to agitate for.


Some fascinating tidbits about U.S. financial policy (note especially the role of Cold War military spedning, which alas has not ended as the Cold War did) from the above Bretton-Woods Wikilink:

...Bretton Woods, then, created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their [WW2-devastated] economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability. When this triangle became destabilized, Bretton Woods entered a period of crisis which led ultimately to its collapse.
...
In 1960 Robert Triffin noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin`s Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.
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These new forms of monetary interdependence [established post-WW2] made possible huge capital flows. During the Bretton Woods era countries were reluctant to alter exchange rates formally even in cases of structural disequilibria. Because such changes had a direct impact on certain domestic economic groups, they came to be seen as political risks for leaders. As a result official exchange rates often became unrealistic in market terms, providing a virtually risk-free temptation for speculators. They could move from a weak to a strong currency hoping to reap profits when a revaluation occurred. If, however, monetary authorities managed to avoid revaluation, they could return to other currencies with no loss. The combination of risk-free speculation with the availability of huge sums was highly destabilizing.
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Reinforcing the relative decline in U.S. power and the dissatisfaction of Europe and Japan with the system was the continuing decline of the dollar—the foundation that had underpinned the post-1945 global trading system. The Vietnam War and the refusal of the administration of U.S. President Lyndon B. Johnson to pay for it and its Great Society programs through taxation resulted in an increased dollar outflow to pay for the military expenditures and rampant inflation, which led to the deterioration of the U.S. balance of trade position. In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and the yen were undervalued; and, naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation. Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.
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By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.

In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the "Nixon Shock".
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The shock of August 15 was followed by efforts under U.S. leadership to develop a new system of international monetary management. Throughout the fall of 1971, there was a series of multilateral and bilateral negotiations of the Group of Ten seeking to develop a new multilateral monetary system.

On December 17 and 18, 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a "temporary" agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued.

This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime. [EWM: Which led to the current Bretton-Woods 2 regime, with no gold standard but retaining dollar hegemony.]

[davar55]

It is not a "rigging" of the dollar.
Ultimately, though it may not seem like it because of the ratios,
it's Fort Knox and an implicit gold standard that the dollar -
and thus the other related world currencies - rely on.
The federal reserve and e-cash are all ultimately are reality based.

[garo]

Originally Posted by davar55

It is not a "rigging" of the dollar.
Ultimately, though it may not seem like it because of the ratios,
it's Fort Knox and an implicit gold standard that the dollar -
and thus the other related world currencies - rely on.
The federal reserve and e-cash are all ultimately are reality based.

Ha ha ha! Your faith is touching.

[davar55]

Originally Posted by garo

Ha ha ha! Your faith is touching.

If I'm wrong, when the world economy collapses,
you can have the last laugh -- if you choose to.

[Fusion_power]

it's Fort Knox and an implicit gold standard that the dollar -
and thus the other related world currencies - rely on.

Just how much gold do you think the U.S. has? And just how much do you think is available worldwide? I read somewhere once that if all the gold in the world were gathered together into one place it would make a sphere about 60 ft diameter. Not sure if that is accurate though, it might be smaller.

Not to make fun of your post, but I suggest some serious study of the 'monetized paper' that our economy is based on. The term "hard" currency no longer applies to any society on earth except maybe the New Guinea savages who use seashells as money.

DarJones

[davar55]

Money is, by definition, a medium of exchange and a store of value.

Everytime money became just the former, the relevant economy failed.

Our paper money may not "seem" to be a store of much value, but
it is ultimately backed up. Even e-cash is ultimately convertible into
what you termed "hard currency". When we stopped printing
"gold certificates" the government hoarded gold. When we
stopped printing "silver certificates", silver coins were generally
removed from circulation. These metals are still around. Guaranteed.

[ewmayer]

Originally Posted by davar55

Money is, by definition, a medium of exchange and a store of value.

Everytime money became just the former, the relevant economy failed.

Our paper money may not "seem" to be a store of much value, but
it is ultimately backed up. Even e-cash is ultimately convertible into
what you termed "hard currency". When we stopped printing
"gold certificates" the government hoarded gold. When we
stopped printing "silver certificates", silver coins were generally
removed from circulation. These metals are still around. Guaranteed.

Except that the "store of value" part was abandoned long ago, as Fusion points out. Our paper money and Treasury-issued debt is only backed by the ill-defined "full faith and credit of the U.S. government". That means if you buy a T-bill, government bond, agency debt, etc, then when the instrument reaches maturity, *if* the U.S. government has not repudiated its debt via default (think Russia in 1998, Argentina every decade or so, etc.), you will get whatever dollar amount the instrument carries.

But - unlike in the gold-standard days, there is ABSOLUTELY NO GUARANTEE of what those "future dollars" will be able to buy. In the 1950s (while we were still on the gold standard), you were GUARANTEED a certain dollar-to-gold exchange rate, which at that time was pegged at $35 per ounce of gold^*. Due to cold-war budget deficits and the rampant government spending of e.g. LBJ's "Great Society" program, such a fixed standard quickly became untenable, as the Wiki article I linked explains in detail. So first the U.S. progressively devalued those "ultimately backed up" dollars, and then abandoned the "store of value" paradigm entirely. How many of those dollars you have so much misguided faith in does it take to buy an ounce of gold today? Sure, incomes have risen (somewhat) following the overall inflation (i.e. dollar devaluation) rate, but that is small comfort to someone who bought a 30-year T-bill in 1970 and cashed it in in 2000.

A similar "gotcha!" applies to other nice-sounding "guarantees" ... for instance the FDIC "guarantees all depositors will get their money up to $100,000" (whoops, now $250,000, since a hundred grand don't buy what it used to) in case of failure of an FDIC "insured" institution ... but they make no guarantee whatever WHAT THOSE DOLLARS WILL BUY.

It's a Ponzi scheme, plain and simple. (Or if you like, a tax on assets ... One of the fundamental results of moving from an economic model based on savings and prudent investment thereof to one based on credit, that is, debt.)

And your comment "Everytime money became just the former, the relevant economy failed" is spot on ... a country can only keep spending beyond its means for so long ... the "rigged system" part of my previous post explains why the U.s. has managed to keep the Ponzi going longer than any other country on earth would be able to. But at some point, the piper *will* demand to be paid, and that is why some very bright independent-of-government minds are predicting a currency crisis in the not-too-distant future for good old Uncle Spendsalot.


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^*Now it's a fair question of "what's so special about gold ... it's not particularly useful". But it has longstanding historical precedent as a widely-agreed-upon, reasonably portable store of value, and most importantly, like the large stones-with-holes currencies of some "primitive civilizations", it is LABOR-INTENSIVE TO PROCURE, that is, it doesn't "grow on tress", so to speak. Paper money, OTOH, requires virtually zero effort to produce, and even less now that nearly all money "printed" by the Federal reserve is of the electronic variety. Need another trillion bucks? A few keystrokes is all it takes, followed by a bit of phony theater involving a series of Treasury auction, in which if there is no foreign demand for the newly issued debt, the Fed can simply prod its network of Primary Dealers to make a show of bidding for it with "strong demand" and the quietly buy the very same funny money back from the PDs by way of its next round of Permanent Open Market Operations, a.k.a. "monetization" of the debt, something Ben Bernanke has strenuously denied doing, but for which there is mounting and incontrovertible evidence.

[Fusion_power]

Lol Davar, I think the seashells are the best currency imaginable. There are lots of them, they are constantly renewable, and you can gather your own just by visiting the seashore.

Seriously, if you think the dollar is some magical store of value, then I suggest you look carefully at the effect of inflation.

The underlying basis for all currency is hard goods. A refrigerator for example represents about $500 to $700 in today's dollars. The key to understanding the relationship is to see that under the gold standard, all dollars could be converted to a single hard asset, gold. With the floating currency we have today, the dollar can be converted to ANY hard asset, but is not backed by a single asset like gold. The problem with this is that inflation becomes much more likely than with a gold standard. The net effect is that he who holds a hard asset wants more dollars to part with it. People who happen to be holding dollars when inflation hits tend to lose buying power. The advantage of the gold standard was simple, it drastically reduced the fluctuations caused by inflation. Note that it did NOT stop inflation. Zimbabwe is an excellent case study to see what happens when the 'hard asset conversion value' of paper money is compromised. Zimbabwe's problem is simple in a way. They printed their way out of a cash crisis and in the process collapsed the value of their currency.

In the final analysis, paper money has no true value at all. It is the perceived value that we trade on.

DarJones