Residential Investment declines to new low as Percent of GDP – I’ll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker’s commissions, and a few minor categories. It is interesting to note that RI as a percent of GDP has declined to a post war low of 2.22%. Some people have asked how could a sector that only accounts for 2.2% of GDP be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery. Not this time. The second graph shows non-residential investment in structures and equipment and software. Equipment and software investment has been booming, and non-residential investment in structures is near a record low.
Why The Downside To The Fed’s "All In" Attempt To Spike Shadow Monetary Velocity Is A $4.5 Trillion Drop In GDP (And The "Upside" Is Hyperinflation) – It appears that the one topic pundits have the most problems grasping is the spread between the segregation of traditional and shadow monetary aggregates, overall economic deleveraging and aggregate monetary velocity, and how all that impacts GDP. A summary which confirms just how prevalent the confusion is, is this terrific post by the Calafia Beach Pundit, terrific not because it is even remotely correct (the post is so blatantly wrong – one wonders if Western Asset Management even expects its current and former asset managers to count beyond 2… M2 that is), but because it demonstrates how self-professed "pundits", whether of the beach variety or not, don’t have the faintest grasp of more than merely trivial monetary topics.
U.S. nuclear renaissance not here yet – Three decades after the Three Mile Island accident seemed to doom the nuclear power industry, the idea of a nuclear renaissance has been gaining public acceptance as a way to generate energy without greenhouse gas emissions and meet the nation’s electricity demands. But not one new plant is even close to being built. The latest sign came last week that a revival might still be a long way off. Baltimore’s Constellation Energy Group — once widely viewed as a leader in developing new nuclear plants — abandoned that business and left its French partner to pursue a new reactor at Calvert Cliffs in Southern Maryland. While Paris-based EDF Group, the world’s largest nuclear power operator, has indicated repeatedly that it is committed to "making new nuclear a reality" in the United States, obstacles remain for the French government-backed entity and other proponents of a nuclear comeback here.
A Future Without Oil – Our current system of trade is based on the availability of cheap fossil fuels. Yet the time nears when prices will rise and oil will become increasingly scarce. If we want to avoid this vulnerability, we must now begin to think about ways to reduce our dependency and promote the idea of self-sustaining towns and communities. In June, Lloyds Insurance and Chatham House issued a report called “Sustainable Energy Security: strategic risks and opportunities for business”, which argued that “energy security is now inseparable from the transition to a low-carbon economy and business plans should prepare for this new reality”. So what might it look like if our response to climate change is also designed to respond to energy security, and the imminent peaking in world oil production (or ‘peak oil’)? The Transition movement, which began in Ireland and is now active in hundreds of communities around the world, is a huge collective experiment in trying to figure this out. Its premise is that just as cheap energy, particularly liquid fuels, have made economic globalisation possible, so will it become increasingly difficult to sustain as these fuels become scarcer…
Guess What’s Coming to Dinner: Inflation! – The surge in global food prices will soon arrive on the dinner table. However, to focus on the direct inflationary impact of higher food prices alone is to miss the bigger, far more inflationary picture implied by rising wage demands in developing countries. Beginning next year, consumers in most developed economies will discover to their surprise that “food” price inflation is creeping into an astonishingly wide variety of consumer goods. US CPI has been trending lower amidst a stagnating US economy. However, a look behind the headline economic data and across some financial market developments reveals a disturbing picture, that in fact the US economy may already have entered a “stagflationary” situation not unlike the late 1970s. This spells danger for financial asset prices.
Unofficial Problem Bank list increases to 894 Institutions
– Note: this is an unofficial
list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Oct 29, 2010.
Changes and comments from surferdude808: As anticipated, the FDIC released its enforcement actions for September this week contributing to many changes to the Unofficial Problem Bank List. This week there were 26 additions and three removals, which results in the list having 894 institutions with $410.7 billion of assets, up from 871 institutions and $402.1 billion of assets last week.
The Path of Least Resistance
– As with anything in economic forecasting, what I am about to say is at best an educated guess. Given the present environment, where is the global economy likely to go? Any analysis like this has to contend with political factors that drive the major imbalances of the global economy. Here are the imbalances as I see them:
- China insists on keeping its currency cheap in order to promote employment at home.
- The US does not care about deficits or currency debasement, as it seeks Keynesian remedies to its economic crises. (Little realizing that they are making things worse…)
- The Eurozone protects profligate euro-fringe nations, at the possible cost of destroying the Eurozone as a whole.
Foreign Money, National Security, And The Midterm Elections
by Simon Johnson – Campaign contributions by non-citizens are a huge issue lurking behind the midterm elections; they will be even more important in 2012. Think about the economic dynamics: Irrespective of how you feel about foreign capital inflows in economic terms, you have to face the political reality. As foreigners accumulate claims on the United States, they will increasingly diversify into corporate assets (in fact, this is the advice they get from their Wall Street advisers). Some of these corporate assets explicitly come with voting rights – but those are supposed to be voting rights over the corporation (or investment fund), not voting rights in political elections. We have effectively enfranchised foreigners in US elections. This is clearly and absolutely not what the drafters of the Constitutions had in mind.
Default, pension reform and systemic risk: State of Default
– WHAT happens if an individual state defaults? That was the question posed to a panel of luminaries at the Buttonwood gathering in New York, including Robert Rubin, Josh Bolten, Glenn Hubbard, Laurence Meyer and Laura Tyson. The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state – unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state’s bonds. The panel reluctantly agreed to provide temporary funding for the state – say for 30 days – but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.
Are Treasury’s Knives Coming Out Against Elizabeth Warren? – After several weeks of officially pleasant interactions, signs are emerging that the Treasury Department’s knives may be coming out against Elizabeth Warren. In recent weeks, Treasury officials have leaked details about Warren to Politico as part of what appears to be an effort to paint her as some kind of prima donna. These relatively silly stories raise troubling questions, however, about what Treasury officials may be leaking with fewer fingerprints and greater ramifications. The Politico pieces have been petty, but there’s no doubt they both came from Treasury. On Oct. 12, Politico ran a piece featuring this anonymous nugget (among others):…..If Treasury is indeed behind the Date hit-piece, there could be no real question about Geithner’s machinations. Trash-talking Warren, her top advisers and the CFPB itself would be an unmistakable effort to compromise the entire enterprise. If it worked, Geithner could deny Warren the formal nomination as CFPB director, Warren would go the way of Brooksley Born, and less consumer-friendly officials could quietly crush the young agency.
QE Has Worked Before: My Reply to Paul Krugman
– Let me begin my response by encouraging Krugman and other monetary skeptics to have a little more faith in the power of monetary policy. Here is why: QE has been done before in the United States and it worked incredibly well. It was initiated in early 1934 when FDR and his treasury officials decided
to (1) devalue the value of the dollar relative to gold and (2) quit sterilizing gold inflows. Now this was a radical move at the time, much like QE2 is to many folks today. The gold standard was viewed then almost as a sacred institution. FDR was going to weaken it and allow prices to permanently increase. How dare he! But that is exactly what was needed, a big permanent shock to inflation expectations that served to stop the deflationary spiral, end the liquidity trap, and allow a recovery in aggregate demand. Now this policy move was backed up with significant and permanent increases in the monetary base over time: it went from about $8 billion right before the policy change to about $24 billion by the end of the 1930s. Below are two graphs that shows this remarkable QE program at work. Here is the monetary base and M2 (Click on figure to enlarge.):
Time to fix up your house? The price of materials is rising … If you’re planning to add an addition to the house, or maybe replace the downspouts before winter sets in, you might want to consider doing it soon. Why? The price of building materials is starting to rise. Copper (used in those downspouts), aluminum (think siding and windows), and plastic (pipes and insulation) are all getting more costly. But the price increases don’t mean the US economy is growing at a healthy pace. Instead, the more expensive materials prices reflect higher worldwide commodity prices where demand is stronger. And many of those commodities are paid for with the greenback, which is down 18 percent over the past year.“ Owners should be prepared for sticker shock in a few months and move ahead now with construction,”