2010

Monetary Policy Can Save the Eurozone, For Now – The Weekly Standard has an article on the challenges facing the Eurozone.  It is an interesting article that has as its main thesis the following: Europe’s countries now face the choice of giving up either their newfangled money or their ancient national sovereignties. It is unclear which they will choose.  This is a conventional view, but is it correct? Are the choices really limited to saving the Euro or preserving national sovereignties?  For the long-run the answer is probably yes. It is difficult to make a monetary union work without a political union.  For many of the economic shock absorbers needed to make a monetary union work–common treasury, fiscal transfers, labor mobility, price flexibility–either require a political union or would be more effective with one. In the short-run, though, there is another option: more monetary easing by the ECB.  As Ryan Avent explains, further easing by the ECB would cause a real depreciation for the Eurozone periphery vis-a-vis the Eurozone core:

 
No solutions, if they can help it – IF YOU haven’t been following Charlemagne‘s tireless coverage of Europe’s efforts to negotiate something like a real solution to the ongoing debt crisis, let me recommend that you go have a read. The big accomplishment, if you want to call it that, is a seeming agreement on the change in the Treaty text to allow for sovereign rescues, which will likely read: The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality. But don’t expect markets to consider the situation handled: On all the other measures proposed in recent days to shore up the euro – Eurobonds, increasing the size of the EFSF or making it more flexible – the Germans shut down the debate. A seven-point declaration on economic policy for the euro-area was skewered too. It is now to be used only as “speaking points” by EU officials, even then in curtailed form. The Financial Times reports that Germany was not alone in its resistance
 
Housing Starts and Vacant Units – Here is an update to a graph showing total housing starts and the percent vacant housing units (owner and rental) in the U.S. Over a year ago, I used this chart to argue that there would be no "V shaped" recovery, and that housing starts wouldn’t rebound rapidly. See: Housing Starts and Vacant Units: No "V" Shaped Recovery. In that earlier post, I also argued that the unemployment rate would remain high throughout 2010. Hey, housing matters!The good news is the total vacancy rate has started to decline. We know that the homebuilders will complete a record low number of housing units in 2010, and the declining vacancy rate suggests more households are being formed than net housing units added to the housing stock, or in other words, the excess supply is being absorbed.  The bad news is there is a long ways to go. In some areas there will probably be a pickup in building next year, but the recovery in construction will remain sluggish until more of the excess supply is absorbed.
 
Can the Great Lakes Region Break Free of its Long-term Slide? -How can we best understand and adapt to the Region’s long term changes? There are three trends that are fundamental to assessing the Region’s economic behavior and prospects. One is the region’s sharp sensitivity to the national business cycle. The region continues to specialize in manufacturing, especially durable goods sectors such as automotive and machinery. For this reason, the region exhibits above-average swings in employment and business activity as the U.S. economy falls into a recession or recovers afterward. The second trend behavior concerns the Region’s long term re-structuring out of manufacturing. Here, it is not so much that the Region’s manufacturing specialization has abated. Rather, since manufacturing productivity gains give rise to fewer workers, and because consumer demand growth for manufactured goods does not compensate for rising labor-saving productivity, the region’s economic base does not keep pace with the nation. Finally, from decade to decade, the Great Lakes Region has experienced pronounced deviations from its overall growth trend.

What’s behind the recent rise in Treasury yields? –  Atlanta Fed’s macroblog – David Beckworth, who blogs at Macro and Other Market Musings, posted a comment regarding macroblog’s post "What might monetary policy success look like?" from December 2. Beckworth’s comment specifically mentioned this chart…(enlarge) … as part of this question: "How did you create the latter figure [shown above]? Using the Fed’s own constant maturities series (for both the nominal and real yield), the figure I come up with is less impressive. It shows a turnaround in inflation expectations about the time QE2 is promoted by Fed officials, but then inflation expectations stall and remain far from the ‘mandate-consistent inflation rate.’ "Here is a post where I placed one such graph." And here’s the graph of expected inflation from Beckworth’s post:(enlarge) The chart Beckworth shows in his referenced blog post is the five-year Treasury Inflation-Protected Securities (TIPS) spread (the difference in nominal and real Treasury yields at five-year maturities). And so when he states, "This figure shows average annual expected inflation over the next five years has been flatlining around 1.55% over most of November" it means just that: it’s examining the next five-year period (2010–15). I’ve reposted below an updated version of this chart, along with the 10-year TIPS spread.

Ron Paul: ‘I Don’t Think We Need Regulators’ Rep. Ron Paul (R., Texas), who is taking over a key House panel with oversight over the Federal Reserve, criticizes regulators in a new interview. Appearing on C-SPAN’s Newsmakers (interviewed for a second time by the Journal’s Sudeep Reddy), Paul responded to recent comments by incoming House Financial Services Committee Chairman Spencer Bachus (R. Ala.,) on bank regulation. “I don’t think we need regulators. We need law and order. We need people to fulfill their contracts,” Paul said. The congressman said that the market should play the main role in regulation. “The market is a great regulator, and we’ve lost understanding and confidence that the market is probably a much stricter regulator,” he said. Separately, Paul, author of “End the Fed,” said of his new role overseeing the central bank: “I will continue to do exactly what I have been doing” but with a “better platform.”
 
A Look Inside the Fed’s Balance Sheet – Assets on the Fed’s balance sheet expanded to around $2.367 trillion in the latest week. But all the additions came from new Treasury purchases — some $18 billion just in the week ended Dec. 15. All other holdings were flat to lower. Since the QE announcement, the Fed has purchased nearly $130 billion in Treasurys, while its MBS portfolio has declined by $42 trillion. Though the overall size of the balance sheet is set to jump, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds more assets in MBS — over $1 trillion — than any other portfolio, including Treasurys. Though at around $970 billion, Treasurys are catching up. Meanwhile, other assets were also declining. The Term Asset-Backed Securities Loan Facility, or TALF, ended in March, and is falling as the last loans made through the program mature. Liquidity swaps with foreign central banks have fallen back to the millions of dollars after jumping in the spring in response to European sovereign debt concerns. Direct-bank lending was essentially flat, remaining at precrisis levels. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed.  See a full-size version. Click on chart in large version to sort by asset class.

Educational Institutions Succeeding Despite (Because of?) Weak Economy – Sageworks, an analytics company that tracks financial data for privately held businesses, sent  the following chart on Thursday. It shows the percentage change in sales in each industry from one year to the next, for private companies earning no more than $10 million in annual revenue: As you can see, in many industries private companies are still seeing their revenues shrink. Transportation and warehousing in particular do not appear to be doing well, as the sector’s revenues have decreased by 14.77 percent so far in 2010. But privately held businesses in several major industries have posted gains, including utilities, real estate, finance and health care. The biggest winner this year, according to Sageworks, is educational services, whose revenues rose 8.19 percent so far in 2010.With so many Americans out of work and looking to upgrade their skills, it may not be surprising that privately held educational institutions are seeing strong demand for their services. The industry’s revenue growth was primarily driven by technology and trade schools, which are posting a 10 percent growth rate in revenues over the last 12 months.
 
Rising Interest Rates Really a Bullish Sign of Recovery – There has been much hand-wringing in the business press lately about the recent rise in interest rates. The fear is often expressed that this will choke off the economic recovery and decimate further the still-weak housing industry. But in fact, rising interest rates are an extremely bullish sign; tangible evidence that the economy may have finally turned the corner and is poised for a sharp rise in growth. The rise in rates has been greatest in the middle of the maturity schedule. Over the last month, for example, the yield on the Treasury’s five-year note has doubled from 1.04 percent to 2.08 percent. A month ago one could get a 30-year fixed rate mortgage at a rate of 4.17 percent; now it’s up to 4.83 percent. Short rates, however remain flat; the 3-month Treasury bill rate has been stuck at about 15 basis points (0.15 percent) since earlier this year. To understand why this is good news, one needs to know something about the fundamental nature of interest rates. The most important thing is that economists talk primarily about the “real” interest rate.
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