Dollar/euro Irrelevance – A number of comments, both here and on my euro article, focus a lot, one way or another, on the respective roles of the euro and the dollar as international currencies; some of the comments drop dark hints about US plots to derail the euro, or petrodollars, or whatever. Really, it’s not a big deal, as I wrote way back when (2003, I think). There are some advantages to having a reserve currency, but they’re really not large. And they certainly aren’t at the heart of the issues now creating so much trouble in Europe. Oh, and by the way, the dollar/euro exchange rate isn’t relevant at all; a strong currency doesn’t imply a strong economy, and may often imply the opposite.
Time For Fed To Emphasize Other Price Gauges – It’s time for the Federal Reserve to start emphasizing its own alternative measures of inflation trends. To gauge where prices are heading, since the 1970s the Fed’s been focusing the public’s attention on a core inflation measure that strips out volatile food and energy prices, making the central bank sometimes look arbitrary and out of touch with reality. Two little-known measures compiled by economists at the Federal Reserve Banks of Dallas and Cleveland since the 1990s may provide the solution. Instead of just taking out energy and food from the PCE price index published by the Commerce Department, the Dallas Fed throws out whatever item shows the biggest price swing, both increases and decreases, and averages out what’s left. As well as eliminating gasoline and fresh foods, the Dallas Fed indicator has recently stripped out volatile hotel rates and used car prices.Instead of just taking out energy and food from the PCE price index published by the Commerce Department, the Dallas Fed throws out whatever item shows the biggest price swing, both increases and decreases, and averages out what’s left. As well as eliminating gasoline and fresh foods, the Dallas Fed indicator has recently stripped out volatile hotel rates and used car prices.
Sales Up, But Stores Fret Over Outlook – Retailers saw their best holiday season since the start of the recession, but a loss of momentum in December fed concerns about the strength of the sector’s revival in the new year. December retail sales at stores ranging from car dealers to grocers rose 7.9% from a year ago, the Commerce Department said Friday, and overall sales surpassed their pre-recession peak. But the pace slowed toward the end of the season, inching up 0.6% between November and December to $380.9 billion, after growing 0.8% the month prior. A rash of early-season discounts prompted some shoppers to make their purchases earlier.
Broad Tack Expected in Implementing ‘Volcker Rule’ —Top U.S. financial regulators charged with issuing recommendations on how to implement the "Volcker rule" appear to be leaning against suggesting precise rules for specific assets or trades, and instead might focus on the amount of risk being carried by a firm or trading desk, according to people briefed on the negotiations. Included in the sweeping financial-overhaul law passed last summer, the Volcker rule, named for former Federal Reserve Chairman Paul Volcker, seeks to prevent banks from putting capital at risk by prohibiting proprietary trading and banning certain relationships with hedge funds and private-equity funds. It left much of the details on how to do that with regulators.
Inflation (or Lack Thereof) – According to the BLS, inflation blipped up in December: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment. Much of that increase was due to the cost of energy, which rose 7.7% in December (gasoline prices were up 13.8%). The "core" CPI, which excludes food and energy prices, was up 0.1% in the month, and 0.8% for the year. While there was some energy-induced inflation in the month, the annual rates of change in both overall (red) and core (blue) inflation remain subdued: Those rates remain well-below the Fed’s informal 2% target. The traditional inflation-unemployment dilemma of monetary policy just isn’t an issue for the Fed right now.
Five Steps Forward in 2011 – The worst of the financial/economic crisis seems to be over. But continued high growth in emerging markets depends on avoiding a second major downturn in the advanced economies, which continue to absorb a large (though declining) share of their exports. Slow growth is manageable. Negative growth is not.Thus, for the emerging economies, advanced countries downside risks and the spillover effects of their recovery policies are the key areas of concern. In several advanced countries, including the US, growth and employment prospects are starting to diverge widely, endangering social cohesion and economic openness. This situation is largely the result of predictable post-crisis economic dynamics, as firms and households in advanced countries repair their balance sheets. But it also reflects non-cooperative policy choices. Indeed, attempts to coordinate economic policy across the G-20, which accounts for 85% of global GDP, fell short of what was hoped for in 2010. So what would a coordinated set of global economic policies look like?
US ‘battle for acreage’ will shape key food markets – Guessing which crops will win the annual “battle for acreage”, using government crop statistics and historical price ratios to forecast how much land will sprout corn stalks or soyabean plants, is especially fraught this year. Stocks of corn and soyabeans are set to fall to the lowest levels in more than a decade with prices at 30-month highs. Because the US exports half the world’s corn and a third of the world’s soyabeans, changes in acreage, and hence output, have a huge impact on global commodity supplies. Other crops join in the contest. These include cotton, the prices of which are at record highs of more than $1 a pound. But limits on cultivable land will this year make plantings a zero-sum game, increasing one crop only at the expense of others. Rabobank, one of the world’s leading agribusiness lenders, says this year’s battle “will be one of the fiercest in history”. Many farmers have invested in fertiliser and seed and begun selling crops forward on futures markets, making planting plans inflexible.
The Fed Has Spoken: No Bailout for Main Street – If the Fed could so easily come up with $12.3 trillion to save the banks, why can’t it find a few hundred billion under the mattress to save the states? Obviously, it could, if Congress were inclined to put non-bank lending back into the Fed’s job description. Then why isn’t that being done? The cynical view is that the states are purposely being kept on the edge of bankruptcy because the banks that hold Congress hostage want the interest income and the control… [Congress] could issue its own debt-free money and spend it on repairing and modernizing our decaying infrastructure, among other needed works… the states could take matters into their own hands and set up their own state-owned banks based on the [Bank of North Dakota]’s model. They could then have their own very low-interest credit lines, just as the Wall Street banks do. Rather than spending or selling off valuable public assets or hoarding them in massive rainy day funds made necessary by the lack of ready credit, states could leverage their assets into a very strong and abundant local credit system, following the accepted business practices of the Wall Street banks themselves.
States Will Soon Have To Start Paying Interest on Their Massive Unemployment Borrowing – Because of the high jobless rate and past fiscal irresponsibility, 30 states have collectively had to borrow more than $40 billion from the federal government just to keep unemployment insurance checks in the mail. A provision in the stimulus bill made those loans interest-free for an extended grace period. But no more. Efforts to include an extension of the grace period in Obama’s tax cut extension enacted at the end of last year failed, and the first batch of 14 states will have to start paying interest before the end of this year. Given that state budgets need to be hammered out in advance, that means state legislatures will soon face tough choices as they come back in session. The amounts due range from California and Michigan, which each face payments of more than $300 million dollars, to Kansas, which will owe about $6 million. And because of federal rules, states can’t use unemployment insurance taxes to make interest payments, which means cash-strapped states will have to take that money from their general budgets, so there will be less money for roads, schools and other priorities.
Is China Really Funding the US Debt? -I keep hearing people erroneously claim that China is funding US deficit spending. It seems that every eejit with a fundamental misunderstanding of mathematics (and access to animated talking bears) has been pushing this concept. It turns out to be only partially true — and by partially, I mean 7.5% true. But that means the statement is 92.5% false. The biggest holders of US debt are American individuals, institutions, and Social Security. We own more than 2 out of every 3 dollars of US debt — about over 67%. Hence, we depend far less on the kindness of strangers than you might imagine if your listen to the intertubes. As of last week, January 4, 2011, the United States’ total public debt outstanding has surpassed 14 trillion dollars. Political Calculations has whipped up a chart showing exactly who is holding US debt, and funding our deficit:
Airborne Prions Make for 100 Percent Lethal Whiff – When sprayed into the air, prions that cause mad cow and other neurodegenerative diseases may be in one of their most lethal forms. A new study has revealed one short exposure to sprayed prions can be 100 percent lethal in mice. While the discovery doesn’t present any foreseeable public health threat, it comes as a surprise to scientists who study prion-based diseases and calls existing safety rules for laboratories and slaughterhouses into question. Most infectious diseases are spread by bacteria or viruses, which use genes to copy themselves. But prions are a third form of disease discovered in 1982, and they’re made only of misfolded proteins. The molecules resemble regular proteins found in the brain cells and other nervous tissues, but their abnormal shape converts healthy proteins into long fibrils that ultimately kill cells. Like a chain reaction, fibrils create more prions until the host dies from destroyed brain and nervous tissue. All prion infections are 100 percent fatal, and symptoms appear suddenly months or years after infection.
Dylan Ratigan on State/Local Public Pension Reforms – Dylan Ratigan had an informative segment today on public pension underfunding, with San Diego as a case study in government responses.
More Reasons Why Banks Should Worry About Ibanez Decision – Yves Smith – Banks and the securitization industry have been spinning the Ibanez decision as hard as they can, even going so far as to put forward Baghdad Bob style claims that the Massachusetts Supreme Judicial Court ruling said that mortgage assignment in blank worked, when a reading of the ruling show the polar opposite. Industry participants have been claiming that the ruling is no big deal, since Massachusetts law has some quirks and the securitization documents on the two mortgages at issue were a real mess. One of the court’s big beefs was that even if you were to try to use the pooling & servicing agreement to prove that the loans in question belonged to the securitzations in question, the loan schedules in question fell far short of providing the necessary detail to identify the particular properties (address, name of borrower, loan number or servicing number). Georgetown law professor Adam Levitin has done a bit of digging to see if the securitization industry defenders’ claims, that most mortgages in RMBS meet the documentation standard set forth in Ibanez, actually holds up. He find that many deals fail to meet the decisions’ requirements:
Floods Spread Across Australia as Brisbane Residents Clean Up – Emergency services are evacuating flood-threatened towns in Australia’s Victoria state as Brisbane cleans up after the city’s worst flooding since 1974 inundated more than 20,000 properties. In Brisbane, the capital of northeastern Queensland state, thousands of volunteers armed with brooms and buckets are helping clear streets and houses of the thick brown mud that deluged the city when the Brisbane River burst its banks earlier this week. The coal- and sugar-producing state, where at least 27 people have been killed in floods since the end of November, has declared a disaster area bigger than Texas and California combined. The Queensland deluge may cost insurers and reinsurers worldwide as much as $6 billion in what might be Australia’s costliest disaster. Queensland police revised the number of people missing from the floods to 28 from 53.
Toyota Tries to Break Reliance on China – The Japanese auto maker believes it is near a breakthrough in developing electric motors for hybrid cars that eliminates the use of rare earth metals, whose prices have risen sharply in the past year as China restricted supply. The minerals are found in the magnets used in the motors. All electric motors rely on magnets to make them work. The new motor Toyota is working on is based on the very common and inexpensive induction motor, found in such devices as kitchen mixers. Induction motors use electromagnets—magnets that only have their magnetic attraction when power is applied to them. But the permanent magnets found in electric-car motors, unlike those that hold up the school lunch menu, are made from neodymium, a rare-earth mineral that is almost entirely mined and refined in China. As car companies race to improve electric and hybrid vehicles, their reliance on metals like neodymium and lithium—used in batteries found in electric and hybrid cars—is raising a host of new geopolitical issues over access to the minerals. The supply of many of these minerals is controlled by China.
Labor Board to Sue 4 States Over ‘Card Check’ for Unionizing – The National Labor Relations Board announced on Friday that it planned to sue Arizona, South Carolina, South Dakota and Utah in an effort to invalidate recently approved state constitutional amendments that prohibit private sector workers from choosing a union through a process known as card check. The labor board asserts that the amendments conflict with federal laws and are pre-empted by those laws. The state amendments were promoted by various conservative groups concerned that Congressional Democrats and President Obama would enact legislation allowing unions to insist on using card check, in which an employer recognizes a union as soon as a majority of workers sign pro-union cards. That method makes it possible for employees to unionize without elections. But Congressional Republicans blocked such legislation.