Friday, December 31, 2004

No pain, no gain.
The world's rich and powerful - already bowed under the weight of their great responsibilities - were advised yesterday that they must learn to cope with yet another obligation.

Silvio Berlusconi, the Italian prime minister, told them it was their duty to follow his example and undergo cosmetic surgery.

His admonition to the opulent but wrinkly, the influential but hairless, came at his year-end press conference when he acknowledged for the first time that he had had a hair transplant in the summer after undergoing facial surgery last Christmas.

"Given the possibilities of today's cosmetic surgery, I think that those who can afford it have a duty to present themselves in the best possible way," the tycoon-turned-statesman told the press conference in Rome. "It's a form of respect." . . .

"I am very happy to have subjected myself to such pain. I think this should be regarded as an example. I now feel 40 to 42 years old in all aspects of my life."
Berlusconi takes narcissism to a whole new level . . .

I don't do a lot of commentary on the Boy King's Social Security deform program except to point out Bush's evil Iraq-like strategy to destroy it, how borrowing $2 trillion to do so might have some nasty effects on the US economy, and throw in a couple of "you go, girl" lines behind other quite excellent analyses.

If you're looking for good hard-nosed analysis, I've found Max Sawicky, Bob Somerby and Paul Krugman to be excellent. Most recently, Angry Bear has penned a very nice piece, too, on Social Security as insurance.

What prompts this posting, however, is the overly critical and/or economistic tone of these writers. The critical posts which have real passion rain fire and brimstone down on Bush's head. The analytic posts which take apart the numbers are often highly clinical and even economistic. Angry Bear's otherwise good post is a particularly bloodless example.

What I haven't seen yet is a strong moral argument for Social Security. Not an argument about minimizing individual risk. Not on argument about efficiency. I want an argument about the moral virtue of solidarity which Social Security embodies. I want to see something like this applied directly to this most weighty issue of our day.
we live in a world that doesn�t seem arranged for human convenience. It�s a world in which human happiness is not the overriding goal, and our plans go awry, and there are terrible limitations on what we can know and understand and control. And in any case our lives are very short. The fact of death is always there, haunting our imagination. . . .

Hope is the primary disposition of the �democratic realist�: we share innumerable miseries together in the saeculum, with little expectation that we can exert control over the existence of sorrow and suffering�yet we hope, in the light of God�s grace, for relief and final joy. Because of our shared condition of suffering, dependency, and weakness, democracy is the form of government most fully in accord with our condition. Democracy, so understood, arises out of mutual need, and finally points to the overarching necessity of a shared sense of democratic caritas, or charity.

Lasch�s argument was counterintuitive by the standards of contemporary political discourse, in which �liberals� are more attendant to the sufferings of the weak, and �conservatives� are more likely to call for self-reliance and rugged individualism. Lasch embraced classically �conservative� arguments, with their stress on human limitation and their profound mistrust of the optimistic belief in progress, but he did so in order to ground securely a �liberal� sympathy for those most apt to be abandoned or overlooked. �Limits and hope��this combination of concepts points to our condition of frailty and imperfection, and thereby exhorts us to be keenly attentive to the suffering and alienation all of us confront. Such attentiveness impels us to acts of generosity and charity. This �spiritual discipline against resentment� chastens our impatience with injustice precisely by emphasizing the necessity for love. This emphasis upon mercy was, Lasch concluded, perhaps the most difficult virtue for humans generally, and modern man especially, to sustain. And yet, he concluded, it was a message needing repetition and renewal, even in the face of likely failure. Hope demands nothing less.
In the wake of the November 2 debacle, Democrats seemed to finally figure out that their politics requires a moral dimension which must be placed front and center. The voluntarism, individualism and flat-out selfish pride lying at the root of Social Security privatization needs to be exposed for what it is, and combatted forcefully with the givenness of our condition, with community, humility before God/nature -- and with hope.

Thursday, December 30, 2004

All the mortgage lenders and housing agents are starting to report their December data, and it's looking like a sharp slow down in the UK housing market.
U.K. house prices fell in December, with annual inflation slowing to the lowest in almost three years as higher borrowing costs end a boom that has tripled home prices since 1995, Nationwide Building Society said.

The average value of a home climbed 12.7 percent from a year earlier to 152,623 pounds ($293,000) after a 15 percent annual increase the previous month, the Swindon, south England-based lender said today. On the month prices slipped 0.2 percent after a revised 0.9 percent gain the previous month, according to Nationwide, the U.K.'s third biggest provider of mortgages.
According to Nationwide, which generally offers more rosy data than does Halifax, average prices are -1.1% from their July peak. This is still better than where they were in October and not a terribly sharp fall all things considered. Rightmove's survey of asking prices shows a much larger drop, and Halifax will report next week.

As in Australia, it appears that eliminating the first-time buyer from the market is the sure-fire first step in popping a housing bubble.
House prices have tripled since 1995, while wages have risen by 50 percent, forcing first-time buyers out of the market, Nationwide said. Fewer people bought their first homes in 2004 than in any other year since the mid 1980s, the lender said.
One can see why first-time buyers are disappearing from places like London where the average price they are paying in 2004:IV is �207,900. At that price I can't imagine you can buy anything but a flat, and at an average monthly mortgage payment surely in excess of �700.

With this last report for the year, all the quarterly regional data is in as well. Among all regions, London's y-o-y price inflation (2003:IV-2004:IV) is the lowest at 7.6%, just around half the national figure of 14.8%, and for 3 of Greater London's 33 boroughs y-o-y prices fell. In the second half of 2004 London house prices rose a mere 1.3% (2.7% nationally) and fell 0.7% in 2004:IV.

When the Halifax data comes out, I might just make a graph.

"Seasonal adjustment" are two magic words in the world of economic data. Wave them once, twice, thrice, and you've got more than lipstick on a pig. You've got biscuits and sausage gravy with a side of bacon, and the only person wearing lipstick is the waitress filling your coffee mug.

With seasonal adjustment, today's US unemployment claims figures look delicious.
The number of new people signing up for unemployment benefits dropped last week, a hopeful sign that the recovery in the jobs market is moving ahead.

The Labor Department reported Thursday that new applications filed for jobless benefits declined by a seasonally adjusted 5,000 to 326,000 for the week ending Dec. 25. That left claims at their lowest level since the week ending Dec. 11.

The newest snapshot of the labor market was better than economists were anticipating. They were expecting claims to rise to around 335,000. . . .

Thursday's report also showed that the four-week moving average of claims, which smooths out week-to-week fluctuations, fell by 6,000 last week to 333,500, the lowest level since the week ending Nov. 20.
If you're interested in comparing December 2004 with July 2004, then "seasonal adjustment" is a necessary magical incantation. But if you're interested in something like the ability of the American consumer to keep shoving cheap imports into his gaping maw from month to month, then maybe we should do without the magic.

December and January are always terrible months for jobs, a fact that "seasonal adjustment" conjures away. The week ending December 25 saw first-time unemployment claims (NSA) rise to 453,654, up over 79,000 from the week before and over 83,000 from two weeks ago. The first two weeks of January 2005 will be downright brutal, as they always are. But we won't see this thanks to "seasonal adjustment".

With American consumers down to a 0.3% savings rate, how much more are they going to buy when 600,000 more of them a week are drawing unemployment benefits instead of wages and salaries? I suppose we should be expecting a negative savings rate in December or January?

Wednesday, December 29, 2004

"I'm President of the United States and I'm not going to eat any more broccoli."

It's one of my favorite George H. W. Bush (aka Bush 41) quotes. Just as Poppy reserved the right not to eat what he didn't like because of his august position, one wonders if the central banks of the world might be brewing the same attitude regarding US Treasury debt.
U.S. Treasuries fell as a group of investors that includes foreign central banks bought the smallest amount of two-year notes at a government auction in a year.

Traders pushed government debt prices lower three of the past four days on speculation a falling dollar would deter international investors from buying U.S. debt. Indirect bidders bought 34 percent of the $24 billion of securities sold today, compared with 43.5 percent last month. . . .

Since the Treasury began publishing the data in May 2003, indirect bidder awards in two-year note auctions have ranged from 27.6 percent to 61.4 percent, and averaged 42.4 percent.

For every $1 sold, there was $2 worth of bids, compared with $2.61 at the Nov. 23 two-year note auction. For the past 12 sales, the bid-to-cover ratio, which gauges demand by comparing the volume of bids with the amount of securities offered for sale, averaged $2.21.
So what do we have here? Low interest by central banks, low bidding overall by private capital and foreign central banks, and the highest interest rate on a two-year Treasury in two-and-a-half years.

And to make things even more interesting, Bloomberg points out that in 2004 the only government bond performing worse than US Treasuries were Japanese government bonds. No wonder foreign capital is losing interest and losing it fast. That being said, the Bank of Japan might still have a robust appetite for these clunkers. The rumor mill is spitting out tales of big-time Japanese selling of the yen next month. And we all know what they'll buy.

Now the question becomes whether the BOJ and the ECB get together and coordinate things, or whether the yen stabilizes at around 105 to the dollar while the Europeans try desperately to avoid a continental wedgie as the euro yanks their collective waistband to $1.40 and beyond.

At least with the demise of the Multi Fibre Agreement on January 1, they'll be able to replace that Mongolian underwear with new stuff from China at around half the price.

When the drug traffickers and the black marketeers are getting out of the dollar, you know a real sea change is in the works.
People the world over�central banks, companies, and individuals�like to hold the dollar. It's stable, liquid, easily convertible, and never goes out of style. The dollar is popular in the official global economy�the money that changes hands through computer terminals, checks, and wire transfers. But it has also been extremely popular in the world's vast cash economy. For American tourists, Chinese smugglers, Ukrainian arms dealers, and African dictators, the dollar has long been the currency of choice. The fearful and shady, those who subsist on tourism, and residents of countries with unstable domestic currencies love the greenback. Citing Federal Reserve estimates, Grant writes that "between 55% and 70% of the $703 billion of U.S. currency outstanding circulates outside the 50 states."

The United States benefits greatly from the fact that the dollar is the world's reserve currency. Many of the $100 bills circulating throughout the globe are essentially loans that we never have to pay back. Americans use them to buy goods, services, or other currencies. But many of those bills never return to our shores to be redeemed for anything we make or produce. Instead, they stay under mattresses in Bogot�, circulate in Iraq, and are stashed in bank accounts around the world.

But among a subset of global cash connoisseurs, the dollar is losing ground to the euro�and it has nothing to do with concerns over U.S. multilateralism. First, the euro zone has been expanding with the addition of new countries and the continued integration between Eastern and Western Europe. So there are simply more people who accept and use euros now. Since 2002, the growth rate of euros in circulation has far outpaced that of dollars. Add in the euro's recent strength against the dollar, and the case for Eastern Europeans and euro-neighbors to use euros becomes more compelling. In the 1990s, the dollar was remarkably popular in Russia, where residents had long been deprived of coveted Western imports. But between January 2002 and August 2004, Grant notes, the percentage of private Russian currency transactions employing the dollar fell from 94.1 percent to 84 percent while the euro's share rose from nothing to about 15 percent.

Finally, in the past two years, euros have also become easier to carry, store, and hide than dollars. Generally, the largest denomination of U.S. currency readily available is the $100 bill. But in the past two years, the European Central Bank has started to print 200-euro and 500-euro bills. These larger bills thus allow for the concentration of wealth in smaller packages. At today's rates, a 500-euro note is worth $682.
While 55-70% of US currency circulates outside the US, only around 10% of all euros circulate beyond euroland. Nonetheless, an interesting leading indicator to keep one's eyes on. I wonder if there is a monthly Bloomberg consensus forecast for international drug dealers currency usage?

Now people are talking downright crazy about the plunging dollar/skyrocketing euro.
David Gilmore, analyst at FXA, saw a �very good chance� of the dollar sliding to $1.45-1.50 against the euro by the time of February�s G7 meeting in London, with $1.60 a possibility before the dollar begins any sustained recovery.

With concern mounting over the twin fiscal and external deficits of the US, Mr Gilmore saw a �growing consensus that the dollar downtrend has months more to play out�.

Clifford Bennett, chief strategist at FxMax, was even more bearish, seeing a �real risk of a blowout� in the US current account deficit in the first half of 2005 as the falling dollar forces US consumers to spend even more on imports to maintain the same standard of living. This could send the dollar plunging to $2 to the euro, he believed.

�The nightmare scenario is a falling US dollar starting a spiral of loss of investor confidence, generating an even lower dollar, which generates a further loss of investor confidence,� he said.

�In such a scenario the euro could hit $2 in 12-18 months and even the united effort of central banks including the Fed would have trouble controlling it. The fall out of investor panic flowing over to other markets could also be severe.
Man, you couldn't even get a pessimist and doom-sayer like me to go for $1.60, much less $2.00. The languid European Central Bank would be thrown in action long before that, and I have to believe the Bank of Japan would throw it's full weight into the fray. In the first eleven months of 2004 Japan exported nearly as much to the eurozone (�6.5 trillion) as to China (�7.2 trillion), and exports more to the eurozone plus the UK (�8.0 trillion) than to China.

Many comments in the media suggest no concerted action will be taken before the February G7 meeting. While I am sure that is true as far as looking to formal US participation in a coordinated currency management scheme, I can't see the EU and the Japanese sitting on their hands watching the euro ratchet up past $1.40.

More perspective on the truly incredible magnitude and force of the Asian earthquake and tsunamis.
The deadly Asian earthquake may have permanently accelerated the Earth's rotation -- shortening days by a fraction of a second -- and caused the planet to wobble on its axis, U.S. scientists said on Tuesday.

Richard Gross, a geophysicist with NASA's Jet Propulsion Laboratory in California, theorized that a shift of mass toward the Earth's center during the quake on Sunday caused the planet to spin 3 microseconds, or 3 millionths of a second, faster and to tilt about an inch on its axis. . . .

Tuesday, December 28, 2004

Ho-hum. A mighty slow news day on the political economy front. I've noticed that some of the big boys (Brad DeLong, Angry Bear) even seem to be taking an extended vacation. But not General Glut! No sir-ee!

Of course, not taking a vacation during a slow news period means a lot of scratching in the dirt like chickens trying to dig up something interesting to talk about. Well, how does this kernel of corn grab ya?
U.S. consumer confidence jumped in December to a five-month high, beating even the most optimistic forecast, as more Americans said jobs were plentiful and the outlook for the economy brightened.

The reading of 102.3 in the Conference Board's index followed a revised 92.6 in November, which was stronger than first reported. Expectations for the economy over the next six months also climbed to a level that was last exceeded in July.

``We expect the consumer to roll into 2005 on a high note, as hiring is poised to accelerate and income gains will pick up as well, while gasoline and heating oil will take a smaller bite out of pocketbooks,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. His forecast of 98 for the index in December was the highest in a Bloomberg News survey of 51 economists.

Today's report suggests that spending by U.S. shoppers will contribute to the economic expansion into the first half of 2005. More consumers in the survey expected their incomes to rise in the coming six months, and a larger percentage expected to buy appliances, automobiles, and houses.
So why are US consumers so -- well -- giddy? Apparently lots more of them think jobs are plentiful and pay is growing at a healthy clip.

The actual data and the economists' forecasts don't seem nearly so rosy, however. Granted the December data on jobs and personal wage/salary income won't be out until January 7 and January 31 respectively, but the latest trends don't exactly cry out for optimism.

Over the last six months, seasonally adjusted job creation has exceeded 200,000 only once (October), and only twice (August and October) has it even exceeded growth in the working age population. Over the last six months the average monthly number of jobs created is 152,000 -- or just barely keeping up with population growth. According to economists surveyed by Bloomberg, the December jobs numbers are going to come in around 175,000. For sixteen months after the jobs trough, this is still a pretty pathetic number.

In November 2004 real wages and salaries rose just 0.1%, the smallest real gain since they actually fell in June. The annual rate of real wage/salary growth in November was 1.9%. This is certainly better than the declining real wages and salaries of 2001, 2002 and early 2003, but it is the second lowest figure in over a year. No word yet on what the forecast is for December, but obviously many more folks think les bons temps are only just startin' to roulez.

Monday, December 27, 2004

Yes it's a day of very light trading, but nonetheless the dollar is absolutely tanking today. As of 2:00pm EST the dollar is trading at
�0.7337 (�1 = $1.3630)
�0.5164 (�1 = $1.936)
�102.96
Most notable is the rising yen. For the last four weeks pressure on the dollar has been venting upon the pound and the euro, but not the yen. Now the yen is at its strongest level in three weeks while the euro soars to daily record highs.

But all the signs are that the European Central Bank and the Bank of Japan are going to let it ride.
The euro hit a fresh all-time high against the dollar on Monday after the prospect of currency market intervention from the European Central Bank looked unlikely.
Bloomberg even raises the historical fact that Bush is the first president since the demise of Bretton Woods in the early 1970s to not intervene in currency markets. If fact, neither the Fed nor the ECB have intervened since September 2000.

Japan seems to be relying on its weak economic data to scare off yen speculators, and the US is more than happy to ride the dollar down so it doesn't have to do anything intentional about the trade deficit or the jobs deficit. Europe and Britain seem to be playing the weakest hands. That being said, the pound has weakened remarkably in the last week against the euro, down some 3% since last Monday. So maybe its just the Europeans who are really in a pickle.

$1.40, here we come!

To give you a sense of how truly enormous the weekend earthquake and tsunami were in Asia,
The 9.0-magnitude quake struck 6 miles beneath the ocean and ruptured a 600-mile stretch of fault running north and south off the coast of Sumatra, in a region where quakes are sometimes unleashed by a geological phenomenon called subduction. The quake shoved the entire island of Sumatra about 100 feet to the southwest. . . .

More falling home price news out of the UK.
The decline in house prices is accelerating and activity in the housing market slowing, according to a new survey that will bring little festive cheer for the nation's homeowners.

The average cost of a house fell by 0.8 per cent in December, the sixth consecutive monthly fall and the worst since the housing market went into reverse in the summer, says Hometrack, the property research company.

According to Hometrack, the average property is now worth �163,500, down from a peak of �167,700 in June this year, bringing 2004 annual house price inflation to just 1.3 per cent.

John Wriglesworth, Hometrack's housing economist, said: "2004 has been a roller coaster year for house prices. The first six months saw continued price rises before the market finally turned in July. Since then, Hometrack has reported an increasing monthly fall, cumulating in a drop of 2.5 per cent since July."
Now Hometrack data is not as reliable as that from Halifax or Nationwide, but it's one more data point in an overall arrow pointing solidly downwards. One important piece of information coming from Hometrack that I've not seen elsewhere puts the Rightmove data I reported last week into focus.
Houses are now taking seven-and-a-half weeks to sell, and sellers are having to settle for, on average, 92.9 per cent of their asking price.
Hometrack's chief housing economist thinks things won't be so bad, however, forecasting a return to price inflation by the end of 2005 based on four factors:
  1. household incomes are increasing by 5 per cent per annum;
  2. unemployment is continuing to fall;
  3. lenders are increasing the multiples of income on which they will lend; and
  4. interest rates are still historically low.
Indeed, compared to the US the underlying economic foundations of the housing market in the UK look positively solid. The UK has better income growth, more jobs, and prospects for falling interest rates next year. And yet the UK market is tumbling while the US chugs merrily along.

My nose tells me that ultra-loose monetary policy in the US and East Asia is keeping the US bubbles aloft, while much tighter monetary policy in the UK plus the absence of a foreign sugar daddy are putting the squeeze on Britain.

Which suggests that if/when the state-manufactured props holding up the US bubbles are pulled out, there will be a mighty fall much worse than in the UK.

Economic theory says that a falling dollar should increase US sales abroad, reduce the trade deficit, and lead the charge in rebalancing the global economy. As a result, the General has been scouring the globe in search of some evidence that nearly three years of a falling currency might have had some significant effects on boosting US exports.

All weekend, Bloomberg has been running a story on the falling dollar in various forms. All of them, however, contain more or less the same tiny blurb which goes something like this:
H.J. Heinz Co. and Deere & Co. are among U.S. companies to benefit from a weaker currency. Heinz, the world's biggest ketchup maker, said the dollar's decline boosted revenue from abroad in its second quarter. Deere said overseas sales of farm machinery jumped in the quarter ended Oct. 31.
Could this daresay be our elusive evidence??

The Heinz 2004:II quarterly report tells us
Sales for the three months ended July 28, 2004 increased $107.5 million, or 5.7%, to $2.0 billion. Sales were favorably impacted by volume of 1.9% and exchange translation rates of 4.0%.
That's a big push from the falling dollar. But is this due to rising Heinz exports? No. In fact, Heinz has more production facilities in Europe than it does in North America and as far as I can tell doesn't export much if anything out of North America. The weaker dollar helps Heinz's bottom line, and it helps keep US finanical income slightly positive, but it does nothing for the much larger trade deficit.

How about John Deere selling all that farm equipment abroad in 2004:IV? The quarterly report says that
Worldwide net sales and revenues grew 32 percent to $5.207 billion for the fourth quarter
Again, a nice number that's nothing to shake a stick at. The two biggest markets for Deere are [1] United States and [2] Europe, Africa and the Middle East, together making up 84% of the company's total sales in 2003. While US plants may be exporting equipment to Latin America and Asia, it seems unlikely that Deere is servicing its big European market from the US. 40% of Deere's equipment operations employees work outside North America and the corporation operates major production facilities in both Germany and France. Deere exports from the US ran only 4% higher in nominal dollar terms in 2003 than in 2002 (no 2004 data yet) and this during a year in which the dollar (real broad index) fell 6% (isn't culling Annual Reports fun?).

The falling dollar seems to be plenty good news for Corporate America's bottom line in that profits gained in euros can be turned into dollars to the glee of Wall Street investors. The falling dollar doesn't seem to be doing much at all for Heinz and Deere exports, however, and thus nothing much for US jobs or the US trade deficit.

China seems determined to scour every corner of the world for oil. Chinese capital has settled down in Canadian tar sands, Iranian natural gas and Venezuelan oil fields. Now it seems the Middle Kingdom is playing post-colonial puppeteer in Africa, a role once reserved for Europeans and Americans but sure to bring similiar results.
China's transformation from an insular, agrarian society into a key force in the global economy has spawned a voracious appetite for raw materials, sending its companies to distant points of the globe in pursuit -- sometimes to lands shunned by the rest of the world as rogue states. China's relationship with Sudan has become particularly deep, demonstrating that Beijing's commercial relations are intensifying human rights concerns outside its borders and clashing with US policies and interests.

Sudan is China's largest overseas oil project. China is Sudan's largest supplier of arms, according to a former Sudan government minister. Chinese-made tanks, fighter planes, bombers, helicopters, machine guns and rocket-propelled grenades have intensified Sudan's north-south civil war. A cease-fire is in effect and a peace agreement is expected to be signed by year-end. But the fighting in Sudan's Darfur region rages on, as government-backed Arab militias push African tribes off their land. . . .

From its seat on the United Nations Security Council, China has been Sudan's chief diplomatic ally. In recent months, the council has neared votes on a series of resolutions aimed at pressuring Sudan's predominantly Arab government to protect the African tribes under attack in Darfur and stop support for militias by threatening to sanction its oil sales. China has threatened to veto such actions. . . .

Just as colonial powers once supplied African chieftains the military means to maintain control as they extracted natural resources, China is propping up a rogue regime to get what it needs.
Isn't it grand to see global empire becoming a truly multicultural color-blind endeavor?

Friday, December 24, 2004



Today is the 90th anniversary of the famous 1914 "Christmas truce" on the battlefields of both the western and the eastern fronts during World War One. In Flanders it began with German soldiers lighting Christmas trees and singing
Stille Nacht! Heil'ge Nacht!
Alles schl�ft; einsam wacht
According to Private Henry Williamson of the London Regiment, this is what happened when one pair of trenches were emptied that Christmas Eve.
After a timeless dream I saw what looked like a large white light on top of a pale put up in the German lines. It was a strange sort of light. It burned almost white, and was absolutely steady. What sort of lantern was it? I did not think much about it; it was part of the strange unreality of the silent night, of the silence of the moon, now turning a brownish yellow, of the silence of the frost mist. I was warm with the work, all my body was in glow, not with warmth but with happiness.

Suddenly there was a short quick cheer from the German lines-Hoch! Hoch! Hoch! With others I flinched and crouched, ready to fling myself flat, pass the leather thong of my rifle over my head and aim to fire; but no other sound came from the German lines.

We stood up, talking about it, in little groups. For other cheers were coming across the black spaces of no man's land. We saw dim figures on the enemy parapet, about more lights; and with amazement saw that a Christmas tree was being set there, and around it Germans were talking and laughing together. Hoch! Hoch! Hoch!, followed by cheering.

Our platoon commander, who had gone from group to group during the making of the fence, looked at his watch and told us that it was eleven o'clock. One more hour, he said, and then we would go back.

'By Berlin time it is midnight. A Merry Christmas to you all! I say, that's rather fine, isn't it?', for from the German parapet a rich baritone voice had begun to sing a song I remembered from my nurse Minne singing it to me after my evening tub before bed. She had been maid to my German grandmother, one of the Lune family of Hildesheim. Stille Nacht! HeiLige Nacht!

Tranquil Night! Holy Night! The grave and tender voice rose out of the frozen mist; it was all so strange; it was like being in another world, to which one had come through a nightmare: a world finer than the one I had left behind in England, except for beautiful things like music, and springtime on my bicycle in the country of Kent and Bedfordshire.

And back again in the wood it seemed so strange that we had not been fired upon; wonderful that the mud had gone; wonderful to walk easily on the paths; to be dry; to be able to sleep again.

The wonder remained in the low golden light of a white-rimed Christmas morning. I could hardly realise it; but my chronic, hopeless longing to be home was gone. . . .

I walked through the trees, some splintered and gashed by fragments of Jack Johnsons, as we called the German 5�9-inch gun, and into no man's land and found myself face to face with living German soldiers, men in grey unif'orms and leather knee-boots-a fact which was at the time for me beyond belief. Moreover the Germans were, some of them, actually smiling as they talked in English. . . .

The truce lasted, in our part of the line (under the Messines Ridge), for several days. On the last day of 1914, one evening, a message came over no man's land, carried by a very polite Saxon corporal. It was that their regimental (equivalent to our brigade, but they had three battalions where we had four) staff officers were going round their line at midnight; and they would have to fire their automatische pistolen, but would aim high, well above our heads. Would we, even so, please keep under cover (lest regrettable accidents occur).

And at 11 o'clock-for they were using Berlin time-we saw the flash of several Spandau machine guns passing well above no man's land.

I had taken the addresses of two German soldiers, promising to write to them after the war. And I had, vaguely, a childlike idea that if all those in Germany could know what the soldiers had to suffer, and that both sides believed the same things about the righteousness of the two national causes, it might spread, this truce of Christ on the battlefield, to the minds of all, and give understanding where now there was scorn and hatred.
His Name shall be called Wonderful, Counsellor, the Mighty God, the Everlasting Father, the Prince of Peace.

Merry Christmas.

Thursday, December 23, 2004

Brad DeLong today gives a tepid endorsement of a "soft-landing" scenario for the US current account deficit.
To restate: (1) the dollar falls, (2) as a result net exports rise, (3) export and importing-competing industries hire workers, (4) unemployment falls, (5) wages start rising and bring rising inflation with them, (6) the Federal Reserve raises interest rates to stop any inflationary spiral, (7) the economy cools off as higher interest rates reduce construction and investment spending and raise unemployment back to its natural rate.

It could happen--if exports react rapidly and substantially to the falling dollar, and if the rising long-term interest rates that diminish employment in construction and investment-goods production are somewhat delayed...
But well before we get to step [7], it would be nice to see some actual evidence that we can even get to step [2].

Thus far we have had nearly three years of [1] ("the dollar falls") and not a bit of [2] ("net exports rise"). From February 2002 to December 2004 the dollar has fallen 16% in real terms (per the broad dollar index) while the trade deficit has grown in real terms about 60%. I keep hearing the "delayed effects" mantra, but it's beginning to wear really thin for me.

What if there is no necessary connection at all between [1] and [2]? What if the US is the global price-setting market, and thus rather than importing inflation via a falling dollar which would cut into import consumption, the US exports deflation instead and maintains import consumption at current or even rising levels?

The key mechanism to correct the CA deficit is not a falling dollar, but -- as I discussed early last week -- rising savings. A little targeted protectionism wouldn't hurt, either.

France turns up the rhetorical heat on the falling dollar.
France's finance minister has said the world faced "economic catastrophe" unless the US worked with Europe and Asia on currency controls.

Herve Gaymard said he would seek action on the issue at the next meeting of G7 countries in February.

Ministers from European and Asian governments have recently called on the US to strengthen the dollar, saying the excessively high value of the euro was starting to hurt their export-driven economies.

"It's absolutely essential that at the meeting of the G7 our American friends understand that we need coordinated management at the world level," said Mr Gaymard.
This week has been the euro's turn to feel the full force of the falling dollar. While the yen has been stable and the pound has fallen nearly 2%, the euro is rocketing skyward, passing $1.35 earlier today.

Data from the last two months suggests that the East Asians are taking a breather from propping up the USD. The Europeans see the writing on the wall -- it's up to them now to pay the price, either by a euro passing the ominous $1.40 line or by a European Central Bank intervening in currency markets.

France wants G7 coordination, but it's not clear to me why the Japanese and especially the Chinese (yes, not a member of the G7, I know) would care to go in on such a deal. The yen is only up around 5% from mid-October while the euro is up nearly 10%. I suspect the Europeans are going to have to bear most of this burden themselves in the near future.

As a side note, I don't think Gaymard is calling for capital controls even though the BBC report says "currency controls". In the AFP report on this, Gaymard urges "une gestion coordonn�e" (a coordinated management) of the dollar/euro/yen/renminbi relationship.

Maybe the hyper-vigilant ECB will actually start cutting interest rates in the eurozone in response? Joachim Fels thinks this will only spur asset bubbles, but since there is so little that is bubbly in the biggest eurozone countries, a little more asset inflation wouldn't be such a bad thing.

US personal savings rate triples in one month!

One of the regular commentors to the Globblog (OK, it's calmo) has been complaining recently that the General just doesn't have enough Christmas cheer this season. So to lay that rumor to rest right away, I've penned the above headline.

And it's true. The US Bureau of Economic Analysis released the November personal income figures today, and the data shows that last month Americans resisted spending a full 0.3% of their disposable personal income. In October the figure was 0.1%, so we're on our way up!

Another glimmer of good news from this report was that last month, personal income grew more than personal consumption, the first time that has happened since August.

But we would be neglectful if we didn't tell the rest of the story (sorry, calmo). In November, wages and salaries rose by their second smallest monthly amount all year ($12.2bn). While the personal savings rate did triple in November, it is still scraping the very bottom of the barrel. At $22.2bn, it's the fifth lowest nominal monthly dollar total and the third lowest real figure since monthly data began being reported in 1959.

For the first 11 months of 2004 the personal savings rate stands at 0.8%. It will take a December figure of around 2.0% -- and we all know that isn't going to happen -- to avoid the lowest US annual savings rate since 1933, the depth of the Great Depression.

But did I tell you that Christmas has been saved!?!

Wednesday, December 22, 2004

Hmm, is that a whiff of deflation I detect in the air?
Sterling fell for the second straight session in European morning trade on Wednesday after the surprise revelation that the Bank of England considered cutting UK interest rates earlier this month.

The minutes of the December meeting of the Bank�s monetary policy committee, released on Wednesday, showed that a discussion about cutting rates was prompted by the growing possibility of inflation undershooting the Bank�s 2 per cent target in two years� time. The risk of a global economic slowdown had also risen since November, according to some committee members.
Here's the word straight from the horse's mouth:
Overall, the news on the month was mixed. . . . For some members the news was balanced and no change in interest rates was appropriate. For others, the downside risks to the inflation projection had increased, but not enough to make a persuasive case for a reduction in interest rates. All members concluded that no change in the repo rate was appropriate this month.
With home prices beginning to fall in London and most other regions, combined with tepid inflation rates and a global slowdown next year, some are starting to predict an early 2005 cut in the Bank of England's repo rate.

I'm looking for the management of asset bubbles to drive interest rate policy in the near term a lot more than consumer price inflation. A big asset bubble pop with current levels of debt across the Anglosphere would signal a dark, dark future.

Today's release of the finalized quarterly GDP data for 2004:III makes it official. From July to September 2004, the US personal savings rate tied the lowest quarterly mark since quarterly data began in 1947.

In 2004:III the amount of income (from labor, rent, capital and transfer payments -- and that income includes employer contributions to pension and insurance plans) that Americans did not spend on consumption, taxes, interest or "personal current transfer payments" amounted to a paltry $42.6bn, or 0.5% of income. This is an annualized figure, however, so the real number is more like $10.7bn. For the quarter that comes out to an average savings out of income of about $12 a month for every man, woman and child in the United States. Twelve dollars. Except for the quarter following 9/11 (more about that below), you have to go all the way back to 1966 to find a nominal dollar figure this low!

The only other time US savings were scraping this low was 2001:IV, during the consumer binge aftermath of 9/11 when President Bush, Mayor Guliani and the rest encouraged Americans to overcome their grief, fear and horror through SUVs, restaurant meals and theater performances. For October-December 2001 the savings rate was also 0.5%, with the quarterly dollar figure at an annualized $40.5bn. But the ultra-low 2001:IV followed a comparatively high savings rate in 2001:III of 3.4%, a level the US consumer hadn't saved at since 1999. Assuming safely that much September 2001 consumption was delayed until the following months, the average savings rate for 2001:III-IV comes to 2.0% -- quite normal (unfortunately) for this period.

So what is our excuse now? If Americans were simply delaying spending in 2001:III to binge in 2001:IV, how to we justify a 0.5% savings rate today? Shall we pat ourselves on the back for saving a whopping 1.3% of our income the quarter before? Are we rightfully compensating for the trauma of higher 2004 gasoline prices?

That infamous bumper sticker seen on enormous RVs, "We're spending our children's inheritance", should be plastered over this entire economy.

In today's Washington Post, Robert Samuelson sees an important disconnect in the popular common sense story of capitalism.
Since their recent low in late 2001, after-tax corporate profits have surged by more than 70 percent; but business investment -- in new computers, software, machinery and buildings -- has revived only modestly, increasing about 18 percent.

Capitalism isn't supposed to work this way. Soaring profits usually signal new investment opportunities and provide the cash to exploit them. Indisputably, cash is plentiful. Since 2001 corporate cash flow is up 42 percent and is now running at a record rate of $1.3 trillion annually (cash flow is essentially the sum of undistributed profits and depreciation -- depreciation being a non-cash expense to reflect the obsolescence of existing plants and equipment). But companies aren't aggressively deploying all that money in new products, factories or markets.
Unfortunately, Samuelson tries to put capital on the couch to figure out why this might be the case. Since he can't see any politics in the economy, it must be psychology.
The disconnect reflects a sea change in corporate psychology. Call it the return of "risk aversion" -- a fancy phrase for caution. In the late 1990s, the idea of risk virtually vanished. The business cycle was dead; stocks would always rise; globalization was good; the Internet was empowering; CEOs were heroes. Anybody could do anything. Not to worry. Now risk has revived with a vengeance.
Calling this "risk aversion" is a cute slight of hand. I'd call it "profit maintenance". This is the Age of Overproduction. Capital knows that big new greenfield investments in such an environment will simply boost production, lower prices, and undermine their profit margins. Does anyone really believe there are great untapped sources of demand (economic demand backed up by income/assets, not biological or moral demands) in the United States just waiting to be discovered? Of course not.

According to Federal Reserve data, production capacity in manufacturing excepting computers, communications equipment and semiconductors has been stagnant for four years. The same is true if you want to measure it as manufacturing excepting hi-tech and motor vehicles & parts. And we all know that private sector employment is still down 1.2 million jobs, 45 long months after the jobs peak.

Thus with few prospects for profitable new investment, hording cash, reducing overhead costs and even eliminating production capacity via M&A activity makes perfect sense, regardless of Samuelson whining that capitalism "isn't supposed to work this way".

And we need psychology to explain this to us?

Tuesday, December 21, 2004

After strutting around here in my most contrary manner, highlighting the terrible recent leading economic indicators figures for the US from the OECD and the Conference Board, I would be remiss if I did not admit that in November a record six-month decline in the latter's LEI index did not come to pass.
A gauge of future economic activity that had declined for five-straight months reversed course in November, signaling that the nation's financial engine is still gaining power even though the growth rate has slowed.

The Conference Board, a private research group, said Monday that its Index of Leading Economic Indicators rose 0.2 percent in November � slightly better than economists had been expecting � following revised declines of 0.4 percent in October and 0.2 percent in September.

The indicator, which is intended to predict economic activity over the next three to six months, now stands at 115.2 versus its all-time high of 116.5 in May. It stood at 100 in 1996. . . .

John Silvia, chief economist at Wachovia Securities in Charlotte, N.C., said the Conference Board data indicate that "the economy will be slower in mid-2005 than it is today." However, the recent strength of the stock market suggests that "overall, economic growth is still very positive."
Silva points out the most important reason behind the recovery of the Conference Board's LEI. Even though the stock price component makes up a mere 3% of the overall index, it was the number one net contributor to the index's November rise.

Is this simply rational and eminently justifable exuberance on the part of stock traders? As of 2:25pm EST today, the price-to-earnings ratio of the S&P 500 stands at 21.43. Granted this is down considerably from the frothy 44.2 of December 1999, the cusp of the popping stock market bubble. Nonetheless, it is still significantly above the long-run mean of about 15.

Now George W. wants you to think that stocks are magical money machines, and I grant you since 1995 they have been, bubble bursting and all. However, high stock prices don't say much of anything anymore about real economic activity -- jobs, wages, investment, etc. All a rising stock market tells us is that capital is feeling its oats again. We'll have to wait and see what crumbs -- if any -- fall out of the feedbag.

And don't forget that one month does not a trend make.

As everyone knows, Pope Alan and his College of Cardinals (aka the Federal Reserve) have been raising interest rates in the United States all year. From the ultra-low 1.0% in mid-2004, rates at the end of the year stand at 2.25% � 125 basis points of change. 2005 promises much more of the same.

The usual rhetoric from the business press says that the Fed raises the federal funds rate, blah-blah-blah, interest rates across the economy go up. Back in the days of national economies and limited transnational capital mobility, this made sense. If you wanted money, you got it from domestic sources, and your country�s central bank controlled the price at which those domestic sources got their hands on it.

But those days are gone.

Throughout the Bush years the US economy has relied heavily upon the kindness of strangers � especially East Asians but also Europeans, Canadians and even Latin Americans � to fund our ever-burgeoning deficits. Which ones, you ask? Federal budget deficits. Trade deficits. You name it, they�re funding it. With a US savings rate under 1.0%, what do you expect?

But interestingly, those foreign �benefactors� are getting a bit more choosy about where to put their money. And the consequences will be enormous for both the US budget and for Bush�s privatization scheme for Social Security.

In 2003 foreigners net purchased $747.1bn in US long-term securities. They liked US Treasury bills the best (37%) with corporate bonds a close number two (36%). US Agency bonds � i.e. our home mortgages funneled through Freddie Mac, Fannie Mae and Ginnie Mae � were third (22%) and US stocks were a very distant fourth (5%).

I give these numbers so you can compare them to the data from the most recent four months available: July-October 2004. Over these four months, foreigners have net purchased $253.7bn in US long-term securities. Annualized that comes to $761.1bn � just about the same as calendar year 2003. However, the kinds of securities foreigners are interested in now has changed dramatically. Now corporate bonds are a clear number one (46%) far outpacing US Agency bonds (26%). Stocks continue to pull up the rear (4%), but what is most remarkable is that US Treasuries are now down to third place (24%).

What foreign capitalists and foreign central banks are saying is that they are still willing to plow money into the US economy � for now at least. However, they�re interested in more high-yield assets like corporate bonds and home mortgages. US T-bills are just not attractive anymore. Foreign capital to Uncle Sam: No soup for you!

The result is substantially higher growth in interest rates for US debt compared to housing debt and corporate debt.



The above chart shows interest rates since 2001 on Aaa corporate bonds, one-year adjustable rate mortgages, and one-year treasury bills, as well as the federal funds rate. As you can see, since early 2004 interest rates overall have gone up. The Fed�s influence is being felt, we are told. However, look closely and you�ll see that some borrowers are not feeling the pinch quite as much as others.

From their early 2004 lows, the federal funds rate is up 125 basis points (i.e. 1.25%). Interest rates on one-year adjustable rate mortgages have gone up only 49 basis points, however, and rates on corporate bonds have gone up a mere 32 basis points. Clearly a lot of money is available at attractive prices if you�re a corporate or home-buying/owning borrower. Things aren�t so rosy for Uncle Sam, however. Compared to the same late-March lows, rates on one-year T-bills are up a big 145 basis points.

Money is getting more expensive in the US, but only for some borrowers. Uncle Sam wants to borrow and borrow and borrow. And if Bush�s Iraq-like Social Security reform plan goes through, he�ll be borrowing an additional $100-200bn a year on top of the overall budget deficit annually for the next decade. The evidence from 2004 shows that foreign capital and central banks � i.e. the people with the money � will loan to the US government but only if we�re willing to pay a lot more for it.

The numbers also suggest that one very important reason behind the continuation of ultra-low mortgage rates is thanks to foreign capitalists and central banks getting mighty interested in our home mortgages. As long as Japan and China and the rest keep throwing money at the US housing bubble, it will bubble on. But woe to us if and when they stop.

In the age of globalization, don�t think the Fed controls the levers to the US economy. All those savers in Asia and Europe, and central banks in every part of the world, are working things as well. And when they decide � as they are now � to start squeezing more profit out of the US federal government�s insatiable appetite for debt you know who�s really pulling the levers.

(This was my post at The American Street yesterday)

The November 2004 housing data for the UK is starting to trickle in, and it looks like the housing bust is in full swing.
House prices fell further in November and property sale times lengthened as rate rises took their toll, the Royal Institute of Chartered Surveyors found.

A total of 48% of chartered surveyor estate agents reported lower prices in the three months to November - the highest level in 12 years.

Meanwhile the number of sales dropped 32% to an average of 22 per surveyor.

The amount of unsold properties on their books rose for the sixth month in a row to an average of 67 properties.
Yesterday the UK property website Rightmove announced that its Housing Price Index -- as they say, "the largest, most accurate and up-to-date monthly sample of residential property asking prices" -- changed -0.3% in December. This marks the second monthly decline in a row in asking prices, which overall are -3.3% since July 2004. The average mortgage payment in the UK, probably the most important figure for measuring the effects of price rises cutting into overall consumption, is now �655/mo., down 2% from its high in October but still up a whopping 34% from this time last year.

London prices were down even more than the rest of the country. At -0.4% for December, London housing prices have fallen three of the last four months are are a stunning -5.8% since their July 2004 high.

Note finally that Rightmove's index is based on asking prices, not selling prices. If the market is softening up as much as the overall trend suggests, these prices may be even lower when Halifax and Nationwide report their data based on actual mortgage approvals. According to the Halifax data, the slide in London prices in 2004 so far is steeper than the slide in 1989 when the last big London housing bubble popped. Back then it took nine long years for prices to recover.

As I've said many times before, a preview of coming US attractions.

Monday, December 20, 2004

One of the biggest surprises in the 2004:III current account data released last week was a major jump in US unilateral current transfers. After moving in a -$16-20bn band for the previous six quarters, the figure suddenly rose to just -$14.6bn. Private remittances and "other transfers" increased precipitously, from an average of -$11.6bn over the previous three quarters to just -$8.3bn in 2004:III.

While one would expect remittance transfers to increase again in the future, US government grants -- which so far in 2004 totaled $17.4bn -- may be set to wither.
The U.S. Agency for International Development, which oversees the distribution of most American food aid through its Food for Peace program, is wrestling with an estimated $650 million shortfall. To make up for the gap in funds, AID is diverting resources from long-term development food assistance programs, which address the health and food needs of millions of people suffering from chronic hunger.

Since last month, AID has canceled or delayed dozens of food orders placed by humanitarian agencies to support a long list of programs. Those include the feeding of orphans and vulnerable children, nutrition for AIDS patients and health care for mothers and infants. . . .

The United Nations World Food Program, which in the past has received more than 50 percent of its funds from the United States, is now bracing for unprecedented cuts in financial support for its non-emergency operations, according to a U.S. food aid official who did not wish to be named. It now is seeking donations from China, Russia and India, the official said.

In southern Africa, the World Food Program's appeal for $171 million to feed 2.8 million people has so far generated only $11.5 million in donations. Food stockpiles will begin running out next month in Lesotho, one of the hardest-hit countries with half a million people in need of food aid. No money has yet come from the United States, WFP officials said. . . .

"The budget deficit is so high, and the administration is trying to stop all increases other than those for defense and national security," said Ellen Levinson, executive director of Coalition for Food Aid
Thanks to Elaine Supkis for the heads up.

The more you think about it, the more the Iraq invasion sums up everything about the Bush administration.

Saddam Hussein posed an implicit threat to the United States. He was a Bad Guy, after all, and he didn't like America. He didn't have the capability to explicitly threaten the United States or any US allies in the Middle East. He didn't have WMDs. Nor WMD programs. Nor any WMD-related program activites. But there was a scientist in Iraq who kind of dabbled in growing nasty molds in his refrigerator. And we knew Saddam was a Bad Guy. And someday he could give those nasty things to terrorists or take a nuclear pot shot at Israel or incinerate the atmosphere and destroy all life on Earth -- some day, you know! So -- voila -- implicit threat becomes explicit threat. Time to invade. There is no alternative.

This same logic is being used now to gut Social Security.
Over the next decade, the federal government may need to borrow around $2 trillion to fund the individual account plan most favored by the Social Security commission that Bush appointed in 2001. For the decade after that, the bill would be even larger.

. . . Officials are beginning to push the argument that this borrowing wouldn't amount to new debt at all. Instead, they maintain, it would simply convert implicit future debt into explicit current debt.

What's implicit debt? The administration uses the phrase to describe the long-term financing gap between the money Washington is raising for Social Security through the payroll tax and the cost of benefits promised to future retirees. The Social Security actuaries place that gap at $3.7 trillion over the next 75 years, and $10.4 trillion through, literally, infinity. Bush and his aides are highlighting the larger, scarier number.

The White House case is that financial markets are already considering these large unfunded future obligations when setting interest rates today. Their theory is that even if Washington adds trillions to the national debt to fund individual accounts, the markets won't raise interest rates � as long as the overall restructuring plan eliminates Social Security's long-term financing gap.
Of course, there is no $10.4 trillion debt because, well, we're in the present not the future (and I'd love to see the evidence that capital markets are 'pricing in' this $10 trillion right now). We don't know what future governments will do. But assuming a ridiculous totally unbelievable worst-case scenario -- namely that these future American leaders will do nothing about the future funding gap other than borrow money year by year to close it -- suddenly the funding gap is a tin pot dictator building up weapons of mass financial destruction with help from wishy-washy one-worlders who like French cheese.

What other choice do we really have but to invade the sonsabitches at the Social Security Administration? After all, raising the retirement age by a couple of years and eliminating the $90,000/yr. payroll tax cap is nothing but weak-kneed appeasement. And we know what happened when Neville Chamberlain tried that, don't we?

Funny how current threats like global warming -- evidence of which you can find in your own backyard -- and a current account deficit of 5.6% of GDP and growing larger with no end in sight are matters of little immediate concern. However, that monster lurking out there in 2042 must not only be slain now but in the most reckless manner possible.

Actually, come to think of it, there's nothing funny about that at all.

Now Colombia's Banco de la Rep�blica joins the crowd of official dollar-buyers.
The central bank also today bought $180 million worth of dollars through contracts that can be exercised within a month. . . .

The government and central bank have spent about $3.3 billion this year in an unsuccessful attempt to weaken the peso. Carrasqilla said the bank would keep buying dollars next year, echoing comments made in a Dec. 13 interview with the central bank's technical director, Jose Dario Uribe, who will take over as the bank's managing director in January.
Colombia isn't relying strictly on selling pesos and buying dollars, however. It is also lowering interest rates and using capital controls to try to scare folks off the peso.

The central banks of three of the four largest economies in South America (Brazil, Argentina and Colombia) are scrambling to force their currencies down against the dollar. They're only bit players compared to the East Asians and the Europeans, but with the US possibly looking for $800bn next year plus another $100bn (the first of ten such installments over the next ten years) on top of that to build a bridge to Bush's privatization of Social Security, every little bit helps.

Saturday, December 18, 2004

Boy, the word "hubris" doesn't even begin to describe this. And you thought the bravado surrounding the Iraq invasion was over the top.
Snow said the government is nowhere near reaching the international lending market's ability to absorb more federal debt, even with the annual government budget deficit near a record in dollar terms already. On the contrary, he said, bond traders will reward the administration for tackling the problem presented by a rising tide of retiring baby boomers who, by 2019, will be taking more out of Social Security than workers will be putting into it.

"They understand that it's a real cost, that it's there today, and that actions to bring that unfunded obligation down will improve the balance sheet of the United States," he said.
When central banks are making 74% of all treasury purchases (as they have been over the last four months), Snow is basically saying that the official sector has an infinite appetite for US debt. Not only can the East Asians, Europeans and increasingly South Americans buy an infinite amount of debt forever, but they want to as well!

I can't see this as anything other than the Bush administration playing chicken with the Japanese and especially the Europeans. We dare you to not buy our debt. We just dare you!

Friday, December 17, 2004

With the expiration of the Multi-Fibre Agreement (MFA) at midnight on December 31, a great transformation (apologies to Karl Polanyi) will be set in motion in the global textile industry. According the the UN Development Programme, Bangladesh alone -- number 138 on the UN's human development index, one step above Sudan -- will lose upwards of 1 million textile jobs to China.

At least Brad DeLong's great grandchildren will be safe 60 years from now from Chinese aggression thanks to this turn of events. No telling if Shagorika will even have great grandchildren -- or children for that matter.

The delicate dance between US capital inflows and capital outflows got a bit more delicate in October, and currency analysts are watching carefully to see if any toes are about to be crushed.
�The decline in the US dollar to record lows against the euro in October coincided with a rapid acceleration of US investment into foreign securities. US investors expect to reap a windfall in overseas equity positions from a falling dollar. Given the continued decline in the dollar during November and December, it is likely that this pickup in US investment in foreign equities has continued,� said Michael Woolfolk, senior currency strategist at Bank of New York

�Now we appear to have two things to worry about: the suspension of Asian central bank buying of US Treasuries and the acceleration in US buying of foreign equities. Were both to occur at the same time, the [inflows] would not only fail to cover the US current account deficit, but would risk dropping into negative territory.�
For the twelve months through October 2004, net foreign securities purchased by US residents increased to $61.4bn, $12.7bn more than in the 2003 calendar year. As I noted yesterday, US residents are buying foreign securities at the highest level since 1997. October in particular showed a big net move into foreign stocks and bonds. At $15.2bn, this was the biggest monthly outflow since July 2000 and the second biggest since July 1997, the cusp of the East Asian financial crisis. Thus we already do have "acceleration in US buying of foreign equities" and bonds.

The other "thing to worry about" is foreign purchases of US treasuries. For the 12 months ending October 2004, foreigners have net purchased $374.9bn in T-bills, up from $278.1bn in calendar year 2003. Sounds like no worries, right? Well, after averaging $39bn a month from November 2003 to June 2004, net buying has slackened off markedly to an average of just $15bn a month since July. Moreover, in these four months of weak foreign interest in US treasuries, Uncle Sam has had to rely on foreign central banks for 74% of the purchases.

The East Asians already appear to be losing interest in dollar-denominated assets. Perhaps the Bush administration's hope now is to tank the dollar so far that the weight of the sinking greenback forces the hand of the European Central Bank to begin intervening in currency markets itself.

In October, Brits, Germans and Swiss residents and central banks accumulated an additional $9.6bn in US assets, more than offsetting the declines from Japan and Korea. In this game of global hot potato, it may now be time for Old Europe to grab hold of the torrid tuber.

UPDATE: Brad Setser has good commentary on this issue as well today.

Mortgage rates remain unbelievably low, and as long as they keep scraping the bottom, the housing bubble will continue to swell.

Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 5.68 percent, with an average 0.6 points, for the week ending December 16, 2004, down from last week when it averaged 5.71 percent. Last year at this time, the 30-year FRM averaged 5.88 percent.

The average for the 15-year FRM this week is 5.11 percent, with an average 0.6 points, down as well from last week when it averaged 5.14 percent. A year ago, the 15-year FRM averaged 5.24 percent.

One-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 4.18 percent this week, with an average 0.7 point, up from last week when it averaged 4.15 percent. At this time last year, the one-year ARM averaged 3.77 percent. . . .

�The Commerce Department report on housing starts showed a considerable drop in starts in November,� said Frank Nothaft, Freddie Mac vice president and chief economist. �However, with December�s mortgage rates continuing to dip even further, we expect housing starts will bounce back fairly quickly.

�There is no doubt now that 2004 will be a record year for single-family construction. That said, because of low mortgage rates, we feel confident that 2005 will not be very far behind this year.�
The federal funds rate sat at 1.00% from July 2003 to June 2004. Cutting off the first and last months to try to excise some pre-emptory moves by the market, the average rate on a one-year ARM in that period was 3.69%. Now the federal funds rate stands at 2.25% while the one-year ARM rate is 4.18%.

So explain to me why the federal funds rate has risen 125 basis points but the one-year ARM rate has risen only 49 basis points.

I'm getting the feeling the US Fed has little to no control over US interest rates, one way or another.

Thursday, December 16, 2004

I think I've finally figured out what "We support a strong dollar" actually means.

Yesterday the Boy King made a few more waves following a meeting at the White House with Italian Prime Minister Silvio Berlusconi.
President Bush pledged Wednesday to work with Congress to reduce the government's huge budget deficit as a key step in assuring the world that his administration supports a strong dollar.

"We'll do everything we can in the upcoming legislative session to send a signal to the markets that we'll deal with our deficit, which, hopefully, will cause people to want to buy dollars," Bush told reporters. . . .

"The policy of my government is a strong-dollar policy," Bush said during a brief news conference following the Oval Office meeting, echoing statements he and Treasury Secretary John Snow have made numerous times over the past three years as the dollar's value has fallen sharply against many major currencies. . . .

Bush told reporters that the trade deficit was "easy to resolve. People can buy more United States products if they're worried about the trade deficit."
Mmm, that's pure genuis. Of course, another "easy" way to resolve the deficit is for Americans to buy less foreign products. But nobody ever accused George W. of knowing anything about economics. Or much of anything else for that matter.

It has become comic to hear Bush repeat that he "supports a strong dollar" ad infinitum like some kind of Hare Krisha chant. It's downright bizarre when this unbelievable claim is followed -- as it always is -- by the Currency Market Creed ("I believe in the Market Almighty, which shall determine all relative currency values"). Yet I do think that Bush is making a cryptic sort of sense.

What Bush & Co. are really saying is "we will not engage in a competitive currency devaluation".

But does anybody buy it? Some like Stephen Li Jen at Morgan Stanley believe that the US commitment to doing absolutely nothing in the face of the falling dollar is a de facto devaluation strategy. Greenspan's little speech after the election makes one think that perhaps the Fed wouldn't mind a little competitive devaluation after all.

So we seem to have on the table two rather dangerous US policy choices for addressing the current account deficit: [1] competitive currency devaluations which will only piss off the Europeans more, drive Japan into outright recession and utterly fail to address the trade deficit with China; and/or [2] targeted tariffs/quotas. Both have rather disturbing track records. Liberals demand #1 (although they won't admit it's competitive devaluation), I'd like more of #2, and the Bush administration will simply do anything it takes to destroy Social Security and eliminate all taxation on capital. Somehow I suspect neither I nor the liberals are going to get their way.

Back in the days before the neocons took over America, I actually believed there was such a thing as an "independent central bank" which maintained significant autonomy from a President's administration and was determined to obstruct every effort to turn government power towards the interests of anybody other than finance capital. Thus not independent from it's true masters -- they're bankers after all for God's sake -- but at least independent of the politicians du jour.

O, how young and na�ve I was!
Senior Republicans sounded out Alan Greenspan, chairman of the Federal Reserve, about taking over from John Snow as US Treasury secretary, the Financial Times has learnt.

The informal approach, which would have put the most respected economic leader in the US in charge of President George W. Bush's ambitious second-term domestic agenda, was declined. . . .

In a separate effort to strengthen its economic team by bringing in a Fed policymaker, Ben Bernanke, an influential Fed governor, is the leading candidate to replace Greg Mankiw as chairman of the White House Economic Advisers.
So it turns out that Fed Governors really are nothing more than Republican political hacks. I know we all had our just suspicions when Greenspan wholeheartedly endorsed Bush's profligate tax-cutting escapade, but I'm glad we've finally got the record set straight for all to see.

I trust the phrase "independent central bank" will now be excised from the English language and from all introductory economics textbooks forthwith.

Well, paint me red and call me a fire hydrant.

The current account deficit figure for 2004:III came in way under expectations this morning. My prediction for the CA balance was -$173.7bn; Briefing.com had -$172bn; Bloomberg had -$170.6bn. We were all wrong.
The U.S. current-account deficit--the combined balances on trade in goods and services, income, and net unilateral current transfers--increased slightly to $164.7 billion in the third quarter of 2004 (preliminary) from $164.4 billion (revised) in the second quarter. An increase in the deficit on goods and a decrease in the surplus on services offset a decrease in net outflows for unilateral current transfers and an increase in the surplus on income.
Now these are only the preliminary figures, to be revised in March, so I'm not throwing the towel in just yet. Still, this is a much better figure than I had expected.

Where did I go wrong? The unilateral current transfers deficit saw a big improvement in 2004:III up to -$14.6bn, its highest level in two years. So there's $3.4bn I missed. In addition, the income balance just keeps chugging along. That's another $5.3bn I missed.

The CA deficit as a percentage of GDP thus rose to -5.58% on the quarter, and revisions to the 2004:II data put the deficit back then at -5.64%, up from an earlier estimate of -5.70%.

I have to admit that I'm amazed the US continues to maintain a postive balance on capital income. Income receipts on US-owned assets abroad hit $92.1bn in 2004:III, the highest nominal figure in history. Of course, income payments on foreign-owned assets in the US hit an all-time record, too, at $85.4bn. Yet this is a truly incredible high-wire act when the market value of the country's net international investment position is -$2.7 trillion -- that is, foreigners own $2.7 trillion more in US assets than Americans own in foreign assets.

Some of this is explained by US assets not returning jack while foreign assets deliver the moon and then some. Some of this must also be explained by foreigners keeping their profits in the US while Americans repatriate theirs. A falling dollar might explain part of it, too, in that foreign profits in euros and yen then turned into dollars will be higher than profits in dollars turned into euros and yen.

Big wheel keep on turning . . .

Wednesday, December 15, 2004

The current account deficit figure for 2004:III gets released tomorrow. The consensus forecast is that the US was in the hole by $170.6bn. This is a little smaller than my own deficit guesstimate of -$173.7bn.

Where the rubber meets the road is in the CA balance as a percentage of GDP. My figure is -5.88% whereas the consensus forecast is -5.78%. Even the economists' consensus puts 2004:III as larger than 2004:II.

The Experts must be predicting a positive income flow figure. More US investments abroad plus higher euro and yen plus repatriated profits equals keeping your head above the water of a net investment position near -30% of GDP?

Treasury Secretary John Snow says not to worry.
``We have the deepest and most liquid capital markets in the world and we're going to keep them that way,'' U.S. Treasury Secretary John Snow said in an interview with Bloomberg News. ``We will be able to attract the capital we need.''
Frighteningly enough, Snow is right -- at least so far. In 2004:III the US attracted a net flow of $182.8bn (NSA). Thus in the third quarter the country could actually have "afforded" a CA balance of around -6.1% of GDP.

Hell, we've got spending room to spare! Bring on the imports!

Private capital agrees: the US is an unattractive place to stick your money.

Regular readers of the Globblog already know that foreign capital has been souring on the US all year. It turns out that US capital is looking for greener pastures as well.

For the 12 months ending October 2004, US residents have net purchased $61.4bn in foreign stocks and bonds. This is the highest tally since 1997 -- that is, the highest since the East Asian financial crisis drove all the roaming wild horses back into the American corral.

Back in the mid-1990s, it didn't matter that US portfolio capital wanted out because the US government wasn't racking up massive debt. From 1993 on the Treasury was cutting back on debt sales and by 1999 was even buying debt back from the public. Now, however, Uncle Sam needs every dollar he can panhandle while patriotic American capitalists walk right on by like they don't even see him.

Has East Asia finally had its fill?

That is one possible interpretation of the Treasury Department's release of the October international capital data. For the month, total net US securities purchased was down $1.4bn; private purchases changed -$2.6bn while official purchases changed +$1.2bn.

But that's not what piqued the General's interest this morning. What made me really sit up and take notice was the data on major foreign holders of US securities -- both private and official -- broken down by country. Japanese holdings of US securities has fallen two consecutive months now. From a high of $722.2bn in August, the total is down 1.0% to $715.2bn in October. The blistering pace of Chinese purchases has slacked off noticeably. While not net selling, China added only $0.3bn to its holdings in October, a mere one-tenth of its average pace of the first seven months of the year. Taiwan added just $0.1bn in October and is still below its June 2004 high, and Korea net sold $0.9bn on the month.

This must be balanced against the data which separates private from official purchases (which is unfortunately not broken down by country), which showed America's sugar daddies -- foreign central banks -- continue to shower gifts on their favorite girl. Official purchases of US treasuries rose a hefty $5.0bn in October to a monthly total of $14.2bn. Private capital reduced its purchases of US treasuries down to just $3.5bn. Over the last 12 months, central banks have bought 55% of US debt. In 2003 the figure was 39%, and in 2002 only 6%.

The US is relying on central banks for purchases of other securities as well. The very suspicious ebbs and flows of private sector data suggests as much. Brad Setser among other thought the record $42.7bn private purchase of US corporate bonds in September was masking a lot of central bank activity, and the big fall down to a below normal $18.3bn lends credence. Even more funny is the data on agency bonds. Private agency bond purchases rose from just $6.1bn in September to $22.8bn in October -- the second highest level in 17 months -- while official agency bond purchases actually fell for only the second time in the last 15 months.

Let's sum up. What do foreigners want from the US?

In the pole position is -- you guessed it -- federal debt. Over the last three months of data (August-October) foreign central banks and private capital have bought net $48.5bn in US treasuries. Central banks have purchased a stunning 83% of this debt.

Number 2 is the American housing stock. Over the last three months of data foreign capital and central banks have bought net $47.6bn in agency bonds. No wonder mortgage rates are staying so low!

A close third is corporate bonds at $47.5bn over August-October. A very distant fourth is equities, which in this period were still being net sold, changed -$0.4bn.

In relative terms, US treasuries and agency bonds purchases have seen the biggest growth. Comparing the 12 months ending October 2003 to the 12 months ending October 2004, growth in foreign purchases of US treasuries is $129bn; in agency bonds, $50.9bn; in corporate bonds, $36.7bn; in equities, $0.1bn.

The massive interest rate subsidies to the US continue, but for how long? Perhaps the November data will show a big spike in East Asian purchases to arrest the dollar's decline. The early fall data suggests that our sugar daddies may be getting tired of all these expensive gifts after all.

Tuesday, December 14, 2004

Let it be said at the outset that all in all, I like liberals. They're usually fine people. But when liberal economists collectively sigh and roll their eyes at the very prospect of limits on trade -- dubbed "protectionism" as if to protect something is an inherently bad idea -- they are completely failing to admit the reality of the conundrum in which the global economy is currently caught.

Exhibit One is Brad DeLong and his maddeningly ever-changing blog template:
the U.S. has a *massive* national security interest in encouraging the industrialization of China as fast as possible. A poor China is an unstable China, and unstable countries ruled by oligarchies often turn to aggressive expansion as a way of using nationalism to slow the crumbling of their rule. A world sixty years from now in which Chinese schoolchildren are taught that the U.S. did what it could to speed Chinese economic growth is a much safer world for my great-grandchildren than a world in which Chinese schoolchildren are taught that the U.S. did all it could to keep China poor.
Exhibit Two is Pro-Growth Liberal at Angry Bear, a web site with a pleasant template and easy-to-read fonts:
Just when we thought we�d see a fall in the price of clothes courtesy of allowing more imports from China, we learn this:
Eighteen days before the end of a 30 year-old system restricting international trade in textiles and apparel, the Bush administration is imposing new barriers on imported clothing that is likely to curtail an expected flood of Chinese imports in the first few months of next year. The administration's measures include an embargo that will be imposed throughout the month of January on some of the clothing shipped to the United States during the final months of 2004.
Then again � this Administration is also making sure we can�t buy more shrimp from Asia at low prices.
I won't even bother with Dan Drezner -- political conservative but economic liberal -- who never saw a trade deficit he didn't like.

While it feels good as a righteous liberal free-trade warrior to rail against textile import quotas and shrimp tariffs, an unpleasant reality needs to be faced. Liberals are proud members of the reality-based community, no?

This is the reality: the US trade deficit so far is 21% larger than in 2003 and the overall current account deficit as a percentage of GDP could hit 6.0% by the end of the year. The top contributor to the US trade deficit continues to be China, which thus far in 2004 has $131.4bn goods trade surplus with the US. Consider that the US goods trade deficit with China is larger than its deficits with Japan and OPEC combined. The US goods deficit with the entire EU-15 is only two-thirds the size of the goods deficit with China.

Considering both [1] industrial supplies and consumer goods are the biggest categories contributing to the US trade deficit and [2] China is the biggest country contributing to the US trade deficit, it is essential that if nothing else the growth of industrial supplies and consumer goods imports from China must be stopped.

How can this happen without tariffs and/or quotas? Overall exports will have to grow 50% faster than imports just to keep the trade deficit stable, much less start to shrink it. That's a short way of saying there is no way in hell the US can address the trade deficit without reducing imports. And remember that the US services surplus -- every free-traders' golden child which will save the family from ruin -- is actually shrinking.

The Chinese have already demonstrated that they refuse to let the dollar fall vis-a-vis the renminbi, and we know that a falling currency by itself won't do much to reduce the trade deficit. With China and transnational capital working together to eliminate the US industrial base, and the Chinese increasingly cultivating Brazil as its source of agricultural imports, even a falling dollar/rising renminbi won't have much effect on the US-China trade balance.

So how does it happen then? Wave a magic wand? Perhaps the responsible liberal would like to see higher real interest rates, and indeed this must be part of the plan. But how high must they go to reduce US imports? A federal funds rate of 4%? 5%? Higher? With a US recession on the horizon, dramatically higher real interest rates in 2005 are going to be a very bitter pill to swallow. Think of 1981-82 and how fun that was.

Bush would love to cut US consumption via [1] cutting Social Security benefits and/or [2] a general consumption tax -- both of which would further shift the tax burden from capital to labor. I hope that's not what liberals are proposing instead of the continuation of quotas and tariffs . . .

In the 1980s the Reagan administration laid down the law to the Japanese who were running enormous trade surpluses with the US at the time: move more of your production facilities to the US or face punishing tariffs. At the very least the US needs to stop the hemorrhaging of its textile and furniture industries caused by imports from China. A cooperative but tough-nosed approach like the one taken in the 1980s would be preferable to a "trade war". But short of real threats against China backed up by real quota/tariff policies, all I'm hearing is a free trade policy which will run the US and the global economy right off the road in no time.

It's a belt buster!!
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total October exports of $98.1 billion and imports of $153.5 billion resulted in a goods and services deficit of $55.5 billion, compared with $50.9 billion in September, revised. October exports were $0.6 billion more than September exports of $97.5 billion. October imports were $5.1 billion more than September imports of $148.4 billion.
Wow! The consensus forecast was -$53.5bn, so a number almost 4% larger than that is a bit of a shocker. These numbers show precisely why a falling dollar is no automatic corrector of the US trade deficit. When prices rise because of a falling dollar, Americans simply import more, save less, and swell the deficit.

In case you're wondering, -$55.5bn is indeed a new all-time record, beating the old record of -$55.3bn standing since all of four months ago. The last five months have seen deficits of over $50bn, and the eleven largest monthly deficits have occurred in the last eleven months.

You can hardly blame high oil prices alone for this continuing rout. The petroleum balance did plunge down in October to -$15.8bn, and the petroleum deficit for the year is 31.4% higher than in 2003. That being said, the non-petroleum goods balance in October fell as well, to -$42.6bn, it's second largest figure ever. So far in 2004 the non-petroleum goods balance is -$398.0bn, 16% larger than at this point in 2003 when it was a "mere" -$342.2bn. The US is simply flat out importing too many goods of all sorts, shapes and sizes.

To make matters even worse, the US services surplus is shrinking. The October figure of +$4.2bn was a welcome increase over September and the third highest surplus of the year. However, the first ten months of 2004 has tallied a services surplus 3.6% smaller than this point in 2003.

Here is the 2004 trade balance breakdown thus far:
Services . . . . . . . . . . . . . . . . . +$40.3bn
Foods, feeds and beverages . . -$5.0bn
Capital goods . . . . . . . . . . . . . -$7.4bn
Other goods . . . . . . . . . . . . . . -$10.6bn
Automotive vehicles, etc. . . . . -$115.5bn
Industrial supplies . . . . . . . . . -$168.6bn
Consumer goods . . . . . . . . . . . -$223.1bn
Thus far the overall trade deficit is 21% larger than in 2003 and 48% larger than in 2002. "Insatiable" doesn't even begin to describe the United States' gaping import maw.

But let's end on a happy note for once. The US trade deficit for September was revised upwards by $634 million, so instead of -$51.6bn, it turns out we were only in the hole -$50.9bn. In all honesty, that's the only bright spot I could find.

Oh, and Christmas is saved!