Commentary by Amity Shlaes
Sept. 29 (Bloomberg) -- Home buyers are infants. They can’t think ahead and don’t try to.
That’s the attitude of President Barack Obama, House Financial Services Committee Chairman Barney Frank and even the folks at Fannie Mae, whose Web site is headlined “Helping You.”
Our leaders seem to believe that U.S. home buyers stumbled because they were allowed to enter the fast-moving waters of the treacherous secondary mortgage market without a lifeguard. As Frank argued recently: “If in fact residential mortgage loans were made only by banks or thrifts or credit unions, then we would not have a subprime crisis.”
In this view the only way to get the country to a recovery is to protect these infants and, of course, jolly them and other consumers into spending and borrowing again. Special treats are in order, including one-time house tax credits or auto clunker programs. Maybe the U.S. home buyer is not an infant but a grown-up who thinks. Someone who does plan ahead, though he may have been wrong on, say, the direction home prices were heading in 2005. This is the profile that emerges from a forthcoming paper in the Journal of Finance, written by Kristopher Gerardi, Harvey Rosen, and Paul Willen, economists with the Federal Reserve Bank of Atlanta, Princeton University and the Boston Fed, respectively.
Rich Database
Gerardi, Rosen and Willen wanted to test Milton Friedman’s permanent income hypothesis, which says that consumers do try to see ahead and act on what they see. The scholars turned to the University of Michigan’s Panel Study of Income Dynamics, which has been tracking home buyers for about four decades. The PSID collects multiple details about home purchasers -- their level of education, their income the year of a house purchase, the purchase price and what those buyers earn three or five years post-purchase.
The paper’s authors looked first at the 1970s, the period when a mortgage was a plain vanilla 30-year fixed contract with a local banker of the very sort Frank longs for. They discovered that sometimes a home buyer who resembled his peer on paper, with similar education and income, bought more house than the peer. This extravagant fellow splurged on a garage, French doors in the kitchen or even a swimming pool.
A few years out, and Mr. Splurger was sometimes earning more than his old peer with the smaller house. So he wasn’t Mr. Splurger at all, but rather someone whose purchase reflected an accurate private forecast.
Inefficient Market
There were also those who bought precisely what their peers did, and then went on to earn more than the rest. Their house was smaller than what they turned out to be able to afford. Maybe this mismatch wasn’t due to buyer caution. Maybe it was because that local bank hadn’t offered this buyer the right kind of mortgage at the right rate. Perhaps that market of plain 30- year products from the local bank wasn’t efficient enough.
In the 1980s, the 1990s and this decade, something changed. Americans got better at matching their house purchases with their own future income. The statistical correlation between initial house purchase price and later income levels strengthened mightily, by 80 percent. The data suggest that deregulation and securitization were a key part of this shift.
As a result of this much-maligned phenomenon, the mortgage market began to broaden and deepen, offering buyers ample supply and a cornucopia of products, including some that suited their own career better.
Here’s a counterintuitive notion: Perhaps the story of American housing is not that couples in the 1990s bought too much house. It is that their parents bought too little house, and didn’t know it.
Imperfect Forecasts
But if consumers are so smart, why did they slip up so badly in this decade, taking out unaffordable home-equity loans, or signing contracts for subprime mortgages?
The answer is that consumers can’t always predict the future. They may get two factors right, such as their own house purchase price and their personal lifetime earnings, and then guess wrong on a third factor such as house price movement, the soundness of Fannie Mae, or the reliability of certain credit rating companies.
What matters is not whether home buyers are always brilliant forecasters. What matters is that they forecast at all. The implication of Gerardi-Rosen-Willen is that short-term stimulus measures such as rebate checks (President George W. Bush) or first-time home-buyer tax credits (President Obama) won’t have much long-term effect.
The consumer is too sensible to be tricked into buying something more than he otherwise would. What looks like an extra purchase (clunker program) is merely a purchase moved up, or postponed.
Safer Markets
Congressman Frank’s idea of making mortgages safe for America sounds cozy. But making a market “safe” involves reconfiguring it in a way that will probably yield more primitive and fewer mortgages -- the kind that can’t entirely capture buyer potential. That means no French doors and garages, and, for some, no mortgages at all.
It is heresy to say this in the week that Michael Moore’s “Capitalism: A Love Story” comes to theaters. But the homeowner now may need more mortgage-related financial products, not fewer.
Gerardi, Rosen and Willen suggest a new instrument that allows Americans to trade home-price risks as they plan for the future. Everyone says confidence is important for recovery, but true confidence isn’t merely feeling flush enough to head to the mall. It is the confidence to plan decades ahead. Home buyers have a hard time summoning this kind of confidence when lawmakers insist on babying them.
Commentary by Alexandre Marinis
(Bloomberg) -- Several Latin American leaders have contracted a potent virus called tyrannous flu. The main symptom is a painfully tight grip on the levers of power, and it strikes leftists and right-wingers alike.
This isn’t good for the region. If enough politicians get this disorder, the rest of the world will begin to think of the continent as a heap of power-crazed tyrants, none of whom merit investors’ attention, or dollars. That’s pretty much how these countries appeared 20 years ago.
Manuel Zelaya’s thirst for power cost him the presidency of Honduras. In June he was dragged out of the presidential palace in his pajamas in Central America’s first military coup since the end of the Cold War. A leftist pal of President Hugo Chavez of Venezuela, Zelaya tried to push a referendum to change the constitution, enabling him to run for re-election in November.
The latest victim is Colombia’s president, Alvaro Uribe. He’s trying to change the country’s constitution so he can run for a third consecutive term. A constitutional court is reviewing the matter.
Latin America’s democracies are experiencing what scholars call hyper-presidentialism -- the dominance of the executive branch over the legislature and judiciary. It’s an unhealthy concentration of power that’s achieved by using decrees to bypass other institutions, weakening political parties and changing laws to suit a ruler’s needs.
The attempt by leaders to concentrate their power is seen in almost every country in the region.
Stop the Presses
Whether this process turns a country into one that’s friendly -- or hostile -- to investors depends on several issues: the president’s ability to control the government and political parties; the degree to which the media is intimidated or silenced; and how long the president remains in office.
Taking any one of these steps far enough can undermine a democracy. Argentina’s president, Cristina Fernandez de Kirchner, recently showed her reverence for democracy by hammering the press. She sent 200 tax auditors to intimidate the country’s largest media group after it published articles accusing her government of corruption.
Chavez nailed all three. He abolished term limits, weakened the judiciary and silenced dozens of Venezuelan radio and television stations.
Born to Run
The latest example of presidential excess is in Colombia, which U.S. investors had favored.
In 2004 Uribe successfully persuaded congress to amend the Colombian constitution to allow him to run for a second consecutive term. His critics accused him of bribing legislators with jobs and money for their favorite pork barrel projects.
Colombia’s highest court is currently investigating more than half of the country’s 166 representatives.
Earlier this month, a slim majority of Colombia’s lower house ratified a previous vote by the Senate and approved holding a national referendum to allow Uribe to run for a third straight term. The measure must be approved by a constitutional court. Uribe appointed most of the court’s members, but there’s no guarantee the president will get his way.
Colombian law requires that at least 25 percent of eligible voters participate in the referendum to validate its result. Although 58 percent of voters say they intend to fill out a ballot, according to the latest Invamer Gallup poll, the government is worried. In 2003 a referendum failed because too few people voted. To boost the turnout this time, the government may pad the ballot with other questions such as whether pedophiles should face lifetime prison sentences or whether water service should be privatized.
Big Tease
Uribe, who leans to the right and has a 70 percent approval rating, hasn’t said whether he’d run in the 2010 election if voters approve the constitutional change. Many of his supporters say Uribe is simply buying time to prevent a premature breakup of his coalition. The Colombian constitution prohibits the president from supporting office seekers.
We will soon find out whether Uribe is just stalling. Colombia’s constitutional court might take until mid-December to rule on the referendum, which must be held no later than February. The presidential election is in May.
Uribe is showing some of the symptoms of tyrannous flu. We’ll see if this is a false positive or the real McCoy.
Commentary by Kevin Hassett
Sept. 28 (Bloomberg) -- Treasury Secretary Timothy Geithner’s appearance in Congress last week to explain how President Barack Obama would overhaul financial regulation elicited the most striking sign yet that the wheels have come off the administration’s economic-policy team.
The White House had proposed, and Geithner was ready to defend, such a radical expansion of government power that even Barney Frank, the ultra-liberal congressman from Massachusetts, felt compelled to object that it went too far.
When Barney Frank thinks that you are too liberal, you better check your medications.
The Obama plan for financial reform, outlined by Geithner at the Sept. 23 hearing, contained two main components.
It would create a new government body, the Consumer Financial Protection Agency (CFPA), which would “write rules, oversee compliance and address violations by non-bank providers, as well as banking institutions.” This agency would have to enforce its rules and would, according to the Obama design, be able to go after any firm that offers credit to consumers.
So if Sam Malone at the “Cheers” bar offers to run a tab for you, Geithner is on the case. Or if the furniture store on Main Street offers to let you have a couch without making a payment for a few months, Geithner is on the case. If a National Football League team lets customers pay for their season tickets on an installment plan, well, you get the picture.
Frank’s Rollback
Such an unprecedented expansion of the reach of government was too much for Frank, chairman of the House Financial Services Committee. In a letter to his colleagues a day before Geithner’s testimony, Frank proposed rolling back much of Obama’s planned intrusiveness.
“Merchants, retailers and other non-financial businesses will be excluded from the regulation and oversight of CFPA,” Frank wrote. “That means that merchants and retailers can continue to give their customers tabs and layaway plans without becoming subject to a new layer of regulation. Also, doctors and other businesses that bill their customers after a service is provided, including telephone, cable, and internet providers, will be excluded.”
It is extraordinary that the president’s original proposal was so broad that it elicited such a response from a member of his own party.
Obama’s Democratic friends in Congress were less negative about the second part of his proposal, which would enact new regulations for firms that pose a systemic risk for the U.S. economy. That part has even less merit than the first.
Most observers agree that a key problem facing financial regulators is the emergence of firms that are “too big to fail.” Such firms have an implicit guarantee from the U.S. government that encourages them to take big risks. Uncle Sam has them covered on the downside.
‘It’s Too Big’
The problem has a simple solution that has been elucidated well by my colleague Allan Meltzer, who recently said, “If a bank is too big to fail, it’s too big.” Government regulators should seek policies that encourage the emergence of a market that consists of many smaller firms.
A less palatable alternative would be to identify firms that are too big to fail and expose them to more oversight. This approach has significant drawbacks.
Once there is a public list of firms that are too big to fail, they will have an enormous competitive advantage. Since government is backstopping them, they will be able to borrow at lower interest rates, just as Fannie Mae and Freddie Mac have for years. Also, regulators will inevitably be unable to regulate these supersized firms well enough to stave off a future disaster.
In his testimony, Geithner leaned toward this extra- regulation approach, and in a truly bizarre fashion.
Hold More Capital
First, he reiterated the administration’s plan to crack down on too-big-to-fail firms: “We will impose tough rules on our largest, most leveraged and most interconnected firms. We will require these firms to hold more capital to protect the system in the event of the firm’s failure.”
He then reassured lawmakers that government would have “no fixed list” of firms that wouldn’t be permitted to fail.
But the promised harsher capital requirements would make it clear to the market which firms have been deemed too big to fail. And what’s to stop firms from announcing to everyone that they have such a designation? Will the Treasury Department remain silent if a bank falsely claims membership in that club?
Just as implausibly, Geithner said firms deemed systematically important will have “no guarantee of extraordinary governmental assistance in the event of financial distress.” In other words, they could be allowed to fail.
Hogwash. The administration’s designation would be seen, correctly, as a promise of a safety net.
President Obama chose to begin the health-care debate without producing an explicit proposal of his own. Now we know why.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
By Simon Kennedy and Mark Deen
Oct. 3 (Bloomberg) -- Finance ministers from the Group of Seven meet in Istanbul today pushing for a “strong dollar” amid concern its slide will impede their recoveries from the deepest global recession in the postwar era.
“Everyone needs a strong dollar,” French Finance Minister Christine Lagarde told reporters yesterday before leaving for the talks. That sentiment is “not unique to Europe,” Canadian Finance Minister Jim Flaherty signaled, saying in Istanbul that “the Australians are concerned, we’re concerned in Canada about upward pressure on the Canadian dollar because of the weakness of the U.S. currency.”
Lagarde’s comments came four days after similar remarks from European Central Bank President Jean-Claude Trichet. U.S. Treasury Secretary Timothy Geithner also has pledged support for a “strong” currency. Flaherty said he expected the G-7 to issue a communique following their meeting, after members earlier debated the need for one.
The dollar’s 14 percent slide this year against a basket of seven currencies since early March threatens economic recoveries outside the U.S. by making their exports more expensive. At the same time, Geithner is being forced to defend the dollar’s status as the world’s sole reserve currency.
Traders Watching
“Market-moving announcements could be forthcoming,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “We expect to hear renewed commitments to the U.S. strong dollar policy and the European delegation may be tempted to communicate their worries on further rises in the euro.”
The dollar, which tumbled about 10 percent against the euro and yen in the past two quarters, slid further after a government report yesterday showed U.S. job losses accelerated in September. It traded at $1.4578 per euro and 89.77 yen late yesterday in New York.
“We’ll have a chance to discuss this in the coming days,” Lagarde said in Gothenburg, Sweden, yesterday before her departure for Istanbul, referring to the dollar.
G-7 members have discussed whether to break with tradition and not release a communique given that G-20’s leaders did so just a week ago after meeting in Pittsburgh. The G-7 is gathering in Istanbul before next week’s annual meetings of the International Monetary Fund and World Bank and its officials will brief reporters from 6 p.m.
China Intransigence
Limiting the G-7’s scope to reverse the decline in the dollar is the absence of China from its ranks and the G-20’s push for a narrowing of global trade and investment imbalances such as the U.S. current account deficit.
Among policy makers expressing concern about the dollar this week were Japanese Finance Minister Hirohisa Fujii. He signaled Sept. 29 his government was open to acting to stabilize the foreign-exchange market, and denied he supported a stronger yen. He won’t discuss the yen’s gains at the G-7, Kyodo News reported yesterday.
Canon Inc., Japan’s biggest maker of office equipment, says every 1 yen appreciation against the dollar will lower its second-half operating profit by 4.2 billion yen ($47 billion). The company based its profit forecast of 110 billion yen on the assumption the yen would average 95 to the dollar in the last six months of the business year.
Lipsky on Currencies
Still, John Lipsky, the IMF’s first deputy managing director, told Bloomberg Television yesterday that at present “there is not a problem in broad terms of valuation of the principle currencies.”
Flaherty two days ago pushed China to let its yuan appreciate “more quickly” after keeping it little changed against the dollar for more than a year.
That view was echoed yesterday by IMF Managing Director Dominique Strauss Kahn, who said he still views the yuan as “undervalued.” The IMF was last week tasked by the G-20 with monitoring its members’ efforts to even out the world economy.
China has frequently ignored campaigns by the G-7 for a more flexible exchange rate. It took almost two years to heed a request to loosen a currency peg with the dollar, only doing so in July 2005. The inflexibility helps Chinese exporters and means other currencies shoulder the burden of the weaker dollar.
While the dollar’s slide may buoy the U.S. economy by boosting demand for its goods, World Bank President Robert Zoellick repeated yesterday that it may lose its rank as the only reserve currency if budget deficits aren’t curbed. For now, it should still attract investors as a haven, he said.
“The American public and the American political leaders take for granted the unique standards of having the reserve currency,” Zoellick said. “You could lose what is an incredible thing to have.”
By Albert R. Hunt and Rich Miller
Oct. 1 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. will have to both tighten credit and raise taxes as the economy pulls out of the worst recession since the 1930s.
“The presumption that we’re going to be able to resolve this without significant increases in taxes is unrealistic,” Greenspan, 83, said in an interview with Bloomberg Television yesterday.
The budget deficit this year is forecast to widen to $1.6 trillion, boosted in part by President Barack Obama’s $787 billion stimulus package. Between 2010 and 2019, deficits will total $7.1 trillion, according to the Congressional Budget Office.
Greenspan also said the Fed will have to withdraw money from the financial system to avoid inflation. The central bank has doubled its balance sheet over the last year to $2.2 trillion as it battled the recession that began in December 2007.
The economy will grow at a 3 percent to 4 percent annual pace in the next six months before slowing in 2010, Greenspan predicted. Growth will be aided by a surge in the stock market and inventory restocking by companies. Share prices are likely to “flatten out, even though earnings are doing very well.”
The Standard & Poor’s 500 Index has jumped more than 50 percent from its low for the year on March 9, an ascent that’s had a “very positive” impact on the economy, Greenspan added. The index was down 2.1 percent to 1,305 at 3:27 p.m. in New York today as a gauge of manufacturing unexpectedly fell and jobless claims grew more than forecast.
Job Cuts
The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year. An unexpected decline in a gauge of business activity released yesterday, along with a private report showing employers cut more jobs than forecast, indicate a recovery may be slow to take hold.
Greenspan, who was appointed Fed chairman in 1987 by President Ronald Reagan and served until January 2006, praised the steps has taken by his successor, Ben S. Bernanke, to help pull the economy out of recession.
“The Fed has done a splendid job,” he said.
Still, the size of the Fed’s balance sheet is “not sustainable” and will eventually have to be reduced to “something just north of $1 trillion,” he said.
“My concern is that legislation or other actions on the part of Congress may prevent” the Fed from withdrawing the stimulus, Greenspan said. “Unless we sterilize or unwind the big monetary base we’ve built up, two, three years out inflation really begins to take hold.”
Policy Audits
Representative Ron Paul of Texas, a Republican, is leading an effort in Congress to repeal the central bank’s immunity to audits of monetary policy.
Greenspan said that the odds are growing that the U.S. will have to enact some form of consumption tax to help reduce the federal budget deficit.
Obama has pledged to bring down the deficit without raising taxes on middle-income Americans. The CBO estimates that this year’s budget shortfall will equal 11.2 percent of the economy, the most since World War II.
Greenspan said he is “quite impressed” by Obama and called him “a very intelligent man.”
“But I don’t think he is sufficiently in control of a very serious budget problem,” the former Fed chief said. He called Treasury Secretary Timothy Geithner “impressive.” The two men worked together when Geithner was president of the New York Fed.
Financial Regulations
Greenspan said that an overhaul of financial regulations is needed. Geithner has proposed the most sweeping changes to the rules governing Wall Street in seven decades, including giving the Fed authority to monitor risk across the financial system while stripping it of its consumer-protection role.
“It’s very obvious that a lot of things which were in place in the regulatory area in the markets failed,” Greenspan said. “It broke down and it’s got to be fixed.”
Bernanke has opposed ceding the central bank’s power to regulate the safety of financial products to a new agency. Greenspan, for his part, called such power “peripheral” to the Fed’s main role.
He also cautioned against responding to the financial crisis with excessive regulation. While agreeing that the government should have a say on executive compensation in the institutions that are receiving government aid, Greenspan voiced wariness about extending that control to other banks.
“You have to be careful here because this should be a relationship between shareholders, directors and executives,” he said.
By Michael McKee
Oct. 2 (Bloomberg) -- The U.S. faces the possibility of deflation for the first time since the Eisenhower administration, a threat that may prompt the Federal Reserve to keep interest rates near zero through next year.
Executives at Kroger Co., the largest U.S. supermarket chain, blamed deflation for a 7 percent drop in earnings in the second quarter, while falling prices for food, gasoline, and electronics left August sales unchanged at Costco Wholesale Corp. A sustained price drop might set off a chain reaction in which lower profits force employers to pare wages and payrolls. That would erode consumer demand, exacerbating wage cuts and firings.
Such a spiral led to Japan’s “lost decade” of slow economic growth in the 1990s. A more vicious version in the U.S. helped create the Great Depression six decades earlier. Bond investors are forecasting retreating consumer prices, as shown by the yield they demand to hold a one-year bond versus a similar inflation-protected bond.
“Deflation is definitely a threat right now,” Nobel laureate Joseph Stiglitz, 66, a professor at Columbia University in New York, said in a Sept. 22 interview. “The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while.”
Consumer prices are experiencing deflation, with the consumer price index sliding for six straight months from year- earlier levels, the longest stretch of declines since a 12-month drop from September 1954 to August 1955, according to the Labor Department.
So far, the core consumer-price index, which excludes food and energy, is facing disinflation, a slowing in the pace of increase. The core index rose 1.4 percent in August from a year earlier, down from 2.5 percent in September 2008.
Fed Trio
Regional Federal Reserve Bank Presidents Janet Yellen, of San Francisco, James Bullard, of St. Louis, Richard Fisher, of Dallas, and Charles Evans, of Chicago, have expressed concern in past weeks about the possibility of declining prices.
“Disinflationary winds are blowing with gale-force effect,” Evans, 51, said in a Sept. 9 speech in New York.
While the economy contracted 2.7 percent during the 1953 recession, it shrank 3.8 percent in the current recession, the most since the 1930s. Economists at New York-based JPMorgan Chase & Co. and Goldman Sachs Group Inc., the second- and fifth- biggest U.S. banks by assets, say there’s so much deflationary excess labor and plant capacity in the economy that the Fed won’t raise interest rates until at least 2011.
Gross Pessimism
“The potential for a deflationary downdraft continues for several years” if economic growth doesn’t accelerate, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in a Sept. 29 interview with Bloomberg Radio.
At their most recent meeting on Sept. 23, Fed policy makers agreed to leave the benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008.
Only 69.6 percent of the country’s factories, utilities and mines were in use during August, close to the record low of 68.3 percent reached in June.
Former Fed Chairman Alan Greenspan said the economic rebound won’t prevent a further slowing of the pace of price increases. “We are still, by any measure, in a disinflationary environment,” Greenspan, 83, said in a Sept. 30 Bloomberg Television interview in Washington.
At the same time, recent reports on manufacturing, housing, and consumer spending suggest that any investor concerns about the danger of deflation are overblown, said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York.
Growth Outlook
The median projection of economists surveyed by Bloomberg News is for first quarter growth of just 2.4 percent, compared with a decline of 6.4 percent in the first quarter of 2009. Maki sees a 5 percent expansion in the first quarter of 2010.
That would translate into higher prices.
“Inflation is driven more by the level of demand and pace of growth than by the size of the output gap,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut. “As the economy returns to solid growth in 2010, we are quite confident that, in sharp contrast to the consensus Fed view, core inflation will be creeping higher.”
Fed officials are already planning for that, and publicly discussing an exit strategy once the economy does pick up. At that point, the Fed may have to move with “greater force” than some anticipate to keep inflation from accelerating too rapidly, Fed Governor Kevin Warsh, 39, said in a Sept. 25 speech in Chicago.
Fed Purchases
That day is far off for bond investors. Inflation fears, raised by the more than $1 trillion the Fed has pumped into the economy by lowering rates and buying Treasuries and mortgage- backed securities, are fading.
“There’s been a significant flattening on the long end of the curve,” reflecting concern about deflation, said Pacific Investment’s Gross, 65, who is buying longer-maturity Treasuries in response. The yield on the 10-year note, which was 3.95 percent on June 10, was 3.18 percent at the close of New York trading yesterday. The difference in yield between nominal and inflation-protected Treasury securities maturing in one year is negative 0.4 percent, suggesting investors expect deflation during the next 12 months. Over five years, that inflation premium is now 1.21 percent, down from 1.86 percent on June 10.
The Fed needs to “keep inflation expectations from slipping to undesirably low levels in order to prevent unwanted disinflation,” Vice Chairman Donald Kohn, 66, said Sept. 10 in Washington during a speech at the Brookings Institution.
Oil Role
Falling consumer prices are partly a reflection of a 52 percent decline in oil prices to about $70 a barrel yesterday from $145.45 a barrel on July 3, 2008.
The slowing in core prices is more of a concern, said Michael Feroli, an economist at JPMorgan. The core rate fell following three prior recessions in which unemployment rose above 7 percent. That “suggests that core inflation could well be below zero within two years,” Feroli said in an interview.
Core CPI fell 5.3 percent following the recession of 1973- 1975, 10.7 percent following the recession of 1981-1982 and 3 percent following the recession of 1990-1991.
Unemployment rose to 9.8 percent in September, a Labor Department report showed today, and it will likely climb to 10 percent in the fourth quarter, according to the Bloomberg survey of economists. The jobless rate was estimated to average 8.8 percent in 2011.
With unemployment elevated, companies may not need to raise pay to attract workers, even when the economy picks up.
‘Enormous Slack’
“My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy,” Yellen, 63, said Sept. 14 in San Francisco.
Wages for U.S. workers fell for eight months in a row, dropping 5.6 percent from October 2008 to June 2009, according to Commerce Department figures. In contrast, wages continued to grow in the 1954-1955 deflation period.
Stagnating wages and fading job prospects are sapping demand. Consumer spending may increase in the fourth quarter by just 1 percent and in 2010 by an average of only 1.6 percent, according to the median estimate in the Bloomberg survey of economists.
Consumption rose by an average 5.7 percent a quarter in the five years before the recession began in December 2007.
“A weak labor market in a competitive environment puts downward pressure on wages,” said Stiglitz, who won the Nobel prize for economics in 2001. “So, the possibility of another actual decline in wages cannot be ruled out.”
Declining Incomes
The deflation danger is compounded by household debt, said Paul Ashworth, senior U.S. economist at the consulting firm Capital Economics in Toronto. U.S. homeowners owed $13.9 trillion in the third quarter of 2008, compared with an average of $8.5 trillion in the 57 years the Fed has kept records.
“As incomes start to fall, that debt gets bigger in real terms: You have a smaller income to pay off that debt,” Ashworth said. “Deflation combined with high indebtedness can be very problematic.”
Inflation happens when too much money chases too few goods. Gary Shilling, president of the investment research firm A. Gary Shilling & Co. of Springfield, New Jersey, said that even as the Fed continues to pump money into the economy, the money supply, as measured by the central bank’s M2 index, has dropped 1 percent since mid-June.
“Look what is happening to money supply, it is actually contracting now when supposedly the economy is picking up,” Shilling said in an interview on Bloomberg Television Sept. 21. The economy is facing deflation “because you’ve got basically an excess-supply world,” he said.
Profits Dwindling
Profits have evaporated as companies lose pricing power. The 419 non-financial firms in the S&P 500 reported earnings down 28 percent in the quarter ending June 30. Analysts surveyed by Bloomberg anticipate a 30 percent decline for the third quarter, which ended this week.
“Businesses trying to sell products and services feel they are pushing on a string and are adjusting their behavior accordingly,” Fisher, 60, the Dallas Fed president, said in a Sept. 3 speech at the University of California in Santa Barbara. “They are cutting prices.”
Rodney McMullen, president of Cincinnati-based Kroger, blamed price reductions for second-quarter earnings that fell 10.5 percent short of analysts’ estimates.
“We certainly sold more units. But lower retail prices and profit per unit pressured” results, McMullen told analysts in a Sept. 15 conference call. “We began to see deflation.”
The average amount spent per transaction in August at Issaquah, Washington-based Costco was about 7 percent below last year, Bob Nelson, vice president for financial planning, said on a Sept. 3 conference call with investors.
At Wal-Mart Stores Inc., the world’s largest retailer, “headwinds” from deflation were in part responsible for a 1.4 percent drop in second-quarter revenue to $100.9 billion, chief financial officer Thomas Schoewe told analysts Aug. 13.
By Timothy Homan
Oct. 2 (Bloomberg) -- New York University Professor Nouriel Roubini said that action by governments and central banks has led to a “bottoming out” of the global recession and that there is “light at the end of the tunnel.”
In the U.S., “there are signs right now that the recession might be close to over,” Roubini, who gained notoriety for predicting the global financial crisis, said today in Istanbul. While he sees a U-shaped recovery, there remains a “a risk” of “a double-dip recession.”
U.S. companies last month cut 263,000 workers, more than forecast, and the unemployment rate rose to a 26-year high, the Labor Department said today in Washington. Fed Chairman Ben S. Bernanke yesterday said economic growth may not be strong enough to “substantially” bring down unemployment.
“The recovery is going to be extremely anemic” in the U.S., Roubini said. “Growth will be below potential” and conditions in the labor market “are awful.”
The International Monetary Fund, which has shored up economies from Iceland to Pakistan in the past year, holds its annual meeting in Istanbul next week with its 186 member nations.
‘Deep Trouble’
“We will be dealing with the aftermath of the crisis for years to come,” IMF Managing Director Dominique Strauss-Kahn said today in a speech in the Turkish city. The IMF predicts the global economy will expand 3.1 percent in 2010, led by growth in Asia, after a 1.1 percent contraction this year.
“Right now, the main issue is the question” of reversing policies implemented to bolster economies from the crisis, Roubini said. Exiting from fiscal and monetary stimulus programs globally “is going to be a very difficult thing” and the timing of this is one of the factors that could lead to a double-dip recession.
He also said that some of the “optimism” in the financial markets “is excessive” and that the U.S. financial system is “still in deep trouble.”
For the period from 2007 through 2010, banks’ writedowns on nonperforming assets will be $2.8 trillion worldwide, the IMF said this week in its semi-annual Global Financial Stability Report. Losses on bad assets are projected to increase from July 2009 through next year by $470 billion for euro-area banks, $420 billion in the U.S. and $140 billion in the U.K., the report said.
The global economic recovery “is going to be difficult, it’s going to be slow,” Roubini said.
By Nicholas Johnston
Oct. 2 (Bloomberg) -- President Barack Obama said today’s report of U.S. job losses is a “sobering reminder that progress comes in fits and starts” and that he is considering additional steps to spur economic growth.
“I’m working closely with my economic advisers to explore any and all additional options and measures that we might take to promote job creation,” Obama said at the White House today.
U.S. job losses accelerated last month and the unemployment rate climbed to 9.8 percent, the highest level since 1983. Payrolls dropped by 263,000 in September, exceeding the median forecast in a Bloomberg survey.
Obama signed into law a $787 billion economic stimulus measure in February to mitigate the nation’s worst economic crisis since the Great Depression. Vice President Joe Biden’s top economic adviser, Jared Bernstein, said that program still has “a lot more firepower” to spur job growth.
“The recession would be much worse without those interventions,” Bernstein said in an interview with Bloomberg Television.
After returning today from a trip to Copenhagen, where he made an unsuccessful bid for Chicago to host the 2016 Olympic Games, Obama said that job growth often lags behind an economic recovery.
“Our task is to do everything we can possibly do to accelerate that process,” he said. “I want to let every single American know that I will not let up until those who are seeking work can find work.”
By Matt Townsend
Oct. 2 (Bloomberg) -- U.S. stocks fell for a fourth day and the dollar slumped as employers cut more jobs than economists forecast, increasing speculation the Federal Reserve will postpone the withdrawal of monetary stimulus as the economy struggles to recover.
The dollar fell against the euro as the economy shed 263,000 positions in September, more than the 175,000 median estimate of economists in a Bloomberg survey. Gold rallied as an alternative to the falling greenback. Treasuries declined as yields near the lowest in more than four months hurt demand before next week’s $78 billion in auctions. Oil fell after two days of gains.
“Reality is beginning to set in that this recovery is going to be very slow in developing and erratic as it goes on,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co. in Nashville, Tennessee, which manages $18 billion. “The market was up for seven straight months. It’s due for a correction.”
The Standard & Poor’s 500 Index retreated 0.5 percent to 1,025.21 at 5:13 p.m. in New York. The Dow Jones Industrial Average lost 21.61 points, 0.2 percent, to 9,487.67.
The S&P 500 declined 1.8 percent this week on concern the seven-month rally in equities has outpaced prospects for an economic recovery. The benchmark index jumped almost 15 percent in the July-to-September period to give it a two-quarter advance of 34 percent, the biggest since a 42 percent surge in the first half of 1975.
Most Since 1983
September’s job losses increased the unemployment rate from 9.7 percent in August to 9.8 percent, the highest since 1983. Since the recession began in December 2007, 7.2 million positions have been eliminated, the biggest decline since the Great Depression.
“The number shows this is going to be a slow and painful recovery process,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “We will have sub-trend growth for an extended period. There is still too much debt in the system and if we keep losing jobs like this we will not get income growth.”
Industrial companies in the S&P 500 fell 1.2 percent, the biggest decline among the index’s 10 industry groups. Orders placed with U.S. factories fell 0.8 percent after a revised 1.4 percent increase in July that was larger than previously estimated, the Commerce Department said. Excluding transportation equipment, orders rose 0.4 percent.
Dollar Decline
General Electric Co., the world’s biggest maker of power- plant turbines, fell 3.8 percent to $15.36. Honeywell, the world’s largest maker of airplane controls, lost 2.2 percent to $35.60.
The dollar touched the strongest level versus the euro in almost a month before erasing its gain as concern rising unemployment will push back the timeline for an interest rate increase by the Fed. Interest-rate futures contracts on the Chicago Board of Trade showed a 38 percent chance the central bank would increase the fed funds target from the range of zero to 0.25 percent through March, compared with 45 percent odds yesterday.
The dollar declined 0.2 percent to $1.4576 per euro, from $1.4545 yesterday. It earlier climbed as much as 0.4 percent to $1.4481, the strongest since Sept. 9. The yen fell 0.2 percent to at 89.79 versus the dollar, compared with 89.60.
Over the past few months, the dollar tended to appreciate on negative U.S. economic reports as investors sought safety in the world’s main reserve currency.
Treasuries Slump
That pattern may be changing as bad news cements expectations for the Fed to keep its interest rates low while other central banks may start to increase theirs, according to Laurent Desbois, president in Montreal of Fjord Capital Inc., a currency fund manager with $750 million under management.
Treasuries declined as the yield on the 10-year note rose four basis points, or 0.04 percentage point, to 3.22 percent in New York, according to BGCantor Market Data. The 3.625 percent security fell 13/32, or $4.06 cents per $1,000 face amount, to 103 10/32. The yield touched 3.1 percent, the lowest level since May 18.
“We rallied so much yesterday and throughout the week that this is a good point to stop and start to build a concession for next week’s supply,” said Martin Mitchell, head of government- bond trading at the Baltimore unit of Stifel Nicolaus & Co. “Pullbacks are an opportunity to buy.”
The U.S. will next week auction $39 billion of three-year notes, $20 billion in 10-year securities, $12 billion in 30- year bonds and $7 billion of 10-year Treasury Inflation Protected Securities over four consecutive days.
‘About The Buck’
Oil for November delivery fell 99 cents, or 1.4 percent, to $69.83 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Earlier, it touched $68.32.
“The economy is faltering, and today’s economic numbers point it out very clearly,” said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. “Main Street is not getting better, and that is where the rubber hits the road as far as demand goes.”
Gold futures for December delivery climbed $3.60, or 0.4 percent, to $1,004.30 an ounce on the Comex division of the New York Mercantile Exchange. This week, the metal gained 1.3 percent.
“It’s about the buck,” said Frank Lesh, an analyst at FuturePath Trading LLC in Chicago. “The dollar is, has been and will be the main driver for gold.”
By Bob Willis
Oct. 2 (Bloomberg) -- U.S. job losses accelerated last month and the unemployment rate climbed to the highest level since 1983, stark reminders of how the worst financial crisis in more than seven decades may undermine consumer spending and economic growth in the months ahead.
Hours after today’s Labor Department report, President Barack Obama said he’s working to “explore any and all additional measures” to spur growth. The figures also underscore forecasts for the Federal Reserve to keep its benchmark interest rate near zero through next year. Stocks fell and the dollar weakened against the euro.
“You will see the economy pulling back,” Richard Yamarone, head of economic research at Argus Research Corp. in New York and most accurate forecaster surveyed for the payrolls loss, said in a Bloomberg Television interview. Payrolls may not return to their previous peak for years to come, he added.
Payrolls dropped by 263,000 in September, exceeding the median forecast in Bloomberg’s survey, with losses extending from cash-strapped state and local governments to retailers to builders, today’s report showed. The jobless rate rose to 9.8 percent from 9.7 percent in August, while working hours matched a record low.
The Standard & Poor’s 500 Index fell 0.5 percent to 1,025.21 at 4:05 p.m. in New York after dropping as much as 1 percent. Ten-year Treasury yields rose to 3.22 percent from 3.18 percent late yesterday, and the dollar weakened to $1.4578 per euro from $1.4545.
Factory Orders
A Commerce Department report today showed that orders placed with factories fell unexpectedly in August, restrained by long-lasting items such as commercial aircraft and construction machinery. Bookings fell 0.8 percent after a revised 1.4 percent increase in July that was larger than previously estimated. Excluding transportation equipment, orders rose 0.4 percent.
Obama called today’s report a “sobering reminder that progress comes in fits and starts” in remarks at the White House after returning from Copenhagen, where he made an unsuccessful bid for Chicago to host the 2016 Olympic Games.
Fed Chairman Ben S. Bernanke yesterday said economic growth may not be strong enough to “substantially” bring down unemployment, indicating the central bank will be slow to drain the trillions of dollars it’s pumped into the economy. UAL Corp. is among companies cutting jobs on concern spending will fade as government stimulus wanes.
‘Uglier Numbers’
“I certainly don’t think we can afford to withdraw the stimulus, without it we’d probably be looking at uglier numbers,” Chris Low, chief economist at FTN Financial in New York, said in a Bloomberg Television interview. “What we are looking at is the lack of small-business job creation that typically marks the beginning of an economic recovery.”
September’s losses bring total jobs lost since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.
Payrolls were expected to drop 175,000, the median of 84 estimates in a Bloomberg News survey of economists. Forecasts ranged from decreases of 260,000 to 100,000. Job losses peaked at 741,000 in January, the most since 1949. The September unemployment rate matched the median projection.
Revisions subtracted 13,000 from payroll figures previously reported for August and July.
Annual Revisions
The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.
The projected decrease was three times larger than the historical average, the Labor Department said. Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings, the government said.
Automatic Data Processing Inc. Chief Executive Officer Gary Butler, who has spent more than three decades at the U.S. payroll processor, said the economy will probably recover at a slower pace than in previous rebounds. In an interview in New York, Butler said he hasn’t yet seen evidence that the government’s stimulus spending is adding jobs.
Factory Jobs
Today’s report showed factory payrolls fell 51,000 after decreasing 66,000 in the prior month. Economists forecast a drop of 52,000. The decline included a drop of 3,500 jobs in auto manufacturing and parts industries.
General Motors Co. this week said it would close the Saturn brand after Penske Automotive Group Inc. broke off discussions to buy the unit. Saturn dealers will have until October 2010 to wind down operations. The Detroit-based automaker said in June a Saturn sale would have saved 13,000 jobs and 350 dealerships.
GM had called back some workers after the government’s “cash-for-clunkers” plan cut further into inventories already diminished during the bankruptcy shutdown.
Sales of cars and light trucks plunged last month after the $3 billion incentive plan expired in late August. Vehicles sold at a 9.2 million annual pace in September, down from a 14.1 million annual pace in August.
Builders, Banks
Payrolls at builders dropped 64,000 after decreasing 60,000. Financial firms decreased payrolls by 10,000, after a 25,000 decline the prior month.
Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 147,000 workers after falling 69,000. Retail payrolls decreased by 38,500 after a 8,800 drop.
Government payrolls decreased by 53,000 after falling 19,000 the prior month.
Economists surveyed by Bloomberg last month projected the jobless rate will reach 10 percent by late 2009 and average 9.7 percent for all of next year even as the economy expands at an average 2.6 percent pace in the second half of this year and 2.4 percent in 2010.
Fed chief Bernanke told lawmakers in Washington yesterday that he anticipated the jobless rate will hold above 9 percent though 2010.
While acknowledging that “economic activity has picked up,” Fed policy makers on Sept. 23 said household spending “remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”
Rosengren Comments
Fed Bank of Boston President Eric Rosengren said the central bank and government should maintain policies to support economic growth and bring down unemployment until a self- sustaining recovery is assured.
“I’d like policy to try to stimulate the labor markets as much as possible,” Rosengren said in response to questions following a speech in Boston today. “But the reality is even with stimulated labor markets, we’re likely to see elevated unemployment for the next couple of years.”
Today’s report also showed companies cut working hours, pushing weekly earnings lower.
The average work week shrank to 33 hours in September, matching a record low, from 33.1 in the prior month. Average weekly hours worked by production workers dipped to 39.8 from 39.9, while overtime decreased to 2.8 hours from 2.9. That brought the average weekly earnings to $616.11 from $617.65.
Workers’ average hourly wages rose 1 cent, or 0.1 percent, to $18.67 from the prior month. Hourly earnings were 2.5 percent higher than September 2008, the smallest gain since 2005. Economists surveyed by Bloomberg had forecast a 0.2 percent increase from the prior month and a 2.6 percent gain for the 12-month period.
Airlines are also cutting staff. UAL’s United Airlines, the third-biggest U.S. carrier, last month furloughed 290 more pilots under a plan to trim jobs and limit labor costs, while American Airlines said it would furlough 228 flight attendants.
What the American People Really Want to Stimulate the Economy: Entrepreneurship-Friendly Policies
By Douglas SchoenWhile the American people remain concerned about the direction of our country and the state of our economy, a growing consensus has emerged in support of policies that encourage private sector and entrepreneurial growth.
In the most recent poll that the Kauffman Foundation conducted as part of its regular research it does on economic growth and entrepreneurship, 34% of Americans say the economy is headed in the right direction, while 54% say it is off on the wrong track. In addition, they remain skeptical about their personal economic situation, and they do not think that the economy is recovering. 54% of Americans say the U.S. economy is not beginning to recover, while one-third believe that it is.
A plurality says that the economic stimulus has helped the economy. However, the Kauffman poll reveals what type of policies Americans really want put forward to stimulate the economy.
The American people want to cut tax rates on payrolls and businesses and reform the health care system as a means of stimulating the economy and producing economic growth. They also want the government to adopt policies that do not increase the deficit or debt.
Americans believe that sustainable economic growth comes more from private sector jobs than from public sector jobs. While one-quarter say that economic growth in the past ten years has come more from the public sector than the private sector, half say that growth has come more from the private sector. This emphasizes the need for policies that support private sector growth, as 71% think we will go through a period of long-term, higher unemployment.
Americans have shown a strong desire for policies that make it easier to start a business, as 85% think this is important. They believe that businesses first and foremost should be socially responsible and create jobs. They also believe that entrepreneurs and big business are most important to job creation in the United States, while government and scientists are less important.
A majority would like the government to do more to encourage entrepreneurship. They believe that tax cuts generally and incentives for small business, followed by less red tape, will encourage entrepreneurial activity. 83% of Americans believe that our economy has been and will continue to be built by entrepreneurs. Seventy-three percent believe that only with entrepreneurship can we have a sustained recovery from our economic crisis.
In response to these sentiments, the Obama Administration has taken steps to promote entrepreneurship and make entrepreneurial activity a central part of their efforts to revitalize and grow the economy. Recently, the Commerce Department Secretary Gary Locke announced the establishment of the Office of Innovation and Entrepreneurship, which will help leverage the entire federal government on behalf of promoting entrepreneurship in America.
This is especially important given that new businesses, which according to the Bureau of Labor Statistics accounted for 14% of hiring between 1993 and 2008, are declining. Business start-ups fell 14% from the third quarter of 2007 to the third quarter of 2008, and the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995, according to an article in yesterday's Wall Street Journal.
In short, the American people are looking for new policies to grow the economy, and the Obama Administration is responding. They want pro-growth, entrepreneurial policies that are fiscally prudent, do not increase the deficit, and offer real incentives for businesses to create the kind of jobs that America desperately needs.
The Kauffman Foundation President Carl Schramm has just announced the formation of an entrepreneurship initiative, which Mr. Schramm has said "is aimed at giving entrepreneurs, and those who support them, a unified voice to influence the debate on behalf of job-creators nationwide...[It] will help business owners of all sizes form a collective force so that policymakers from coast-to-coast will consider their needs -- and the needs of all entrepreneurs -- as they evaluate new laws and regulations."
And it shouldn't be surprising given the feelings of the American electorate and the absence of such a movement, that close to 20% of the American people and over 15% of entrepreneurs say that they are willing to consider joining the movement, creating a force of potentially hundreds of thousands of people or more to advance the interests of entrepreneurship.
Obama’s Olympic failure will only add to doubts about his presidency
(Charles Dharapak/AP)
Barack Obama fails to make the case for Chicago to the IOC in Copenhagen
Obama's French Lesson
By Charles Krauthammer"President Obama, I support the Americans' outstretched hand. But what did the international community gain from these offers of dialogue? Nothing." -- French President Nicolas Sarkozy, Sept. 24
WASHINGTON -- When France chides you for appeasement, you know you're scraping bottom. Just how low we've sunk was demonstrated by the Obama administration's satisfaction when Russia's president said of Iran, after meeting President Obama at the U.N., that "sanctions are seldom productive, but they are sometimes inevitable."
You see? The Obama magic. Engagement works. Russia is on board. Except that, as The Washington Post inconveniently pointed out, President Dmitry Medvedev said the same thing a week earlier, and the real power in Russia, Vladimir Putin, had changed not at all in his opposition to additional sanctions. And just to make things clear, when Iran then brazenly test-fired offensive missiles, Russia reacted by declaring that this newest provocation did not warrant the imposition of tougher sanctions.
Do the tally. In return for selling out Poland and the Czech Republic by unilaterally abrogating a missile-defense security arrangement that Russia had demanded be abrogated, we get from Russia ... what? An oblique hint, of possible support, for unspecified sanctions, grudgingly offered and of dubious authority -- and, in any case, leading nowhere because the Chinese have remained resolute against any Security Council sanctions.
Confusing ends and means, the Obama administration strives mightily for shows of allied unity, good feeling and pious concern about Iran's nuclear program -- whereas the real objective is stopping that program. This feel-good posturing is worse than useless, because all the time spent achieving gestures is precious time granted Iran to finish its race to acquire the bomb.
Don't take it from me. Take it from Sarkozy, who could not conceal his astonishment at Obama's naivete. On Sept. 24, Obama ostentatiously presided over the Security Council. With 14 heads of state (or government) at the table, with an American president at the chair for the first time ever, with every news camera in the world trained on the meeting, it would garner unprecedented worldwide attention.
Unknown to the world, Obama had in his pocket explosive revelations about an illegal uranium enrichment facility that the Iranians had been hiding near Qom. The French and the British were urging him to use this most dramatic of settings to stun the world with the revelation and to call for immediate action.
Obama refused. Not only did he say nothing about it, but, reports Le Monde, Sarkozy was forced to scrap the Qom section of his speech. Obama held the news until a day later -- in Pittsburgh. I've got nothing against Pittsburgh (site of the G-20 summit), but a stacked-with-world-leaders Security Council chamber, it is not.
Why forgo the opportunity? Because Obama wanted the Security Council meeting to be about his own dream of a nuclear-free world. The president, reports The New York Times citing "White House officials," did not want to "dilute" his disarmament resolution "by diverting to Iran."
Diversion? It's the most serious security issue in the world. A diversion from what? From a worthless U.N. disarmament resolution?
Yes. And from Obama's star turn as planetary visionary: "The administration told the French," reports The Wall Street Journal, "that it didn't want to 'spoil the image of success' for Mr. Obama's debut at the U.N."
Image? Success? Sarkozy could hardly contain himself. At the council table, with Obama at the chair, he reminded Obama that "we live in a real world, not a virtual world."
He explained: "President Obama has even said, 'I dream of a world without (nuclear weapons).' Yet before our very eyes, two countries are currently doing the exact opposite."
Sarkozy's unspoken words? "And yet, sacre bleu, he's sitting on Qom!"
At the time, we had no idea what Sarkozy was fuming about. Now we do. Although he could hardly have been surprised by Obama's fecklessness. After all, just a day earlier in addressing the General Assembly, Obama actually said, "No one nation can ... dominate another nation." That adolescent mindlessness was followed with the declaration that "alignments of nations rooted in the cleavages of a long-gone Cold War" in fact "make no sense in an interconnected world." NATO, our alliances with Japan and South Korea, our umbrella over Taiwan, are senseless? What do our allies think when they hear such nonsense?
Bismarck is said to have said: "There is a providence that protects idiots, drunkards, children, and the United States of America." Bismarck never saw Obama at the U.N. Sarkozy did.
No revival in US; big economic crisis ahead: Marc Faber
The
Here is a verbatim transcript of the exclusive interview with Marc Faber on CNBC-TV18. Also watch the accompanying video.
Q: There have been stray concerns on where the market might be headed, and whether things are approaching a bubble like proportion, especially in the equity market. What do you feel?
A: Basically, we have had huge fiscal stimulus packages and we had quantitative easing in basically all countries around the world. So asset prices have recovered strongly after March 6 this year, with stocks rising, commodity prices rising and the dollar weakening again and each time the dollar weakens it is kind of a symptom of some inflation in the system and excess liquidity building up. What we have is large cash positions around the world and zero interest rates and also the policy by the Fed to keep the matter very low level for a very long time as was the case of 2001. With this in mind, money goes out of cash balances into something, either consumption or into some kind of assets like equities or commodities or bonds or art or real estate.
Q. While the rally has been intact, there seems to be one concern which is that interest rates will soon start moving higher and that in turn will start sucking the liquidity out or the easy liquidity out. Is that a real fear for the market?
A: I don't think so. I think we have to distinguish between short-term interest rates and long-term interest rates. Long-term interest rates, the Federal Reserve does not really control them in the long run. Temporary they can somewhat control them through quantitative easing and through the purchases of 10 year bonds, 7 year bonds, 30 year bonds but what they control are the short-term interest rates in other words, the Fed fund rates.
Q. Will talk about sectors and markets in specific in a bit but what about the dollar? There has been almost a straight line correlation between the way emerging markets have moved and the way the dollar has been weakening. Do you sense that is going to snap back soon?
A: If I look around the world — and this is frequently missed in the inflation-deflation debate — the US current account deficit, growing from USD 150 billion to USD 800 billion between 1998 and 2007 flushed the world with liquidity and led to essential inflation in emerging economies, in particular asset inflation. We now have flats in
Q: If there were to be a snap back, how powerful do you think it might be, are we talking about a big pullback for the dollar considering how much it sold off these past few months?
A: That I doubt because the Federal Reserve and the
Q: While the correction has been called for many months now, do you see a situation over the next few months where the liquidity can actually push markets to far higher levels and see almost a blow out like rally over the next couple of months?
A: That I doubt; we are very overbought and the economic news is not particularly good. So I think that before we would rise much more in equity markets, a correction should actually take place. But markets are unpredictable and it is conceivable that there is a kind of a blow-off phase before we go down substantially. But I would not bet on that. I think the big move to grave this out, we are up 100% in India, we are up 50% in the United States, may be we go up another 10%, but we are not going to go another 100% straight away.
Q: As you watched the markets right now, do you see any similarities with the situation that we had in 2007 and just by extension of that if there is indeed a correction who do you think will falter a blink first, the equity markets or the commodities or a completely other asset class?
A: I think equities after the peak in October 2007 collapsed around the world by plus or minus 50% and now they have rebounded but they are not at their previous highs. In the meantime, in some countries, companies have continued to increase their earnings and so the valuations are not as stretched as in 2007. But what disturbs me personally is that we had the financial crisis. The cause of the financial crisis was excessive debt growth that was essentially produced by notably the American Central Bank, the Federal Reserve. Now the same people who produced the crisis namely the policy makers in the
Q: Where does
A: I think the Reserve Bank of India (RBI) has one of the best monetary policies in the world because they supervise the financial sector very closely. They have maintained relatively tight monetary policies and also they pay attention not only to core inflation which is not representative of the cost of living increase and is not representative of inflation in the system but the RBI also pays attention to rising and falling asset prices. So I have to give them credit for being one of the best Central Banks in the world.
The Labour Party conference
Backwards, not forwards
Labour is struggling even to pretend that its best days lie before it
THE last time Gordon Brown’s Labour Party held a seaside conference with a general election in the offing, a prelapsarian triumphalism reigned. At Bournemouth in 2007 the prime minister, new at the time, toyed with cashing in on his poll lead over the Conservatives by calling a snap vote. Lord Kinnock urged his successor-but-two as Labour leader to “grind the bastards into the dust”. But the Tories staged a recovery and Mr Brown ducked the election, a political ignominy from which he has never recovered.
In Brighton, two years and a recession later, a grim realism ruled. This time an election must be held by June 3rd, and the Tories’ poll lead seems as durable as it is comfortable. An Ipsos MORI survey on the eve of the conference put Labour in third place for the first time since 1982, behind the Liberal Democrats. The loudest cheers during Mr Brown’s speech on September 29th followed his roll-call of Labour’s achievements since 1997, not his plucky insistence that the party can win again.
True, it would have taken something extraordinary to buck the political gravity that must drag down any 12-year-old government during a recession. Instead, the speech showed how little Mr Brown has changed. His old tropes were there: the fiddly policy announcement (extending the car-scrappage scheme), the epic but unverifiable target (to cure cancer “in this generation”) and of course the commissioning of a review (to look into a national-investment fund for small businesses).
He promised to create a power to recall corrupt MPs and a referendum on a new voting system; but constitutional reform has long been a Labour cause, in word if not in deed. The social conservatism of the speech, which pledged to put teenage parents in supervised accommodation, was hardly surprising either. A harder line on crime and moral issues was as central to New Labour as its embrace of the market. In any case, the inquest into the distressing story of Fiona Pilkington, who killed herself and her daughter in 2007 after years of bullying by local youths, has heightened public anger over law and order. No democratic politician could resist the pressure to be seen to be doing something.
The only curiosity of Mr Brown’s speech was its reluctance to confront the crises of the day. His brief moments of glory—early in his premiership, when he dealt calmly with floods and botched terrorist attacks, and last autumn, when he bailed out banks to prevent a financial meltdown—have come when he has played the political grown-up. Yet his speech reflected little recognition that Britain is in a fiscal mess and an increasingly deadly war in Afghanistan. Britons would have benefited from honesty on the former in particular: the Ipsos MORI poll revealed that only 24% think spending on public services needs to be cut to improve the public finances.
Activists who came to Brighton looking for scraps of hope will not have departed empty-handed. For one thing, Labour is unified. There was none of the leadership speculation that pervaded last year’s conference. This owes much to the proximity of the election; removing Mr Brown now would be bizarre. But with a contest for the party’s crown likely next summer, more manoeuvring by potential candidates was expected. Secondly, if the conference had a star (other than Lord Mandelson, the first secretary of state, who now provokes rapture among Labour members who once loathed him), it was Ed Miliband. The popularity of the broadly centrist energy secretary in fringe events suggests that Labour is not necessarily destined to lurch to the unelectable left in opposition.
Even the most symbolic setback of the conference, the Sun’s withdrawal of its long support for Labour, had a silver lining. The editorial in Britain’s biggest-selling daily newspaper concentrated on lamenting the government’s record and only perfunctorily declared a preference for its Conservative opponents.
But as much as voters seem to share the Sun’s grudging support for the Tories, who gather in Manchester for their conference on October 4th, they may also be put off by the ferocity of Labour’s attacks on them. Until recently ministers confusingly argued that David Cameron, the Tory leader, was both bereft of beliefs and an unreconstructed Thatcherite. Labour’s message now seems to be settling on the latter. Mr Brown’s speech baldly described Mr Cameron’s party as having “no heart”. Contempt for George Osborne, the shadow chancellor of the exchequer, whom Labour loves to hate more than any other serving Tory, was evident in fringe meetings and the conference hall—where Harriet Harman, the party’s deputy leader, mystifyingly accused him of wanting “a lap-dance club in every community”. His party’s decision to sit in the European Parliament with continental Eurosceptics who also happen to espouse right-wing social views is dubiously offered as proof of the Tories’ dark heart.
As part of a core-vote strategy to minimise the scale of a Labour defeat, this pugnacity makes sense. Such a strategy may have been adumbrated in Mr Brown’s speech, with its spending pledges and chest-beating eulogies to Labour and the NHS. But as a way of showing that Labour has a governing vision for the future, or even that it has learned from the calamitous flirtation earlier this year by some of the prime minister’s aides with negative media tactics, it is surely a dead-end. Mr Brown did a manful job this week of defending Labour’s work during its three terms in power. He was less convincing as to why it deserves a fourth.
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