The US Dollar has done well against the Euro with the impending bankruptcy of the PIIGS. It's also holding up against the Blizzard of 2010:
Recently in money, interest, prices Category
After getting a B.A. in economics from BYU in 1998, I went to work for Thredgold Economic Associates for two-and-a-half years. Jeff Thredgold took an unconventional route to becoming a Chief Economist for major banks. He came up as a bond portfolio manager. As such, I always felt like he had very good intuition for what was happening in markets on a day-to-day basis.
One of Jeff's most insightful arguments is one that he has been making for as long as I've known him. In this week's issue of his weekly economic newsletter, The TEA Leaf, Jeff drives the point home, yet again, in compelling fashion.
One of Jeff's most insightful arguments is one that he has been making for as long as I've known him. In this week's issue of his weekly economic newsletter, The TEA Leaf, Jeff drives the point home, yet again, in compelling fashion.
"What [Ron] Paul and other Fed critics don't understand is that the Federal Reserve has an overseer...something or someone IT has to answer to. That something is the American bond market."
Continue reading Overseer of the Federal Reserve: the bond market.
A good friend (Suzanne Bates) pointed me to this provocative and insightful article in The Washington Post from May 18, 2009 entitled "Poor? Pay Up." The article carefully documents many of the ways in which the poor pay more for the same goods and services that higher income households consume. The clever opening line is, "You have to be rich to be poor."
Continue reading Why do the poor pay more?.
The Consumer Price Index (CPI) numbers for June were released today, and the initial press was that inflation was higher than expected. The inflation hawks would point to today's numbers as an indication that the massive injections of money by the Federal Reserve and Congress are starting to increase prices toward the great inflation they have been predicting. But don't go there so fast. Headline CPI inflation increased by 0.7% in June, the highest monthly increase since June 2008. However take a look at the figure below of the headline CPI percent change over the last 12 months.
Continue reading Don't put your inflation knickers on yet.
How would interest rates be different if we all "aged" like Benjamin Button? The movie made me wonder if consumption and youth might be complements--would you rather have the red convertible at 56 or 16? Would rates be different still if our minds (and not just bodies, as in the movie) aged in reverse? For example, we seem to get more risk averse as we grow older.
The employment numbers that came out today show that the economy is still in the process of gearing down. The normalized peak plot below shows U.S. employment levels as a percentage of their peak level in the last 14 recessions back to the Great Depression (dark black line). Employment in our current recession (the heavy lime green line) is 4.7% lower than its peak back in December 2007. The only recession that looks like this since the Great Depression is the post WWII reduction in spending in 1945. It looks like the recession still has some room to run. Similar comparisons of GDP and stock prices are in my post from a month ago.
The U.S. CPI numbers came out today (see chart below). A lot of noise was made last week about inflation worries starting to surface in yields from the auctions of U.S. Treasuries. This WSJ piece from last Thursday posited that the higher yields might be signaling inflation in six-to-nine months. Jim Hamilton had a great analysis two weeks ago explaining why we should probably still be more worried about deflation than inflation. I had a post a few months ago debunking some of the inflation rhetoric from the far right. Below is a chart of the core CPI (overall prices minus food and energy) in terms of year-over-year percentage change. We're definitely not in high inflation territory yet.
The Cleveland Fed has put up a site that shows in glorious graphical detail how the Fed's new policy of quantitative easing has developed and grown over the last eight months. The light orange area in the graphic below represents traditional monetary policy. You can navigate through different date ranges and different detail views using menu bars across the top and left sides of the graph. They also include dowloadable source data, brief explanations of the data, as well as a link to a more detailed article.
Thanks to Mark Showalter for pointing me to this great resource, and thanks to the Cleveland Fed for the most simple, beautiful, and interactive display of economic data that I have seen yet. Here's to central bank transparency!
Thanks to Mark Showalter for pointing me to this great resource, and thanks to the Cleveland Fed for the most simple, beautiful, and interactive display of economic data that I have seen yet. Here's to central bank transparency!
With bankruptcy plans finally announced for GM today, I thought it would be nice to revisit a previous post. On December 20, 2008, I posted an article entitled, "Ford tough," in which I praised Ford's decision not to accept government bailout money. I said the following:
Just look at what has happened to the stock prices of Ford and GM since December 20, 2008. The market has spoken.
The proposed auto bailout has been one of the most discouraging pieces of government action since the beginning of our current financial crisis. Ford's decision to stick with the market is one of the silver linings in the ominous clouds of the global recession. Ford does, of course, run the risk of not beeing able to compete in the short-run with GM and Chrysler and their new influx of government cash. But that's not really where the competition is anyway. The real contest is to see which U.S. company will be able to compete with their Japanese counterparts. I think the market will look favorably on Ford's long-run positioning.
Just look at what has happened to the stock prices of Ford and GM since December 20, 2008. The market has spoken.
I've been thinking that a decent investment strategy might be to go short anything the government gets heavily involved in (think housing and banking). Of course timing is everything here and it's hard to know when the bet will pay off (will health-care fall apart sooner or later?).
Well, I just came across a fund that is taking a like-minded strategy. The fund is called the Congressional Effect Fund. The fund's basic strategy is to capture the above average returns on the stock market on those days when Congressmen are on vacation. A great idea and much easier to implement than my strategy. The average annualized return to the S&P 500 when congress is in session (1965-2009)? 0.31%. The average annualized return to the S&P 500 when congress is out of session? 16.15%.
Hat tip to DoL'er (and fellow Georgian) Frank Stephenson.
Well, I just came across a fund that is taking a like-minded strategy. The fund is called the Congressional Effect Fund. The fund's basic strategy is to capture the above average returns on the stock market on those days when Congressmen are on vacation. A great idea and much easier to implement than my strategy. The average annualized return to the S&P 500 when congress is in session (1965-2009)? 0.31%. The average annualized return to the S&P 500 when congress is out of session? 16.15%.
Hat tip to DoL'er (and fellow Georgian) Frank Stephenson.
Mark Thoma writes:
"In addition, as time has passed and prices have fallen, solvency issues have come to the forefront - the balance sheet problems are no longer hidden by overpriced assets - and the solvency problems must be addressed directly. That means that if there is no separate program to provide an infusion of capital, simply removing the toxic assets from the balance sheets through government purchases at current prices - prices so low that the banks are insolvent - won't be resolve the problem."If the prices of "toxic" assets has fallen overtime, isn't this evidence of a very low true value of the assets? The original argument was that a panic had temporarily suppressed the prices of said assets and that the government only need take hold of these assets until prices rebounded. From what I can tell, the credit crisis is not as severe as last fall. So if the price of assets is lower now and the credit crisis not as severe, shouldn't one conclude that the continuing fall in these asset prices is due to a deterioration in the fundamentals of those assets?
Continue reading Which bailout plan now?.
I couldn't resist posting and responding to this Glenn Beck video (1/29/09) because I know that he has been advised by multiple parties against the arguments that he is pushing. We all should have reason to be worried about the economy, but not for the reasons Beck is trumpeting.
Continue reading Sorting out inflation risks: debunking Beck.
Some sentences I'll be thinking about over spring break (from Gary Gorton's "Subprime Panic"):
"How do banking panic's come to an end? Some history is instructive. During the 19th century, in the USA, the solution to banking panics was the institution of the private bank clearinghouse, which evolved over the century to the point where banks' response to panics was fairly effective... This system was abandoned with the founding of the Fed and the subsequent adoption of deposit insurance. These were institutions aimed [at] preventing a panic from happening. But they are not equipped to solve the information problem that arises if a panic does happen. Clearinghouse loan certificates attacked the problem directly."
Continue reading Banking Panics.
Rick's been posting some disturbing data. As much as I'd like to cheer things up, I can't get over what's been going on in the U.S. Stock markets in the last couple of days. Check this out:
I feel really bad for those nearing retirement. But I guess we have to remember that this is a huge transfer to those of us in the younger generations, not a "destruction of wealth" as properly defined.
Related to these recent numbers, Bryan Caplan posits an excellent question:
"If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that 'Events decisively prove that laissez-faire is a disaster'?"
Related to these recent numbers, Bryan Caplan posits an excellent question:
"If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that 'Events decisively prove that laissez-faire is a disaster'?"
The only significant policy difference between the current period of global recession and the Great Depression is monetary policy and financial market intervention. The government spending part is looking like it will be the same. The annual deficit is projected to rise from its current 2008 level of just under 3% of GDP to potentially 10% of GDP in 2009. However, this rise in the deficit is also similar to the early 1980s and 2000. (The big blip is World War II.)
Continue reading Only difference from Great Depression is monetary policy and TARP.
I posted a graph a while back showing how home prices for the 100 years leading up to the mid 1990s showed no growth, but fluctuated around a mean. Seems home prices are heading back there now.
And the fall in the price of oil from mid-2008 levels ought to put a lid of the "peak oil-ers".
So maybe mean reversion is the best way to model and forecast home and commodity prices. Is it also the best way to forecast the growth in the value of equities? Mankiw posts the following picture:
And the fall in the price of oil from mid-2008 levels ought to put a lid of the "peak oil-ers".
So maybe mean reversion is the best way to model and forecast home and commodity prices. Is it also the best way to forecast the growth in the value of equities? Mankiw posts the following picture:
Alright, I stuck my neck out yesterday and predicted that the core CPI numbers released today would show a decline of between -0.1 and -0.4 percent, based largely on the Fed minutes from last month. Well, the final tally is no change, although the exact amount was a decrease of -0.015 percent. That is virtually zero, but it was a decline. This just pushes the deflation watch forward another month. I still think that the core CPI is a bellwether as to whether the economy is responding to all the stimulus being poured in. And the previous three months do now rank as the biggest quarterly decline in prices since the late 1950s, and probably since the Great Depression. Stay tuned.
One of the best economics music videos out there:
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I know it's been a while since this first made the rounds, but it's still a great piece of work. Thanks to a reader for suggesting we archive it on the jokes page.
For more (and some more recent) work by Columbia B-school students, go to http://www.cbsfollies.com/
Continue reading Every Breath You Take.
Three main risks to the economy emerged from the minutes of the December 15-16, 2008 meeting of the Federal Reserve's Federal Open Market Committee (FOMC)--Decline, Deflation, Division.
Continue reading Three "D"s: Biggest risks from FOMC minutes.
The December 2008 Journal of Economic Literature published the 105th annual list of doctoral dissertations in economics published between July 2007 and July 2008. This is really just a shameless plug by Rick and Jason for our two of favorite entries in this year's JEL list. The first is entitled, Three Essays on Openness, International Pricing, and Optimal Monetary Policy, and the second is entitled, Essays on Dynamic Political Economy.
Continue reading Two interesting dissertations from 2008.
The Globalization and Monetary Policy Institute (GMPI) at the Federal Reserve Bank of Dallas just released its most recent International Economic Update today. One bright spot in this report comes from the chart below that forecasts that the global economy (as represented by the U.K., Euro-area, and Japan) will return to positive growth in the second quarter of 2009. I think this forecast, taken from Consensus Economics, might be a little overly optimistic.
Continue reading Some positives in global forecasts.
After the decline of the core CPI of -0.1% for October 2008 (reported last month), I have been telling students and associates to watch out if we had another decline in the core CPI in November. Two consecutive declines in this more stable measure of consumer prices (it excludes the volatile food and energy components) would signal an increased likelihood that a destructive deflationary spell is upon us. The Bureau of Labor Statistics reported today that core inflation
actually increased by 0.02%. This is a very small number that is practically zero. But at least it is positive. In keeping with the analogy of my last post, we have dodged the deflation bullet for the month of December (November CPI).
Continue reading CPI deflation watch: November close call.
The Federal Reserve's decision today to lower the fed funds rate to a target range of 0.00-0.25% represents the Fed's last shot they can take at the recession with the fed funds gun. They are literally out of ammo with that instrument. You can't lower the rate below zero. The effective fed funds rate for Wednesday, December 10, was 0.13%. We are now really in uncharted territory. How can I say this any more forcefully? This is like Japan in the 1990s, except every other country in the world is entering a recession as well. The only difference is that the Fed is trying to signal more willingness to do anything and everything than Japan did in the 1990s. We'll see if it will be enough.
Continue reading The last fed funds bullet has been fired.
In an excellent piece on the response to the financial crisis, John Taylor highlights the important concept of rules versus discretion in government policy.
Taylor shows that monetary policy during the start of the housing boom deviated significantly from the "rule" it had been following for the previous 20+ years. Taylor and his coauthors find evidence that this amplified the boom and bust in the housing market. While not everyone agrees with this conclusion, Taylor presents some convincing counter factual experiments.
Taylor shows that monetary policy during the start of the housing boom deviated significantly from the "rule" it had been following for the previous 20+ years. Taylor and his coauthors find evidence that this amplified the boom and bust in the housing market. While not everyone agrees with this conclusion, Taylor presents some convincing counter factual experiments.
Continue reading Rules versus Discretion.
John Tamny had a post today on Real Clear Markets arguing that the way to make the value of the dollar more stable against currency depreciation is to tie it to some commodity like gold. I would argue that his timing is off and his argument is flawed.
Continue reading Argument against the gold bugs.
As an update to a previous post (I promise that I won't do this for every Treasury auction), the Treasury today auctioned $27B for three months at an annualized discount rate of 0.005%. That's ½ a basis point. So the treasury will pay about $338,000 to borrow $27 BILLION for 3 months. As a side note, this is the lowest three month yield since 1929 (cue scary music)...
See here for all of the details.
I found the following graph startling:
All those years where you can't see a line at all? That is because borrowing was zero. Notice that periods with little or no borrowing include: the recession of the early '90s, most of the dot com bubble burst and pretty much all of the '40s, '50s and '60s.
Continue reading The sky {is, is not} falling.
The size of the recent fiscal and monetary stimuli (is that a word?) has many concerned about the spiraling national debt. Luckily, a biproduct of the financial crisis has been extremely low short term yields on treasury securities. As of this morning (about 12:30 ET) Bloomberg lists the following as the yields on U.S. Treasury securities.
Notably, the yield on the three month T-Bill is 1 basis point. 1. That's 0.01% when it is annualized. What does that mean for the Treasury? It means that the cost of financing $10,000 for 90 days is ... wait for it ... 25 cents. Put another way, if Treasury could rollover the entire, $10.6 trillion national debt for three months (which of course they couldn't because the demand curve for this stuff has to slope downward somewhere) it would cost them a mere $265M in interest. That is about 0.00184% of the current estimate of annual GDP.
Greg Mankiw posted this Mike Luckovich cartoon on Thanksgiving 2008. However, notice that the date of the cartoon is November 16, 2007. And I'll bet we'll be able to use this same cartoon next Thanksgiving.
I commented earlier in the week on the financial problems facing the Federal Government. Well the states have problems too. Its particularly interesting to think about the states that have hamstrung themselves by not having a state personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee (the last two do tax dividends and capital gains income).
These states without personal income taxes rely more heavily on sales taxes and property taxes. Well guess what's happened to property values in some of these states:
These states without personal income taxes rely more heavily on sales taxes and property taxes. Well guess what's happened to property values in some of these states:
Continue reading Public Financing Problems.
Authors
- Richard W. Evans is an Assistant Professor of Economics at Brigham Young University
- Jason DeBacker is a Washington, D.C. economist.