Monday, March 22, 2010

And, you thought you didn’t like rap music . . . .

Long time readers will remember about a year ago I was asked to speak to the twenty brightest seniors in Virginia Beach about economics, which I was happy to do. The biggest shock to me was when one of them asked me about the difference between Keynesian economics and Austrian economics. Since I was probably a senior in college before I knew about such things, it was a pleasant surprise to hear a high school student ask the question. Hopefully, I gave a cogent answer. Unfortunately, I didn’t have the benefit of a delightful viral video, answering the question by using rap music. For a good time, click on

Tuesday, March 16, 2010

Current Currency Thoughts

In my last column for Inside Business, I commented that the fear of the dollar losing its status as the world’s reserve currency was over-blown. This worried a number of readers. If this loss does occur, it will not happen for many years. In the meantime, we need to remember that responsibility comes along with the status of being the reserve currency. Since the Asian Contagion in the late 1990’s, when currencies could not be borrowed, the need for national reserves has been increasing about $600 billion a year and 60% of all reserves are in the dollar. We have to provide that currency.

This discussion began with comments by the Chinese finance minister who suggested the dollar could lose its status. He never suggested the Yuan could take its place, for good reason. It is not freely convertible, and its capital markets are rudimentary. Most importantly, they have demonstrated they will manipulate their currency to help their exports. Likewise, the Euro is not a good candidate either, because they have no central Treasury. Don’t forget, there could never be a two-currency reserve system, as that is inherently unstable.

For now, the dollar remains the loser in the ugly currency contest, i.e., it is not as ugly as the others. Besides, America has many problems more worrisome than this.

Wednesday, March 10, 2010

Not Market Timing, Cycle Timing.........

The National Association of Business Economics is an organization of “working” economists, as opposed to “theoretical or academic” economists, and I have been a member for years. This week, we held our annual policy conference in Washington, and it was fascinating as always.

If asked what was most interesting to me, it is that the developed nations actually got their act together at the beginning of this global recession and implemented a synchronized set of responses together. That alone semi-renews what little faith that traditional institutions work effectively any longer. But, now comes the hard part: How to implement a non-synchronized set of exit strategies?

Because different nations suffered different degrees of damage, each needs a different exit strategy from all the government stimulus. Indeed, major commodity exporters, such as Australia, have already begun withdrawing stimulus. When nations running large surpluses, like China, begin exhibiting inflation, their exit strategies will have to be implemented more quickly. Failure to coordinate our exit strategies could push us back towards a “double-dip” or at best, delay the recovery. The U.S. and England were arguably damaged the most, primarily because finance is a larger share of GDP than anywhere else in the world. They will also be the last to implement their exit strategies, which is convenient because it will require “tough love”, which our politicians are loathe to do and maybe incapable of doing.

Saturday, March 6, 2010

Credit Where Credit is Due.....and Needed

Most people know that individual home mortgages are put into bundles, which is funded by bond purchases to repay the mortgage originators. This greatly expanded the amount of money available for home mortgages by allowing bond buyers to provide it, a lot of it. Less well known is that the same is done for auto loans, student loans, and equipment loans. When the market collapsed last year, no bond buyers were putting money into anything, for obvious reasons. To get this market for consumer loans functioning again, the Fed made non-recourse loans to bond buyers if they would buy this consumer debt. Effectively, the Fed put $100 billion into consumer loans to kick-start the market. The program was called TALF or Term Asset-backed securities Loan Facility, one of an alphabet variety of surprisingly innovative programs.

The good news is that the program quietly ended last week, as the market for bonds collateralized with consumer debt was functioning normally again. Not only did the taxpayer get all their money back, they even made a profit. I hate to say it but . . . Kudos to Ben Bernanke and the Fed!

Friday, March 5, 2010

Recovery Postponed...due to weather delay?

While few economists disagree, the most important monthly economic statistic released each month for investment strategists is the “Jobs Report”, which is released the first Friday of each month. Today, the Labor Department announced the unemployment rate remained unchanged at 9.7%. The good news is that we only lost 36 thousand jobs last month, compared with a loss of 26 thousand in January. The reason this is good is because that we were expecting a loss of 50 thousand jobs, primarily due to the terrible weather last month. Clearly, there had to be some impact but it is not measurable. As a result of this pleasant surprise, futures jumped from 29 to 65 immediately, indicating a strong open for the market today.

The sad news is that the rate of under-employment increased from 16.7% to 16.8%. If we stopped losing jobs, the rate stays like that. To restore full employment within five years, we need to see over 200 thousand job created each month. It will be a long, hard slog, and this weather delay didn’t help.

Monday, March 1, 2010

Return to the Future . . . I hope not!

Today, the Commerce Department reported that consumer spending in January increased for the fourth straight month and increased by more than expected. They also announced that the December increase was greater than earlier reported. Unfortunately, spending increased five times as fast as personal income increased, which only increased about one-fourth of what was expected. Hopefully, we are not returning to our old habits. The US savings rate got as low as 1.2% in early 2008 before rising to 5.1% last Spring and declining since then.

At the same time, our economy is still losing jobs, albeit at a slower rate. Obviously, those who feel secure in their jobs are really ramping up their spending. The question is whether the 17 million people who are either unemployed or under-employed will ever feel that secure again? While we have experienced numerous recessions, this was the Great Recession. If the spending psyche of 17 million workers is damaged, it will be a drag on our consumption-based economy. Just maybe, that is a good thing.