Archive for February, 2010|Monthly archive page

‘HOW A NEW JOBLESS ERA WILL TRANSFORM AMERICA, ‘ by Don Peck in the Atlantic Monthly. Interviewed on the Newhour last night. “We’re about to see a big national experiment on stress.”

In Uncategorized on February 27, 2010 at 14:58

How a New Jobless Era Will Transform America

The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.

By Don Peck

HOW SHOULD WE characterize the economic period we have now entered? After nearly two brutal years, the Great Recession appears to be over, at least technically. Yet a return to normalcy seems far off. By some measures, each recession since the 1980s has retreated more slowly than the one before it. In one sense, we never fully recovered from the last one, in 2001: the share of the civilian population with a job never returned to its previous peak before this downturn began, and incomes were stagnant throughout the decade. Still, the weakness that lingered through much of the 2000s shouldn’t be confused with the trauma of the past two years, a trauma that will remain heavy for quite some time.

The unemployment rate hit 10 percent in October, and there are good reasons to believe that by 2011, 2012, even 2014, it will have declined only a little. Late last year, the average duration of unemployment surpassed six months, the first time that has happened since 1948, when the Bureau of Labor Statistics began tracking that number. As of this writing, for every open job in the U.S., six people are actively looking for work.

All of these figures understate the magnitude of the jobs crisis. The broadest measure of unemployment and underemployment (which includes people who want to work but have stopped actively searching for a job, along with those who want full-time jobs but can find only part-time work) reached 17.4 percent in October, which appears to be the highest figure since the 1930s. And for large swaths of society—young adults, men, minorities—that figure was much higher (among teenagers, for instance, even the narrowest measure of unemployment stood at roughly 27 percent). One recent survey showed that 44 percent of families had experienced a job loss, a reduction in hours, or a pay cut in the past year.

There is unemployment, a brief and relatively routine transitional state that results from the rise and fall of companies in any economy, and there is unemployment—chronic, all-consuming. The former is a necessary lubricant in any engine of economic growth. The latter is a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps society’s most noxious ill.

The worst effects of pervasive joblessness—on family, politics, society—take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.

If it persists much longer, this era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.

The Long Road Ahead

SINCE LAST SPRING, when fears of economic apocalypse began to ebb, we’ve been treated to an alphabet soup of predictions about the recovery. Various economists have suggested that it might look like a V (a strong and rapid rebound), a U (slower), a W (reflecting the possibility of a double-dip recession), or, most alarming, an L (no recovery in demand or jobs for years: a lost decade). This summer, with all the good letters already taken, the former labor secretary Robert Reich wrote on his blog that the recovery might actually be shaped like an X (the imagery is elusive, but Reich’s argument was that there can be no recovery until we find an entirely new model of economic growth).

No one knows what shape the recovery will take. The economy grew at an annual rate of 2.2 percent in the third quarter of last year, the first increase since the second quarter of 2008. If economic growth continues to pick up, substantial job growth will eventually follow. But there are many reasons to doubt the durability of the economic turnaround, and the speed with which jobs will return.

Historically, financial crises have spawned long periods of economic malaise, and this crisis, so far, has been true to form. Despite the bailouts, many banks’ balance sheets remain weak; more than 140 banks failed in 2009. As a result, banks have kept lending standards tight, frustrating the efforts of small businesses—which have accounted for almost half of all job losses—to invest or rehire. Exports seem unlikely to provide much of a boost; although China, India, Brazil, and some other emerging markets are growing quickly again, Europe and Japan—both major markets for U.S. exports—remain weak. And in any case, exports make up only about 13 percent of total U.S. production; even if they were to grow quickly, the impact would be muted.

Most recessions end when people start spending again, but for the foreseeable future, U.S. consumer demand is unlikely to propel strong economic growth. As of November, one in seven mortgages was delinquent, up from one in 10 a year earlier. As many as one in four houses may now be underwater, and the ratio of household debt to GDP, about 65 percent in the mid-1990s, is roughly 100 percent today. It is not merely animal spirits that are keeping people from spending freely (though those spirits are dour). Heavy debt and large losses of wealth have forced spending onto a lower path.

So what is the engine that will pull the U.S. back onto a strong growth path? That turns out to be a hard question. The New York Times columnist Paul Krugman, who fears a lost decade, said in a lecture at the London School of Economics last summer that he has “no idea” how the economy could quickly return to strong, sustainable growth. Mark Zandi, the chief economist at Moody’s, told the Associated Press last fall, “I think the unemployment rate will be permanently higher, or at least higher for the foreseeable future. The collective psyche has changed as a result of what we’ve been through. And we’re going to be different as a result.”

One big reason that the economy stabilized last summer and fall is the stimulus; the Congressional Budget Office estimates that without the stimulus, growth would have been anywhere from 1.2 to 3.2 percentage points lower in the third quarter of 2009. The stimulus will continue to trickle into the economy for the next couple of years, but as a concentrated force, it’s largely spent. Christina Romer, the chair of President Obama’s Council of Economic Advisers, said last fall, “By mid-2010, fiscal stimulus will likely be contributing little to further growth,” adding that she didn’t expect unemployment to fall significantly until 2011. That prediction has since been echoed, more or less, by the Federal Reserve and Goldman Sachs.

The economy now sits in a hole more than 10 million jobs deep—that’s the number required to get back to 5 percent unemployment, the rate we had before the recession started, and one that’s been more or less typical for a generation. And because the population is growing and new people are continually coming onto the job market, we need to produce roughly 1.5 million new jobs a year—about 125,000 a month—just to keep from sinking deeper.

Even if the economy were to immediately begin producing 600,000 jobs a month—more than double the pace of the mid-to-late 1990s, when job growth was strong—it would take roughly two years to dig ourselves out of the hole we’re in. The economy could add jobs that fast, or even faster—job growth is theoretically limited only by labor supply, and a lot more labor is sitting idle today than usual. But the U.S. hasn’t seen that pace of sustained employment growth in more than 30 years. And given the particulars of this recession, matching idle workers with new jobs—even once economic growth picks up—seems likely to be a particularly slow and challenging process.

The construction and finance industries, bloated by a decade-long housing bubble, are unlikely to regain their former share of the economy, and as a result many out-of-work finance professionals and construction workers won’t be able to simply pick up where they left off when growth returns—they’ll need to retrain and find new careers. (For different reasons, the same might be said of many media professionals and auto workers.) And even within industries that are likely to bounce back smartly, temporary layoffs have generally given way to the permanent elimination of jobs, the result of workplace restructuring. Manufacturing jobs have of course been moving overseas for decades, and still are; but recently, the outsourcing of much white-collar work has become possible. Companies that have cut domestic payrolls to the bone in this recession may choose to rebuild them in Shanghai, Guangzhou, or Bangalore, accelerating off-shoring decisions that otherwise might have occurred over many years.

New jobs will come open in the U.S. But many will have different skill requirements than the old ones. “In a sense,” says Gary Burtless, a labor economist at the Brookings Institution, “every time someone’s laid off now, they need to start all over. They don’t even know what industry they’ll be in next.” And as a spell of unemployment lengthens, skills erode and behavior tends to change, leaving some people unqualified even for work they once did well.

Ultimately, innovation is what allows an economy to grow quickly and create new jobs as old ones obsolesce and disappear. Typically, one salutary side effect of recessions is that they eventually spur booms in innovation. Some laid-off employees become entrepreneurs, working on ideas that have been ignored by corporate bureaucracies, while sclerotic firms in declining industries fail, making way for nimbler enterprises. But according to the economist Edmund Phelps, the innovative potential of the U.S. economy looks limited today. In a recent Harvard Business Review article, he and his co-author, Leo Tilman, argue that dynamism in the U.S. has actually been in decline for a decade; with the housing bubble fueling easy (but unsustainable) growth for much of that time, we just didn’t notice. Phelps and Tilman finger several culprits: a patent system that’s become stifling; an increasingly myopic focus among public companies on quarterly results, rather than long-term value creation; and, not least, a financial industry that for a generation has focused its talent and resources not on funding business innovation, but on proprietary trading, regulatory arbitrage, and arcane financial engineering. None of these problems is likely to disappear quickly. Phelps, who won a Nobel Prize for his work on the “natural” rate of unemployment, believes that until they do disappear, the new floor for unemployment is likely to be between 6.5 percent and 7.5 percent, even once “recovery” is complete.

It’s likely, then, that for the next several years or more, the jobs environment will more closely resemble today’s environment than that of 2006 or 2007—or for that matter, the environment to which we were accustomed for a generation. Heidi Shierholz, an economist at the Economic Policy Institute, notes that if the recovery follows the same basic path as the last two (in 1991 and 2001), unemployment will stand at roughly 8 percent in 2014.

“We haven’t seen anything like this before: a really deep recession combined with a really extended period, maybe as much as eight years, all told, of highly elevated unemployment,” Shierholz told me. “We’re about to see a big national experiment on stress.”


‘WHAT WILL WE KNOW & WHEN WILL WE KNOW IT?,’ by Simon Johnson at baselinescenario .com.

In Uncategorized on February 27, 2010 at 03:42

What Will We Know And When Will We Know It?

Posted: 26 Feb 2010 11:06 AM PST

By Simon Johnson

One of the most basic questions in economics is: Which countries are rich and which are relatively poor?  Or, if you prefer a highly relevant question for today’s global situation, who recovers faster and sustains higher growth?

The simplest answer, of course, would be just to compare incomes – i.e., which country’s residents earn the most money, on average, at a point in time and how does that change over time?

But prices differ dramatically across countries, so $1,000 in the United States will generally buy fewer goods and services than would the same $1,000 in Guinea-Bissau (although this immediately raises issues regarding consumer’s preferences, the availability of goods, and the quality of goods in very different places.)

The standard approach developed by economists and statisticians, working with great care and attention to detail on a project over the past 40 years known as the “Penn World Tables”, is to calculate a set of “international prices” for goods – and then to use these to calculate measures of output and income in “purchasing power parity terms.”  For countries with lower market prices for goods and services, this will increase their measured income relative to countries with higher market prices (with Gross Domestic Product, GDP, per capita being the standard precise definition, but components and variations are also calculated along the way).

Some of the limitations inherent in the Penn Tables are well known.  But it turns out there are other, quite serious issues, that should have a big effect on how we handle these data – and how doubtful we are when anyone claims that a particular country has grown fast or slow relative to other countries.

The Penn Tables are based on collecting detailed price information – what it actually costs to buy all kinds of things in different places.  But the basic problem is that the people running the Tables do not have access to such data for all years and all countries – so they have to make a number of moderately heroic assumptions.

In “Is Newer Better?”, we show that a particular technical issue – the extrapolation of estimated price levels backwards and forwards in time – has a big impact on estimated GDP.  This in turn changes, dramatically in some cases, the calculated growth rates for particular countries; and these changes can be huge for smaller countries with less good data, particularly when the year in question is quite far from the moment when prices were actually “benchmarked” though direct observation.

Just to illustrate our point, in Table 1 we show that the ranking of growth rates – e.g., top 10 and worst 10 countries, in terms of growth performance – within Africa, from 1975 to 1999, is completely different if you use Penn World Tables version 6.1 or if you use version 6.2.  Just speaking for ourselves, we were quite shocked by these differences – and consequently spent a long time digging through the details (see the appendices of the paper for much more than you wanted to know about how this kind of sausage is made).  We’ve also tried to figure out exactly how much these issues matter both for how people have studied growth in the past (to do this, we replicated and checked the robustness of 13 influential and indicative papers), and for how to think about (and measure) economic success and failure moving forward.

Our bottom line is: while the Penn Tables are reasonably reliable for comparing changes in income level over long periods of time (e.g., 30-40 years), they are much less appealing – and results based on them will generally not be robust – as a source for annual data.  You should regard claims based on such annual data with a great deal of skepticism.

We also suggest there is a different and – for some purposes – better way to use the information in the Tables (see Section 6 of our paper).  In essence, we suggest combining estimated GDP levels directly from the Tables, rather than using the standard (and problematic) extrapolation method.

Looking at annual growth rates from national statistics is fine – or at least raises different issues – for thinking about short-term growth dynamics (i.e., who is in crisis, who is recovering, who may be overheating).  But for considering longer-run comparisons, say over 5-10 years or longer, you unfortunately cannot avoid worrying about comparable prices and some sort of purchasing power adjustment.

Whether or not you like our specific proposal, the main takeaway point is the same: do not rely on just one growth series.  Check that your claims (or anyone else’s) hold across different versions of the Penn World Tables, and – if you are focused on annual growth rates – look also at estimates from the World Bank’s World Development Indicators.

If you are interested in these issues more broadly, see the papers presented at the ”Measuring and Analyzing Economic Development” conference at the University of Chicago today.

‘PREPARING FOR THE INEVITABLE BURSTING BUBBLE,’ the Your Money column in the N.Y. Times. Pass it on!

In Uncategorized on February 27, 2010 at 01:47


Preparing for the Inevitable Bursting Bubble


Published: February 26, 2010

Financial bubbles are a way of life now. They can upend your industry, send your portfolio into spasms and leave you with whiplash. And then, once you’ve recovered, the next one will hit.

How are you preparing for the next bubble?

Or so you might think, as a veteran of two gut-wrenching market declines and a housing bubble over the last decade.

There’s plenty of reason to expect more surprises, given the number of hedge funds moving large amounts of money quickly around the world and the big banks making their own trades.

Individuals, as always, may be tempted to make their own financial bets, too. Last time, they bought overpriced homes with too much borrowed money. Next time, who knows what the bubble will be? And that’s the problem, as it always is. How do you identify the next thing that will pop? Is it China? Or Greece? Or Treasury bonds? It is difficult to predict and make the right defensive (or offensive) moves at the correct moment to save or make money.

Still, if you want to better insulate yourself from bubbles — however often they may inflate — there are plenty of things you can do. Your debt levels matter, and you may want to consider a more flexible investment strategy. But perhaps most important, this is a mental exercise that begins and ends with an honest assessment of your long-term goals and how you handle the emotional jolts that come from the bubbles that burst along the way.

FIXED EXPENSES Start with the basics. The less you have to pay toward monthly obligations, the better off you are, and that’s especially true at a time of economic disruption. You certainly wouldn’t want any bills increasing, so now’s a good time to refinance to a fixed-rate mortgage.

Whittle down student loan and credit card debt, too, and pay cash for your car if possible. “Flexibility is priceless in a time of panic,” said Lucas Hail, a financial planner with Foster & Motley in Cincinnati.

SELF-RELIANCE Then take a hard look at how much you should rely on promises from the government. Social Security and Medicare may not fit the traditional definition of bubbles, but that hasn’t stopped Rick Brooks from advising his financial planning clients to expect less from both programs. “Something that is not sustainable will not continue. It just can’t,” he said of Medicare.

Mr. Brooks, the vice president for investment management with Blankinship & Foster in Solana Beach, Calif., said anyone under 50 should assume that Medicare will look nothing like it does now and examine private health insurance premiums for guidance as to what may need to be spent on health care in retirement. Meanwhile, the firm advises current retirees to assume a 20 percent cut in Social Security benefits at some point.

Bedda D’Angelo, president of Fiduciary Solutions in Durham, N.C., has an equally stark outlook on long-term employment risk. If there are two adults in the household, your goal should probably be to have two incomes instead of one. “I do believe that unemployment is inevitable,” she said, adding that people who think they are going to retire at 65 should save for retirement as if they will be forced out of the work force in their mid-50s.

PORTFOLIO TACTICS Perhaps you did what you thought you were supposed to during the last decade. You got religion and stopped trading stocks. Then, you split your assets among various low-cost mutual funds and added money regularly. And the results weren’t quite what you hoped.

Tempted to make big bets on emerging markets or short Treasury bills? You’ve landed in the middle of the debate between those who favor a more passive asset allocation and those who prefer something called tactical allocation.

The first camp sets up a practical mix of investments, according to a target level of risk, and then readjusts back to that mix every year or so.

They frown on the hubris of the tactical practitioners. To make a tactical approach work, they note, you need to know what the right signals will be to buy and sell everything from stocks to gold, during every future market cycle. Then, these tacticians need to have the discipline to act each and every time. This is extraordinarily hard.

The tacticians, however, believe they have no choice. “What consumers need to know is that no matter how comforting it is to believe a formulaic approach or prepackaged investment product will allow them to put their financial future on autopilot, our current and future financial environment will require advice, diligence, education and responsiveness, which takes into account strategic consideration of geopolitical and economic relationships,” as Ryan Darwish, a financial planner in Eugene, Ore., put it to me this week.

Mr. Darwish scoffed at the notion of mere bubbles and said he thought that more fundamental and far-reaching shifts were under way, like the transfer of economic power from the United States to China and other nations.

A growing number of financial planners are embracing a middle, more measured approach: If diversification across stocks, bonds and other asset classes has proved to be a good thing in most investing environments, why not diversification around investment approaches?

“I am not a financial genius, but the geniuses are even worse off because they’re anchored on one philosophy,” said David O’Brien, a financial planner in Midlothian, Va. So he and a growing number of his peers have added some strategies to their baseline portfolios aimed at losing less during bubbles while still gaining in better times. “We’re not trying to shoot for the moon,” he added.

These tactics can include managed futures, absolute return funds, merger arbitrage and other approaches that will get their own column someday.

The embrace of all this even led one investment professional I spoke with this week to express the ultimate sacrilege: It really is different this time.

Thomas C. Meyer of Meyer Capital Group in Marlton, N.J., noted that many of these alternative strategies were not even available in mutual-fund form three to four years ago. So that’s different. He’s now putting 30 percent of his clients’ equity portfolios into such investments.

The big change, however, is that the baby boomer money is getting older. People are further along in their careers than they were during the market crash in 1987, and they can’t rely on pensions as so many more near retirees could in the 1980s (while shrugging off stock market volatility). And the boomers don’t have as much time to make up lost ground, especially if they’re already retired.

“Losing less means a lot right now,” Mr. Meyer said. “So we want to suck volatility out where we can.”

MATTER OF THE MIND But can you live with less volatility — and the permanent end of occasional portfoliowide returns in the teens or higher? Markets run on greed and fear; bubbles expand and deflate thanks to outsize versions of each. One of the few things you can predict about bubbles is that they will test your conviction on where you sit along the fear-greed continuum.

And once they pop, you’ll know a bit more about how your mind works than you did before.

This last downturn was severe enough that about 10 percent of Steven A. Weydert’s clients realized that they had overestimated their own risk tolerance. “Ideally, with an asset allocation, you never want to look back and say you’re sorry,” said Mr. Weydert of Bowyer, Weydert Wealth Planning Partners in Park Ridge, Ill.

So rather than trying to predict the number and type of bubbles, it may make more sense to look inward when trying to predict the future. Bob Goldman, a financial planner in Sausalito, Calif., said that clients often looked at him blankly when he asked them what it was they imagined for themselves in the future. Sometimes, they need to go home and figure out what sort of life it is that they’re saving for — and how much (or little) it might cost.

“People come in and talk about how we all know that inflation is going to explode next year,” Mr. Goldman said. “Well, we don’t all know that. We don’t know anything. But we can know something about our own lives, and there is a person we can talk to about that. A person in the mirror.”

‘VOLCKER RULES?, ‘ by Simon Johnson at baselinescenario .com.

In Uncategorized on February 25, 2010 at 15:39

Volcker Rules?

Posted: 24 Feb 2010 03:13 AM PST

By Simon Johnson

Bloomberg reports this morning that Treasury is gently letting the Volcker Rule (limiting proprietary trading for big banks) slip – Secretary Geithner would grant greater discretion to regulators which, in today’s context, most likely means not make the restriction effective.

This step is consistent with the broader assessment of the Volcker Rules that Peter Boone and I have in The New Republic (print and on-line): the underlying principles are sound, but the Rules have not been well-designed, and top people in the administration show little sign of wanting to make them effective.  This dimension of financial reform does not appear to be headed anywhere meaningful – and the main issues (bank size, capital, and derivatives) are not yet seriously on the table.

In the recent Senate Banking hearings on the Volcker Rules, John Reed – former head of Citibank – was adamant that the Volcker Rules made sense and could be made to work.  His point is that the executives know who is taking risk with the bank’s balance sheet – it’s a well-defined group within any bank with its own (speculative) culture – and this should be discontinued for banks that are in any sense too big to fail.

You really do not want high octane speculators at the heart of this country’s largest banks.   Make banking boring, Reed argues with conviction.

‘HOW LONG CAN THE U.S. DOLLAR DEFY GRAVITY?, ‘ from Reuters via A long & very thorough primer on where the dollar is and is likely to be down the road. DOWN, DOWN, DOWN……

In Uncategorized on February 23, 2010 at 18:00

How long can the U.S. dollar defy gravity?


By Steven C. Johnson, Kristina Cooke and David Lawder

NEW YORK/WASHINGTON (Reuters) – The only time the U.S. dollar ever took a serious shellacking in the marketplace, the wounds were almost entirely self-inflicted.

Facing mounting inflation and the escalating cost of the Vietnam War, President Richard Nixon, on August 15, 1971, took the United States off the gold standard, which had been in place since 1944 and required that the Federal Reserve back all dollars in circulation with gold.

The move amounted to a made-in-America double-digit devaluation, shocking the country’s foreign creditors.

Deep inside the New York Federal Reserve Bank’s fortress in lower Manhattan, Scott Pardee, then 34, was fielding frantic calls from central bankers around the world. They were demanding the United States cover the foreign exchange risk on their reserves.

“The whole roof came in on us,” recalled Pardee, a former New York Fed staffer who is now an economics professor at Vermont’sMiddlebury College. “That is the kind of situation the U.S. doesn’t want to be in.”

Nearly 40 years later, the dollar still dominates world trade. At the height of the financial crisis in 2008, investors fled to the dollar as a temporary safe haven. But the dollar has been falling steadily since 2002, and as the world economy recovered last year, dollar selling resumed, reviving doubts about how long it could remain the world’s unrivaled reserve currency.

The Greek debt crisis, which has sent investors stampeding back into the U.S. currency, has provided a reprieve. The dollar has gained some 10 percent against the euro since December. And following the Fed’s decision last week to hike the discount rate it charges banks for emergency loans, the dollar rose even higher as some investors bet it would benefit from the eventual end to the Fed’s post-crisis regime of easy money.

But a number of economists, investors and officials here and abroad interviewed for this story say the longer-term prognosis is far from rosy.

As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion — but perhaps not as slow as some might think. If the world loses confidence in U.S. policies, “there’d be hell to pay for the dollar,” Pardee said. “Sooner or later, the U.S. is going to have to pay attention to the dollar.”

French President Nicolas Sarkozy isn’t on anybody’s short list for the Nobel Prize in economics. But at January’s World Economic Forum in Davos Sarkozy proposed, to scattered applause, creating a new version of the Bretton Woods currency accord, which set up the very gold standard that Nixon brought crashing down.

Most economists doubt a return to the gold standard is feasible in today’s interconnected world, with so much capital crossing borders at the click of a mouse.

Yet, as Gian Maria Milesi-Ferretti, a foreign exchange expert at the International Monetary Fund in Washington, put it: “Post-crisis, a lot more things are on the table. It is true among policymakers and in the markets that people are much more willing to look at unconventional proposals and even some proposals that may seem antiquated.”


Some argue the dollar’s recent rally against the euro and yen (it’s up almost 6 percent against the Japanese currency since December) is less a vote of confidence than a realization that it’s simply the best of a bad bunch.

Per Rasmussen, a retired currency trader who worked at Chase in the late 1970s in London, called it a “reverse beauty pageant” in which investors pick the “least ugly” contestant. Since rising above $1.50 in November, the euro has tumbled more than 10 percent and was last changing hands around $1.3550, near a nine-month low.

The currency has been battered by doubts about whether Greece and other wobbly euro zone economies can manage the spending cuts needed to rein in out-sized budget deficits. The worries have weakened confidence in the whole concept of European monetary union.

Thomas Kressin, who helps manage PIMCO’s $100 million GIS FX strategy fund, said the euro is in danger of entering into an extended downtrend that takes it as low as $1.22 — which he described as fair value — over the next three to five years.

But the euro’s lurch lower has done nothing to change traders like Axel Merk’s dim view of the dollar’s future.

Based in Palo Alto, California, Merk has been trading for 16 years and is currently president and portfolio manager of Merk Investments, the biggest mutual fund manager dealing exclusively with currencies.

He acknowledges he has had to scramble in his short-term funds to avoid being on the wrong side of the euro’s nosedive. But over the next decade and beyond, Merk said the dollar has nowhere to go but down.

Investors will balk at “reckless U.S. fiscal and monetary policies” and start looking for alternatives to the U.S. currency, he said.

Others might take refuge in commodities. A recent U.S. Securities and Exchange Commission filing showed billionaire investor George Soros’New York-based firm more than doubled its bet on the price of gold during the fourth quarter.

Merk, whose $550 millionHard Currency Fund is designed to profit from a steady dollar decline, said he believes Washington is banking on a gradual dollar devaluation to shrink its monstrous debt and fuel an export boom to propel the economy.

“Now I am convinced that (U.S. authorities) consider a weaker dollar the solution to many of their problems. But you can’t turn your policies upside down and expect the rest of the world to put up with it forever.”

That view is at odds with the official line from U.S. policymakers. They insist that “a strong dollar is in the U.S. interest,” a phrase repeated so often by former Treasury Secretary Robert Rubin in the 1990s it became his mantra. The person in the job today, Timothy Geithner, has made this mantra his own. Treasury officials, who routinely defer to the Treasury chief as the only authorized spokesman for dollar policy, declined to provide comments for this story.


What’s clear is that America’s debt-holders aren’t the passive, pliant bunch they used to be. Some of the biggest holders of U.S. dollar assets are also among the fastest growing economies and they are hardly bashful about criticizing U.S. policies, particularly now that the financial crisis has eroded America’s influence and its reputation for sound economic management.

China alone holds $2.3 trillion in foreign exchange reserves, with nearly $800 billion in U.S. Treasury debt. And at a press conference last year, Premier Wen Jiabao did not mince words: “We have lent a massive amount of capital to the United States and of course we are concerned about security of our assets. To speak truthfully, I do indeed have worries.” Terrence Checki, who has acted as the Federal Reserve Bank of New York’s chief international trouble-shooter for two decades, warns that the U.S. cannot afford to ignore such concerns.

“We are no longer alone as the central axis for the global economy,” he told a gathering of influential bankers and policy-makers during a Foreign Policy Association dinner at New York’s St Regis hotel in December. That, he added, implies “recognizing that our leverage will not be what it once was. We also need to be attentive to the messages we receive, such as rumblings about the dollar and our policies and priorities, even when we disagree with them.”

History suggests that a currency is supplanted the same way Ernest Hemingway said a man goes broke: gradually, then suddenly. In terms of economic might, the United States surpassed Britain in the late 19th century. But it took another 60 years and two world wars to strip sterling of its reserve status.

Even so, some worry time is not on the United States’ side. Emerging markets already account for roughly half of global output and that share is rapidly increasing. In 2003, Goldman Sachs said the size of China’s economy would surpass that of the United States by 2041. Five years later, it revised the forecast to 2027. China is expected to surpass Japan as the world’s second largest economy this year.

All of which would be fine were it not for the fact that the United States continues to live beyond its means. The recent spike in borrowing and spending following the financial crisis is creating a debt burden that, in the word of Moody’s Investors Service, is trending “clearly, continuously upward.”


For the last 60 years, reserve currency status has conferred upon the United States what former French President Valery Giscard d’Estaing, during his time as finance minister, called “the exorbitant privilege.”

Because the dollar is in high demand, U.S. borrowing costs remain low. That makes it easier for the government to fund domestic priorities and military commitments and the average citizen to buy a home or start a business.

It also means the United States need not borrow or repay debts in foreign currencies, making the value of its currency a less urgent concern than it would be for other borrowers who borrow and pay for imports with dollars.

But such easy access to capital has led to huge deficits. With Americans spending more than they save, the money to finance the shortfalls has to come from abroad.

“We are plainly overextended in our budgetary terms and in our dependence on foreign capital; we resort to the kindness of strangers to meet our deficits,” said former Federal Reserve Chairman Paul Volcker at an Economic Club of New York speech last month. Volcker is now head of President Barack Obama’sEconomic Recovery Advisory Board.

That kindness probably has a limit.

China and Russia have both talked publicly about long-term alternatives to the dollar. Some central banks, including Russia’s, have said they intend to hold a greater amount of their foreign exchange reserves in other currencies.

Chinese central bank governor Zhou Xiaochuan also made waves last year when he said the dollar should one day be replaced, perhaps by a “super-sovereign” reserve currency based on Special Drawing Rights, the IMF’s in-house unit of account.

Economists have interpreted the comments as an attempt to give the yuan, China’s currency, a more prominent role in global finance, in keeping with the nation’s growing clout on the world stage.

Of course, that won’t happen overnight.

“There might be some progress toward multi-polarization of the international monetary regime, but there will be no immediate change to the dollar’s role as the main international currency,” said Zhang Zhigang, chief economist with the China Center for International Economics Exchanges.

But over the last year, China has voted with its pocketbook. It quietly struck currency swap accords worth some 650 billion yuan ($95 billion) with central banks in Asia, Latin America and Eastern Europe that allow importers to pay for Chinese goods in yuan instead of dollars.

That could set the stage for greater use of the yuan for offshore financial and investment purposes. And that is a precondition if the currency is to achieve greater international status.

For now, however, central bank reserve managers have few options beyond the dollar. No country is close to outranking the United States — economically, militarily or politically. The euro, which many see as the dollar’s most immediate rival, is tied to an economic area with no common political or fiscal policy. That’s part of what makes solving Greece’s debt woes so difficult.

It also lacks a common bond market. Veteran Brown Brothers Harriman currency strategist Marc Chandler likens Europe’s sovereign bond markets to those for U.S. municipal debt — lots of issuers of varying size and credit quality, but none that on its own can rival the deep, liquid U.S. Treasury market.

The U.S. Treasury, in an addendum to its October 2009 currency report, cited the disparate sovereign debt markets as the key reason the euro doesn’t take an equal share of global reserves, even though the eurozone approximates the United States in economic power.

But other rivals will likely continue to gain strength. Ten years ago, China “was hardly even on the radar screen” in Washington, said Jeffrey Garten, a professor at the Yale School of Management and a former undersecretary of commerce during the Clinton administration.

“So people who say their currency is nowhere near an international currency and that it’s going take at least 20 or 30 years — I think they’re living in a dreamworld,” Garten said.


As they open up and develop their capital markets, emerging economies such as China, Brazil or India could see their currencies occupy a larger portion of central bank reserves in coming decades, according to the October U.S. Treasury report.

It also asserts that as long as the United States maintains sound macroeconomic policies and open, deep and liquid financial markets, the dollar will remain “the major reserve currency.”

Some worry, however, that the parlous state of U.S. public finances makes betting on long-term dollar dominance dicey. The White House this month said the 2010 budget deficit would reach $1.565 trillion — at nearly 11 percent of output, the largest shortfall since World War II.

But America was running large trade and budget deficits before the financial crisis. “We went into the crisis in a weak fiscal position,” said C. Fred Bergsten, a former assistant Treasury secretary and current director of the Washington-based Peterson Institute for International Economics.

Dean Baker, co-director of the Center for Economic Policy Research in Washington, said U.S. finances are still manageable and a weaker dollar is necessary to boost exports, cut the trade deficit and end a multi-decade spending binge.

Provided America invests in education and infrastructure, maintains high output and productivity and keeps people employed, he said it can overcome the challenges it faces.

“We are moving to a world that’s going to be multi-polar, a world where the dollar is not going to be as dominant as today,” he said. “But if we do things to keep the U.S. economy strong, we will be able to finance ourselves going forward.”

The United States found ready buyers for roughly $1.7 trillion in new debt issued in fiscal year 2009, which brought total debt held by the public to $7.89 trillion, some 55 percent of output.

There are, however, some early signs that buyers may be growing sated. Treasury plans to issue another $1.5 trillion to $2 trillion this year — a record $126 billion this week alone. Yet auctions for $41 billion in long-dated debt earlier this month attracted only modest interest. The yield demanded by buyers of fresh 30-year debt was the highest in more than two years.

The United States still pays less than 4 percent on its 10-year Treasury notes — well below an average of 7-9 percent in the 1980s and 1990s. But economists also worry about the government’s unfunded pension and health care liabilities. Last year, Dallas Fed President Richard Fisher estimated that the United States may be on the hook for as much as $99 trillion, much of it tied to Medicare. That’s about seven times the size of the entire U.S. economy.

“The bottom line is that we can’t keep borrowing at this pace forever,” said Kenneth Rogoff, Harvard University economist and former chief economist at the IMF. “That only works if the Chinese are willing to lend us unlimited amounts of money at near-zero interest rates, and that just isn’t going to last forever.”

When it ends, Rogoff said the U.S. will have to deal with higher interest rates, higher taxes and slower growth, all of which will further undermine its economic might.


Of course, much as the United States depends on Chinese savings to finance its deficit, China depends on U.S. consumers to keep buying its exports.

Few think this mutual dependence can last indefinitely. U.S. authorities and a number of economists claim the problem is China’s inflexible exchange rate that pegs the yuan to the dollar, thus keeping it undervalued to support exports.

Analysts at the Washington-based Peterson Institute say that given China’s massive growth, the yuan may be undervalued against the dollar by as much as 40 percent.

Since President Barack Obama assumed office, the U.S. has twice declined to label China a currency manipulator, a move that could trigger trade sanctions. But the administration has repeatedly complained of China’s unfair trade advantage.

Recently, the White House even pledged to double U.S. exports in five years, a goal that economists say would require a significantly weaker dollar.

It’s not clear how much other nations, particularly China, will go along.

In the post-Cold War era, currency talks are the rough equivalent of nuclear arms reduction negotiations. In language evocative of the U.S.-Soviet face-off, Chinese military officers have proposed punishing Washington with “a strategic package of counter-punches” that includes dumping U.S. government bonds.

While the military plays no role in setting China’s foreign exchange holdings, the comments underscored the rising level of tension and mistrust between the two powers.

Nicholas Lardy, a senior Peterson Institute fellow, dismisses such threats, noting that China’s vast dollar wealth would start to evaporate and its currency to rise if it started unloading Treasuries.

“The Chinese are in the classic dollar trap. They have so many dollars that they can’t diversify,” he said.

Marc Leland, head of Leland & Associates and deputy undersecretary of the Treasury during the first Reagan administration, said: “It’s only leverage if one thinks they can pull the trigger. I don’t think they can.”

Morgan Stanley Asia chairman Stephen Roach isn’t so sure. He said that if the U.S. eventually resorts to trade sanctions against China — not unthinkable in a U.S. election year, with the unemployment rate near 10 percent — Beijing would likely retaliate.

China might boycott a Treasury auction, he said, which could cause the dollar to plummet and interest rates to spike.

“I spend a lot of my time talking to the Chinese about that, and if it happened, I think they would feel compelled to stand up and take strong retaliatory actions, even though, yes, there would be consequences for them as holders of Treasuries and other dollar-denominated assets,” Roach said.

Merk, the investor who is betting against the U.S. currency, said the dollar’s future may depend on Washington assuming a more humble attitude.

“Once you believe that you are better and greater than everyone else, you have a problem,” he said, “because today, the competition is right around the corner.” That may be especially true for any winner of a reverse beauty context.

‘TAKING ON YOUR 2009 TAX RETURN, ‘ from Fidelity Viewpoints at

In Uncategorized on February 23, 2010 at 17:44

Taking on your 2009 tax return


The arrival of W-2 and 1099 forms and other tax documents in your mailbox means it’s time to start tackling your 2009 tax return. You’ll want to pay close attention this year because of wide-ranging new tax provisions.

Here are changes that might affect your tax situation—as well as last-minute tax-saving moves to consider now.

Reduce your taxable income

You’ve heard it many times but it bears repeating: One of the best ways to lower your federal tax liability is to reduce your taxable income. Although it’s generally too late to make 2009 contributions to a 401(k) or similar employer-sponsored plan, you can still make a 2009 tax-year contribution to a traditional individual retirement account (IRA), a health savings account (HSA), or a Simplified Employer Pension (SEP) IRA right up until the April 15 tax-filing deadline.

All three of these vehicles should allow you to deduct your contributions from your current-year taxable income if you meet deductibility requirements. In the case of a SEP (used primarily by self-employed individuals) or an IRA, taxes on deductible contributions and earnings are deferred until the money is withdrawn, typically in retirement.

Contributions to an HSA, on the other hand, are never taxed if the money is used for qualified medical expenses.

For 2009, you can contribute up to $5,000 to an IRA or $6,000 if you’re age 50 or older (by 12/31/2009). If your adjusted gross income was too high to allow you to make a deductible contribution to a traditional IRA in past years, be sure to take another look, because the phase-out limits have changed. (When deciding whether to make a deductible IRA contribution, however, consider your long-term retirement plans. A non-deductible contribution to a Roth IRA may make more sense in the long run than a tax deduction in the current year.)

For couples filing jointly, phase-out begins at $166,000 of modified adjusted gross income if one of them does not participate in a workplace retirement plan, and $89,000 if both have a workplace plan. If neither participates in a workplace plan, there’s no income limit for making a deductible contribution.

For single filers, who don’t participate in a workplace plan, there’s no income limit for deductible contributions to an IRA. For those who participate in a workplace plan, the phase-out begins at $55,000 of income.

Taxpayers with HSAs, meanwhile, can make 2009 contributions of up to $5,950 for a family and $3,000 for an individual ($1,000 additional if the primary account holder is 55 or older). SEP owners can contribute up to the lesser of $49,000 or 25% of income for the 2009 tax year.

Review new provisions

The American Recovery and Reinvestment Act of 2009 (better known as the economic stimulus package) and other legislation included a host of provisions aimed at helping specific segments of the economy, as well as families and individuals hit hard by the recession.

Some of the provisions are similar to federal tax breaks that have been available in the past, but they contain changes that may make them significantly more attractive. You can find a complete list of changes on the Internal Revenue Service Web site but here are several items that you don’t want to overlook, including some that you can still take advantage of if you haven’t already:

First-time and repeat homebuyer credits. The previous version of this tax credit allowed qualified first-time homebuyers to deduct up to $7,500 from their current-year tax bill, but they had to pay it back over time. Now, for homes purchased in 2009 and before May 1, 2010, the maximum credit is $8,000, and if the home remains your primary residence for three years, it does not need to be paid back. Congress also expanded the law to create a “long-term resident” credit of up to $6,500 for those who aren’t qualified first-time homebuyers. A buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

Modified adjusted gross income limits for these credits have increased for purchases after November 6, 2009. The phase-out range is now $125,000 to $145,000 for single filers and $225,000 to $245,000 for couples filing jointly. Homes costing more than $800,000 don’t qualify. For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns. Eligible taxpayers must buy or enter into a binding contract to buy a home by April 30, 2010, and settle on the purchase by June 30, 2010. Members of the Armed Forces and certain federal employees serving outside the United States have an extra year to buy a principal residence in the U.S. and still qualify for the credit.

Education expenses credit. There are three education-related credits: the Hope scholarship credit, the American Opportunity Tax Credit (a modification of the Hope), and the Lifetime Learning Credit. The American Opportunity Tax Credit increases the amount you can lop off your tax bill to a maximum of $2,500, from $1,800 last year. Plus, the credit now applies to four years of qualified college expenses (including course materials), and the income phase-out begins at $80,000 for single filers and $160,000 for couples filing jointly. The income limits for claiming the Lifetime Learning Credit also increased for 2009.

New vehicle deduction. If you bought a qualified new car or truck between 2/17/2009 and 12/31/2009, you might be able to deduct the state and local sales and excise taxes on up to $49,500 of the purchase price. You can take the deduction whether or not you itemize. The deduction begins to phase out at $125,000 of modified adjusted gross income for single taxpayers and $250,000 for couples filing jointly.

Energy credits. If you made certain energy-related upgrades to your property in 2009, you could be getting a bigger tax break than you expected. Congress bumped the credit for energy-efficiency improvements, such as better windows and insulation, to 30% of the cost (from the previous 10%). The cumulative credit you can take for 2009 and 2010 energy-efficiency improvements is capped at $1,500, but Congress removed the cap for newly installed energy-saving systems, including solar energy, geothermal heat pumps, and small wind turbine equipment.

Midwestern disaster relief. If you live in a Midwestern federally declared disaster area, be sure to find out if you qualify for any of the tax-relief provisions described in IRS Publication 4492-B.

Haiti earthquake contributions. Normally, charitable contributions are deductible only for the tax year in which they’re made. This year, however, you can deduct contributions you made after January 11 and before March 1, 2010, to a qualified charity for Haitian earthquake relief efforts. A note for high-income taxpayers: If your charitable contribution deduction for 2009 is restricted because of your income, you might want to wait to deduct your Haiti contribution until 2010, when the income restriction is dropped.

Unemployment provisions. If you received unemployment benefits in 2009, you can exclude the first $2,400 from your taxable income. Also, remember that you can deduct job-search expenses as a miscellaneous deduction, to the extent that all of your miscellaneous deductions exceed 2% of your adjusted gross income.

Itemize, or not?

The decision of whether to itemize your deductions or take the standard deduction deserves some extra attention this year. The standard deduction may be more attractive for several reasons, but rule changes could also increase your itemized deductions. Here’s an overview of the changes:

Standard deduction increase. If you choose not to itemize, the standard deduction is $11,400 (up $500 from 2008) for married taxpayers filing a joint return and $5,700 (up $250) for single filers. In addition, joint filers can tack on up to $1,000 of real estate tax paid; single filers, up to $500. Plus, as previously noted, the deduction for sales tax paid on a new vehicle can also be added to the standard deduction.

Increase in income threshold for itemized deduction phase-out. For 2009, the value of your itemized deductions is reduced when your adjusted gross income exceeds $166,800, regardless of filing status, compared with $159,950 in 2008.

Other expanded tax breaks. In addition to the more-favorable provisions already mentioned, tax-law changes have increased the phase-out thresholds for excluding Education Savings Bond interest and deducting student loan interest. Also, the amount of long-term care insurance premiums you can include as a deductible medical expense has increased.

Alternative minimum tax (AMT). The AMT has thrown a wrench into more than one carefully planned tax strategy by negating many potential deductions. For 2009, the AMT exemption amount increases to $46,700 for individuals and $70,950 for couples filing jointly. If you’re still affected by the tax, you’ll need to carefully consider its impact on your tax deduction strategies.

Remember any tax-loss carryforwards

Many investors sold investment assets in 2008 for less than their cost basis. If you have unused capital-loss carryforwards from 2008, or previous years, you generally should be able to use them to offset capital gains realized in 2009. If your losses exceeded your gains, you can generally use the excess to offset up to $3,000 of ordinary income ($1,500 married filing separately). Unused net capital losses can usually be carried forward in future tax years subject to applicable tax rules and limits.

Cut your tax-filing and preparation expenses

Don’t add to your tax-time pain by paying more than necessary to prepare and file your taxes. If you use a tax preparer, make sure you have gathered and organized the necessary documents, which will reduce the amount of time your preparer has to spend looking for missing and misfiled information.

Finally, don’t procrastinate. You are more likely to make a mistake if you are rushed.

“RISK MANAGEMENT over REWARD CHASING.” As quoted in ‘A FIVE-STEP GUIDE TO CONTAGION,’ by Todd Harrision at Via John Maudlin at Front Line Insights.

In Uncategorized on February 23, 2010 at 03:32

A Five-Step Guide to Contagion

By Todd Harrison Feb 10, 2010 7:35 am

Why European debt matters to the United States

Times are tough and those struggling to make ends meet have focused their efforts close to home.

That’s a natural instinct but it doesn’t change the fact that problems on the other side of the world affect us all. To fully understand the depth and complexity of our current conundrum, we must appreciate how we got here.

It is widely accepted that grieving arrives in five stages: denial, anger, bargaining, sadness, and acceptance. If we apply that psychological continuum to the financial market construct, it offers a valuable lens with which to view this evolving crisis.


In April 2007, policymakers assured an unsuspecting public that housing and sub-prime mortgage concerns were “well contained.” Minyanville took the other side of that trade and argued that the nascent contagion extended all the way around the world. (Read more in Well Contained?)

In August 2007, as the Dow Jones Industrial Average traded near an all-time high, Canadian officials told investors it would “provide liquidity to support the stability of the Canadian financial system and the continued functioning of the financial markets” before systemic contagion ensued. (See also The Credit Card)

In March 2008, Alan Schwartz, CEO of Bear Stearns appeared on CNBC to assuage concerns that his firm was facing a liquidity crisis. “Some people could speculate that Bear Stearns might have some problems since we’re a significant player in the mortgage business,” he said, “None of those speculations are true.”

On January 28 of this year, Greek Prime Minister George Papandreou offered that Greece was being victimized by rumors in the financial markets and denied seeking aid from European partners to finance the country’s budget deficit, according to Bloomberg. As we know, European issues are now staking claim as the next phase of the financial crisis.


Two of my Ten Themes for 2010 are relevant to this discussion. The first is the “tricky trifecta,” or the migration from societal acrimony to social unrest to geopolitical conflict. Populist uprising, the rejection of wealth, and an emerging class war are symptomatic of this dynamic, as is the unfortunate fact economic hardship traditionally serves as a precursor to war.

The other theme is the notion of “European Disunion,” as I wrote in early January:

The European Union is committed to the regional and economic integration of 27 member states, with sixteen countries sharing a common currency. That was a fine idea when it was first founded but the economic fallout of the financial crisis will put loyalties to the test.

Look for the Union to adopt more stringent guidelines in the coming year, including but not limited to distancing itself from the weaker links such as Greece and Ireland. Sovereign defaults, as a whole, should jockey for mind-share. This could conceivably spark a rally in the US Dollar, which could have ominous implications for the crowded carry trade.

European discontent continues to simmer with labor strikes and social strife as efforts are made to map an amenable plan before €20 billion ($28 billion) in Greek debt comes due in April and May. While that amount is far smaller than what financial firms faced in September 2008, the dynamic is eerily reminiscent. (Read also Pirate’s Booty)


By the time it was evident sub-prime mortgage woes weren’t contained, the damage already occurred. Our government reactively responded to the crisis by consuming the cancer in an attempt to stave off a car crash. (See also Shock & Awe)

As the European Union and International Monetary Fund wrestle with how to address the sovereign mess, our financial fate can be drilled down to one very simple question: Will we see contagion, as we did with Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), Bear Stearns and Lehman Brothers, or will the current congestion be contained in the context of an evolving globalization?

The bulls will offer that corrections must feel sinister if they’re to be truly effective. They’re right, of course, but I will remind you of a salient point made by Professor Peter Atwater on Minyanville. If sovereign lifeguards saved corporations when the financial crisis first hit, who is left to save the lifeguards?

Over the last few weeks, we’ve seen significant widening in overseas credit spreads, including Hong Kong, Switzerland, Indonesia, Malaysia, Portugal, and New Zealand. As markets are fluid and policy takes time, the lag must be factored into the fragile equation, particularly as the European Union is structurally interlinked.


We can talk about how the capital market construct forever changed, how our constitutional rights have been challenged or how the lifestyles of the rich conflict with the struggle to exist. While those dynamics remain in play, they miss an entirely more relevant point for purposes of this discussion. (See The Declaration of Interdependence)

Social mood and risk appetites shape financial markets. One of the greatest misperceptions of all time was that The Crash caused The Great Depression when The Great Depression actually caused The Crash.

It’s been a full year since Minyanville fingered Eastern Europe as a modern day incarnation of a sub-prime borrower. The question is therefore begged, what if Greece is Fannie Mae, Portugal is Freddie Mac, Spain is AIG, Argentina is Wachovia Bank, and Ireland is Lehman Brothers? (Also read Eastern Europe, Subprime Borrower)

Contagion, by definition, arrives in phases and we must remember that Greece is a symptom of the problem, not the problem itself. Regardless of what IMF or Euro Zone “cross border solution” we see, it’ll simply buy time, much like the bearded nationalization of Fannie and Freddie pushed risk out on the time continuum.

Given the trending direction of social mood and the discounting mechanism that is the market, the perception that defines our financial reality must remain front and center in the mainstream mindset.


In September 2008, we offered that the government invented fingers to plug the multitude of holes that sprang open in the financial dike. That imagery would again apply if there were viable fingers attached to a healthy and able arm.

While many dismiss the notion that Greece or Portugal “matter” in the global financial construct, I’ll explain why they might. Concerns in the Euro zone could manifest through a “flight to quality” in the US Dollar, as it has to the tune of 8% in the dollar index (DXY) since the December low.

Those hoping for a stronger greenback should be careful for what they wish, much like the “lower crude will be equity positive” crowd learned in 2008. In an “asset class deflation vs. dollar devaluation” environment, a weak currency is a necessary precursor to — but no guarantor of — higher asset class prices. (See Hyperinflation vs. Deflation)

The hedge fund community currently has the carry trade on in size. If the greenback continues to strengthen, the specter of an unwind increases in kind. Should that occur, asset class positions financed with borrowed dollars would come for sale across the board.

The point of recognition will eventually arrive that our debt issues are cumulative; when that happens, the contagion will no longer be contained. In the meantime, as we edge from here to there, be on the lookout for the unintended consequences of European austerity initiatives, including but not limited to social unrest and the abatement of risk appetites.

Risk management over reward chasing as we together find our way.

‘GENDER TRADE-OFFS,’ by Nancy Folbre in the N.Y. Times. Very interesting!

In Uncategorized on February 22, 2010 at 15:26

February 22, 2010, 6:00 AM

Gender Trade-Offs


Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

It’s pretty hard to get something for nothing. That’s one reason why economists like to analyze trade-offs.

Changing gender roles in our society have created some rather complicated trade-offs, and that helps explain why it’s hard to assess progress toward gender equality.

Women on nonfarm payrolls — a measure that includes part-time workers — now slightly outnumber men.  Employers find women attractive to hire in part because women typically earn less than men with the same education.

A recent comparative analysis of 21 countries by two sociologists at the University of Washington, Becky Pettit and Jennifer Hook, reports that women’s labor-force participation tends to be lower in countries where their earnings relative to men are higher.

For instance, in Germany and Italy, a smaller percentage of women work for pay than in the United States, but those who are employed earn more, on average, relative to men.  Women who overcome the obstacles to employment there tend to be high earners.

Across all countries, overall inequalities in wage income influence average differences in men’s and women’s earnings. So do public policies such as child care provision that help adults cope with trade-offs between paid and unpaid work — and, more broadly, between economic independence and family commitment.

These trade-offs remain sharply significant in the United States.

Median weekly earnings for women working full-time came to 80 cents for every dollar a man earns in 2008, compared to about 62 cents in 1970. But women are much less likely than men to work full time, year round, because they typically take time out to care for family members. One study that examines differences in earnings over a 15-year period shows women earning, on average, less than 40 cents for every dollar a man earns.

Women who don’t marry or have kids earn about the same as men with the same qualifications. Going without a family life seems a rather steep price to pay for equality.

Men experience a different, often less costly trade-off: Becoming a parent typically leads them to increase their hours of market work. They give up some leisure and some family time, but their earnings go up, along with their lifelong career prospects.

Married men devote significantly more time to housework and child care than they used to. But many fathers remain unmarried, and the risk of divorce remains relatively high, between 40 and 50 percent.

Divorced men are more likely to remarry than divorced women, and often successfully find someone younger and healthier than they who will take care of them as they age.

Some argue that the advent of no-fault divorce laws made it too easy for men to leave marriages, increasing women’s economic vulnerability. But the cost of staying in a bad marriage is quite high. Analysis of differences across states in implementation of no-fault rules reveals that they significantly lowered both women’s suicide rates and domestic violence, including murders of wives.

College-educated women seem better positioned than other women to bake their cake and eat it too. Relatively high earnings make them attractive to potential marriage partners and improve their bargaining power, which helps them persuade men to take on more responsibilities for family care.

Once married, they can use their earnings to buy high-quality substitutes for their own time, often from less-educated immigrant women providing domestic services, child care and elder care.

Partly because they tend to marry at a later age, when both they and their partners are more mature, college-educated women are less likely to divorce. If they do divorce, however, they’re better able to hire a good lawyer.

These factors may help explain why women are now more likely than men to enter and complete college. The access to better jobs that a diploma provides helps them improve the trade-off between independence and commitment.

That trade-off remains far more costly for less-educated women, who face a high risk of poverty when they become mothers.

‘THE NEW POOR: MILLIONS OF UNEMPLOYED FACE YEARS WITHOUT JOBS,’ by Peter S. Goodman in the N. Y. Times. It’s a new day out there folks. The SLOW jobless recovery.

In Uncategorized on February 22, 2010 at 05:24


Millions of Unemployed Face Years Without Jobs


Published: February 20, 2010

BUENA PARK, Calif. — Even as the American economy shows tentative signs of a rebound, the human toll of the recession continues to mount, with millions of Americans remaining out of work, out of savings and nearing the end of their unemployment benefits.

“There are no bad jobs now. Any job is a good job,” said Jean Eisen, who became unemployed more than two years ago.

Economists fear that the nascent recovery will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.

Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come.

Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to extend the payments, according to the Labor Department.

Here in Southern California, Jean Eisen has been without work since she lost her job selling beauty salon equipment more than two years ago. In the several months she has endured with neither a paycheck nor an unemployment check, she has relied on local food banks for her groceries.

She has learned to live without the prescription medications she is supposed to take for high blood pressure and cholesterol. She has become effusively religious — an unexpected turn for this onetime standup comic with X-rated material — finding in Christianity her only form of health insurance.

“I pray for healing,” says Ms. Eisen, 57. “When you’ve got nothing, you’ve got to go with what you know.”

Warm, outgoing and prone to the positive, Ms. Eisen has worked much of her life. Now, she is one of 6.3 million Americans who have been unemployed for six months or longer, the largest number since the government began keeping track in 1948. That is more than double the toll in the next-worst period, in the early 1980s.

Men have suffered the largest numbers of job losses in this recession. But Ms. Eisen has the unfortunate distinction of being among a group — women from 45 to 64 years of age — whose long-term unemployment rate has grown rapidly.

In 1983, after a deep recession, women in that range made up only 7 percent of those who had been out of work for six months or longer, according to the Labor Department. Last year, they made up 14 percent.

Twice, Ms. Eisen exhausted her unemployment benefits before her check was restored by a federal extension. Last week, her check ran out again. She and her husband now settle their bills with only his $1,595 monthly disability check. The rent on their apartment is $1,380.

“We’re looking at the very real possibility of being homeless,” she said.

Every downturn pushes some people out of the middle class before the economy resumes expanding. Most recover. Many prosper. But some economists worry that this time could be different. An unusual constellation of forces — some embedded in the modern-day economy, others unique to this wrenching recession — might make it especially difficult for those out of work to find their way back to their middle-class lives.

Labor experts say the economy needs 100,000 new jobs a month just to absorb entrants to the labor force. With more than 15 million people officially jobless, even a vigorous recovery is likely to leave an enormous number out of work for years.

Some labor experts note that severe economic downturns are generally followed by powerful expansions, suggesting that aggressive hiring will soon resume. But doubts remain about whether such hiring can last long enough to absorb anywhere close to the millions of unemployed.

A New Scarcity of Jobs

Some labor experts say the basic functioning of the American economy has changed in ways that make jobs scarce — particularly for older, less-educated people like Ms. Eisen, who has only a high school diploma.

Large companies are increasingly owned by institutional investors who crave swift profits, a feat often achieved by cutting payroll. The declining influence of unions has made it easier for employers to shift work to part-time and temporary employees. Factory work and even white-collar jobs have moved in recent years to low-cost countries in Asia and Latin America. Automation has helped manufacturing cut 5.6 million jobs since 2000 — the sort of jobs that once provided lower-skilled workers with middle-class paychecks.

1 2 3 4 NEXT PAGE


‘HOW FREE MARKET THEORY DESTROYED THE FREE MARKET,’ by Paul Craig Roberts at The Second Wave. ‘The crisis is not over.’ WHAT A READ. TAKE HEED FOLKS.

In Uncategorized on February 22, 2010 at 04:16

How Free Market Theory Destroyed the Free Market

January 20, 2010


Is the financial crisis over? Is the recovery for real and, if not, what are Americans’ prospects? The short answer is that the financial crisis is not over, the recovery is not real, and the U.S. faces a far worse crisis than the financial one. Here is the situation as I understand it:

The global crisis is understood as a banking crisis brought on by mindless deregulation of the U.S. financial arena. Investment banks leveraged assets to highly irresponsible levels, issued questionable financial instruments with fraudulent investment grade ratings, and issued the instruments through direct sales to customers rather than through markets.

The crisis was initiated when the U.S. allowed Lehman Brothers to fail, thus threatening money market funds everywhere. The crisis was used by the investment banks, which controlled U.S. economic policy, to secure massive subsidies to their profits from a taxpayer bailout and from the Federal Reserve. How much of the crisis was real and how much was hype is not known at this time.

As most of the derivative instruments had never been priced in the market, and as their exact composition between good and bad loans was unknown (the instruments are based on packages of securitized loans), the mark-to-market rule drove the values very low, thus threatening the solvency of many financial institutions. Also, the rule prohibiting continuous shorting had been removed, making it possible for hedge funds and speculators to destroy the market capitalization of targeted firms by driving down their share prices.

The obvious solution was to suspend the mark-to-market rule until some better idea of the values of the derivative instruments could be established and to prevent the abuse of shorting that was destroying market capitalization. Instead, the Goldman Sachs people in charge of the U.S. Treasury and, perhaps, the Federal Reserve as well, used the crisis to secure subsidies for the banks from U.S. taxpayers and from the Federal Reserve. It looks like a manipulated crisis as well as a real one due to greed unleashed by financial deregulation.

The crisis will not be over until financial regulation is restored, but Wall Street has been able to block re-regulation. Moreover, the response to the crisis has planted seeds for new crises. Government budget deficits have exploded. In the U.S. the fiscal year 2009 federal budget deficit was $1.4 trillion, three times higher than the 2008 deficit.  President Obama’s budget deficits for 2010 and 2011, according to the latest report, will total $2.9 trillion, and this estimate is based on the assumption that the Great Recession is over. Where is the U.S. Treasury to borrow $4.3 trillion in three years?

This sum greatly exceeds the combined trade surpluses of America’s trading partners, the recycling of which has financed past U.S. budget deficits, and perhaps exceeds total world savings.

It is unclear how the 2009 budget deficit was financed.  A likely source was the bank reserves created for financial institutions by the Federal Reserve when it purchased their toxic financial instruments. These reserves were then used to purchase the new Treasury debt. In other words, the budget deficit was financed by deterioration in the balance sheet of the Federal Reserve. How long can such an exchange of assets continue before the Federal Reserve has to finance the government’s deficit by creating new money?

Similar deficits and financing problems have affected the EU, particularly its financially weaker members. To conclude: the initial crisis has planted seeds for two new crises: rising government debt and inflation.

A third crisis is also in place. This crisis will occur when confidence is lost in the U.S. dollar as world reserve currency. This crisis will disrupt the international payments mechanism. It will be especially difficult for the U.S. as the country will lose the ability to pay for its imports with its own currency. U.S. living standards will decline as the ability to import declines.

The financial crisis is essentially a U.S. crisis, spread abroad by the sale of toxic financial instruments. The rest of the world got into trouble by trusting Wall Street. The real American crisis is much worse than the financial crisis. The real American crisis is the offshoring of U.S. manufacturing, industrial, and professional service jobs such as software engineering and information technology.

Jobs offshoring was initiated by Wall Street pressures on corporations for higher earnings and by performance-related bonuses becoming the main form of managerial compensation. Corporate executives increased profits and obtained bonuses by substituting cheaper foreign labor for U.S. labor in the production of goods and services marketed in the U.S.

Jobs offshoring is destroying the ladders of upward mobility that made the U.S. an opportunity society and eroding the value of a university education. For the first decade of the 21st century, the U.S. economy has been able to create net new jobs only in domestic nontradable services, such as waitresses, bartenders, sales, health and social assistance and, prior to the real estate collapse, construction. These jobs are lower paid than the jobs were that have been offshored, and these jobs do not produce goods and services for export.

Jobs offshoring has increased the U.S. trade deficit, putting more pressure on the dollar’s role as reserve currency. When offshored goods and services return to the U.S., they add to imports, thus worsening the trade imbalance.

The policy of jobs offshoring is insane. It is shifting U.S. GDP growth to the offshored locations, such as China, thus halting growth in U.S. consumer incomes. For the past decade, U.S. households substituted an increase in indebtedness for the lack of growth in income in order to continue increasing their consumption. With their home equity refinanced and spent, real estate values down, and credit card debt at unsustainable levels, it is no longer possible for the U.S. economy to base its growth on a rise in consumer debt. This fact is a brake on U.S. economic recovery.

Stimulus packages cannot substitute for the growth in real income. As so many high value-added, high productivity U.S. jobs have been offshored, there is no way to achieve real growth in U.S. personal incomes. Stimulus spending simply adds to government debt and pressure on the dollar, and sows seeds for high inflation.

The U.S. dollar survives as reserve currency because there is no apparent substitute. The euro has its own problems. Moreover, the euro is the currency of a non-existent political entity. National sovereignty continues despite the existence of a common currency on the continent (but not in Great Britain). If the dollar is abandoned, then the result is likely to be bilateral settlements in countries’ own currencies, as Brazil and China now are doing. Alternatively, John Maynard Keynes’ bancor scheme could be implemented, as it does not require a reserve currency country. Keynes’ plan is designed to maintain a country’s trade balance. Only a reserve currency country can get its trade and budget deficits so out of balance as the U.S. has done. The prospect of U.S. default and/or inflation and decline in the dollar’s exchange value is a threat to the reserve system.

The threats to the U.S. economy are extreme. Yet, neither the Obama administration, the Republican opposition, economists, Wall Street, nor the media show any awareness. Instead, the public is provided with spin about recovery and with higher spending on pointless wars that are hastening America’s economic and financial ruin.