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Fed Preview: Time to Forge Ahead
by Carl Tannenbaum of Northern Trust,
I got home at about 8 one evening last week, and it looked like a bomb had gone off inside my house. The shrapnel included empty pop cans, open bags of snacks, and scores of used napkins. The sink was filled with dirty dishes, and laundry (clean, or dirty?) was strewn about the floor. No one was home, leading me to suspect that the explosion had done them all in.
The ECB: No Rest for the Weary
by Carl Tannenbaum of Northern Trust,
The economic picture in Europe is worsening, exposing flaws in the foundation of the euro compact. The European Central Bank is trying its best, but remains hindered by its charter. European policy makers should focus on stabilizing the situation first, and seeking retribution later.
Whats A House Really Worth?
by Carl Tannenbaum of Northern Trust,
Despite the well-documented correction in real estate prices, our property taxes have been slow to react. My wife is on a singular mission to correct this asymmetry, collecting evidence from a variety of sources that suggest that our house is relatively worthless. Good thing we don't need a home equity loan.
Setting Up for Jackson Hole
by Carl Tannenbaum of Northern Trust,
I was once favored with an invitation to the Federal Reserve's annual retreat in Jackson Hole, Wyoming. It was an amazing experience; the participant list was a Who's Who of global economic policy makers. I called my mother to brag, but all she wanted to talk about was the mischief that she and my father had gotten into while honeymooning in the area some fifty years earlier. Too much information.
Citius, Altius, Fortius
by Carl Tannenbaum of Northern Trust,
Countries across the globe seek faster, higher, stronger growth. Central banks in the United States and Europe are both seeking new ways to stimulate economic activity. Recent news from the housing market has been encouraging, but the race to recovery is likely to be a marathon, not a sprint. Headwinds blowing from Europe and China will continue to present significant downside risks to U.S. economic growth.
An Excess of Reserve
by Carl Tannenbaum of Northern Trust,
Bank credit has expanded nicely over the past two years, yet financial institutions continue to hold substantial pools of excess reserves with the Fed. Some suggest that this extended conservatism is hindering the economic expansion, and are calling on the Fed to lower the rate it pays on excess reserves. The ECB has already taken this step. We think that a cut in the interest rate on excess reserves is unlikely.
Peaks and Valleys
by Carl Tannenbaum of Northern Trust,
Second quarter economic activity disappointed on many fronts. The drama in Europe has taken its toll on exports, markets, and confidence. The 2012 election is starting to take shape, amid the approach of a huge fiscal "cliff" at the national and local level. The negativity and uncertainty which often surround Presidential campaigns may hinder economic and market performance. This months special focus is on the Fed's recent Survey of Consumer Finances, and what it means for our economy.
Central Banks Take Steps to Stimulate Economic Growth
by Asha Bangalore of Northern Trust,
Following the Feds extension of Operation Twist on June 20, 2012, the European Central Bank (ECB), Peoples Bank of China (PBoC), and the Bank of England (BoE) put in place new monetary policy support today as gloomy economic data have trickled in during recent weeks.
What Next For The Euro-Zone?
by Victoria Marklew of Northern Trust,
The European Union has just completed its 20th make or break Summit in a little over two years, and actually managed to beat expectations. Two key agreements were reached on June 28-29: expanding the remit of the two bailout funds to include sovereign debt purchases and eventually direct banking sector support; and creating a unified banking regulator for the Euro-zone under the auspices of the European Central Bank (ECB).
Patient But Vigilant Fed
by Asha Bangalore of Northern Trust,
Chairman Bernanke failed to offer broad hints about an imminent round of financial accommodation or an extension of Operation Twist (Maturity Extension Program) in his testimony on June 7. There were three key takeaways pertaining to the near term economic outlook from Bernanke's testimony and response to questions.
Labor Market Issues Hold Down Consumer Confidence Index in May
by Asha Bangalore of Northern Trust,
The Conference Boards Consumer Confidence Index slipped in May to 64.8 from 68.7 in the prior month. The sub-components of the index measuring the present situation (45.9 vs. 51.2 in April) and expectations of consumers (77.6 vs. 80.4 in April) declined in May. The Case-Shiller home price index rose 0.1% in March, after a 0.2% gain in the prior month. The back-to-back monthly increase is noteworthy because one gains of this sort were seen several ago, excluding the period when the first-time home buyer program was in place.
Sorting Out the Fiscal Cliff Issue
by Asha Bangalore of Northern Trust,
Under current law, the federal budget deficit in fiscal year 2013 will show a drastic decline from fiscal year 2012 as a result of scheduled increases in taxes and reductions in government spending. The Congressional Budget Office (CBO) estimates that the federal budget deficit of $1.17 trillion in fiscal 2012 will shrink to $612 billion in fiscal 2013. This sharp reduction of the federal budget deficit is referred to as the fiscal cliff in the financial media and macroeconomic discussions.
Don't End the Fed, Mend the Fed
by Paul Kasriel of Northern Trust,
Congressman Ron Paul has written a book entitled End the Fed. I have to admit that I have not read his book. But I have read many of Congressman Pauls excellent (in my opinion) essays on monetary theory and policy. Congressman Paul likely argues in End the Fed that the Fed and other central banks have created monetary "mischief" in the past and are likely to continue to do so in the future. Because of this monetary mischief, I assume that Congressman Paul would like to replace the Fed and other central banks with some form of a gold standard. I share Congressman Pauls sentiments.
Kasriels Parting Thoughts Mortgage Refinancing: Stimulative or Redistributive?
by Paul Kasriel of Northern Trust,
It is a little acorn for you to bury today and dig up in the future when some partial-equilibrium yahoo on CNBC says that total spending in the economy will get a boost as households refinance their mortgages at lower interest rates. Yes, the folks doing the refinancing will now have more income left over after making their monthly mortgage payment to spend on other things. But what about the ultimate lender who has had his higher-interest security called away from her? She was earning 6% on her loan but now is able to earn only 4% on the same type of loan.
The Cyclical Macroeconomic Impact of Taxmageddon 2013 and Seniors Worried about the Debt
by Paul Kasriel of Northern Trust,
December 31, 2012, the current federal personal income tax rate structure will revert to the structure that prevailed at the close of the Clinton administration. And among other things, tax rates also will go up because of the additional taxes on investment income as part of the Affordable (Health) Care Act. All told, tax revenues will increase by about $500 billion in 2013, which is about 3.2% of the Blue Chip survey average forecast of 2012 nominal GDP.
Kasriels Parting Thoughts Recent Federal Budgetary Trends: Facts, Not Opinions
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012. The year-over-year growth in the 12-month moving total of federal outlays peaked at 19.7% in July 2009. In March 2012, the year-over-year change in the 12-month moving total of federal outlays was minus 1.1%. The median growth in the year-over-year moving total of federal outlays from December 1955 through March 2012 is 6.6%.
Recent Federal Budgetary Trends: Facts, Not Opinions
by Paul Kasriel of Northern Trust,
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012.
Small Businesses Less Optimistic in March
by Asha Bangalore of Northern Trust,
The Small Business Optimism Index of the National Federation of Independent Business fell in March to 92.5 from 94.3 in the prior month. The March decline is the first after six monthly gains since September 2011. Although the percentage of respondents indicating that poor sales is problematic has held steady for two straight months, it has failed to show an improvement in March. The index tracking plans of firms to increase employment declined to zero from 4.0 in the prior month, the poorest showing since October 2008, which was during the global financial turbulence.
The Greenback Remains the Preferred Choice of Official Foreign Exchange Reserves
by Asha Bangalore of Northern Trust,
The IMFs Currency Composition of Official Foreign Exchange Reserves (COFER) database continues to indicate that dollar remains the preferred reserve currency. In Q4 2011, the dollar made up 62.1% of official reserves vs. 61.8% in Q3. The dollar accounted for 61.4% of official reserves in 2011 vs. 61.8% in 2010 and 62% in 2009. The euros share was virtually unchanged in 2011 at 26%. Is the dollars role as an official reserve currency shrinking? A small decline is visible prior to the onset of the crisis but the dollar has prevailed in the past three years.
Why Should Not Stocks Have Done Well? or Business, With Enemies Like This, Who Needs Friends?
by Paul Kasriel of Northern Trust,
Brent crude oil is trading around $122 and change today, down from a peak of $128.31 on March 9. The rapid run-up in oil prices since late-January has made a dent in household budgets and keeps us wondering if it is permanent. The reasons for the jump in oil prices in recent months is largely a supply story the Iran nuclear controversy raising concerns about future oil supply and actual supply bottlenecks in several spots of the world. The support to this thesis is visible in the recent behavior of industrial metal prices.
Kasriel's Parting Thoughts - Has the Fed Boosted the Stock Market?
by Paul Kasriel of Northern Trust,
The Feds actions have benefited the stock market as well as aggregate demand for goods and services in the U.S. economy. Would you have preferred that the Fed sit idle as it did in the early 1930s, with likely similar results for the stock market and the economy in recent years as occurred at that time? The Fed has simply provided some of the credit to the economy that the private MFI system would have had it not been crippled with loan losses. And even with the Feds additional credit creation, total MFI credit growth has fallen short of the long-run normal credit creation of private MFIs.
Kasriels Parting Thoughts Mary Matlins Economics
by Paul Kasriel of Northern Trust,
There is a controversy about whether one should use real GDP or real GDI to evaluate the performance of the U.S. economy. Real GDP is obtained by adding up spending across the economy and real GDI is computed by adding up income earned. Conceptually, GDP and GDI are identical but the source data for each is different and they yield different numbers. The GDI measure is gaining attention; Jeremy Nalewaik of the Fed has pointed out the National Bureau of Economic Research uses monthly indicators, GDI and GDP to determine official dates of business cycle peaks and troughs.
One Year Into the Arab Spring
by James A. Pressler of Northern Trust,
The last three months marked the first anniversary of events considered unthinkable before 2010. The past year saw the outbreak of protests throughout Tunisia, Egypt, Bahrain and beyond; an outbreak of democracy not imported from the industrialized powers but home-grown. And as each dictatorship fell, onlookers checked off another successful transformation from the Arab Spring. Such waves of change felt as unstoppable as they were inevitable, and a feeling emerged that it was only a matter of time before the Middle East/North Africa (MENA) region stepped into the third era of Arab awakening.
Hey, Big Spender?
by Paul Kasriel of Northern Trust,
Some political movement ought to unfurl the Mission Accomplished banner with regard to reining in federal government spending. As shown in the chart below, in the 12 months ended January 2012, the cumulative total of federal outlays-defense, non-defense, entitlements, interest on the debt-increased only 1.5% vs. the 12 months ended January 2011. The median growth in 12-month cumulative total federal outlays from January 1954 through January 2012 is 6.6%. Starting with the 12 months ended March 2010, this measure of growth in federal outlays has been below the long-run median.
If Current Bank Credit Trends Continue, Bet Against the Feds Interest Rate Forecast
by Paul Kasriel of Northern Trust,
A majority of FOMC members expect that the interest rate on federal funds, an interest rate controlled by the Fed, will not be increasing until late in 2014. If the current trend in the behavior of bank credit continues in 2012 and into 2013, I believe that the FOMC will be lifting its federal funds rate target early in the second half of 2013. Again, if the current growth trend in bank credit continues, a failure on the part of the FOMC to raise its federal funds rate target and shrink its balance sheet will sow the seeds of a rate of consumer inflation above the FOMCs 2% annualized target.
Should the Definition of the Central Bank Lender of Last Resort Function Be Expanded?
by Paul Kasriel of Northern Trust,
If the ECB needed to expand its balance sheet to maintain the specified rate of growth in combined ECB and MFI credit, the ECB could purchase in the open market the requisite amount of pan-euro bonds rather than individual-country sovereign debt. In this way, the ECB could fulfill its expanded lender-of-last resort function without taking on individual-country sovereign-debt credit risk.
Outlook 2012: Living In Interesting Times
Setting aside the debate over the appropriateness of various policy directives, this Outlook considers which countries or regions are vulnerable as we head into 2012. Not surprisingly we start off with Europe, then go through the U.S., industrialized Asia, and Latin America, finishing with a brief discussion of the political powder keg that is the Middle East.
Asia: Diverging Outlooks Going Into 2012
by James A. Pressler of Northern Trust,
With most of the industrialized world focusing on all things European, we thought it might be worthwhile to see just what was happening on the other side of the Ural Mountains. Asia has not become embroiled in the debt problems sweeping through the likes of Greece and Italy, and its exposure to the euro is contained. However, what happens in Europe will inevitably drift into Asia, so a look at its major economies might provide insight into what awaits the region in 2012. In particular, we are focusing on the two most populous countries in the world China and India.
Europe Is in for a Long Recession
by Paul Kasriel of Northern Trust,
Collectively, the 27 sovereign nations that make up the EU most likely entered a recession this quarter. Given that the EU represents the largest economy in the world, a recession there is no small beer for the rest of the world. The Greek tragedy morphed into an Italian comedy. Now, it has become a French farce. The plot behind all of these theater forms is how an economy struggles when deprived of adequate bank credit. Although eurozone MFI credit is growing, its growth is much slower than it was prior to the global recession.
Just as Domestic Demand Picks Up, Foreign Demand Weakens
by Asha Bangalore of Northern Trust,
The Commerce Departments first estimate of Q3:2011 real GDP growth was 2.5% annualized. Although this headline was better than the 0.8% annualized real GDP growth in the first half of 2011, underneath the headline, the news was even cheerier. Real final sales to domestic purchasers grew at an annualized rate of 3.2% in Q3:2011, the fastest growth of this measure since the 4.9% posted in Q2:2010. So, is it onward and upward for the U.S. economy going forward? Unlikely. Although things may be looking up for domestic demand, foreign demand for U.S. exports is expected to wane.
With Apologies to James Carville, It's the Demand, Stupid
by Paul Kasriel of Northern Trust,
If there were more demand for goods and services in the economy, then corporations allegedly sitting on all that cash would start to use it. Our current weak economic growth is largely the result of inadequate aggregate demand for goods and services, not inadequate supply. And that is why I suggested a properly designed Federal Reserve quantitative easing could chum up aggregate demand until banks are able to create adequate amounts of credit on their own to get the job done. Monetary policy is all about affecting aggregate demand; fiscal policy is all about affecting aggregate supply.
"Animal Spirits" - What Keynes Penned, Its Relevance Today
by Asha Bangalore of Northern Trust,
In Animal Spirits: How Human Psychology Drives the Economy, Why it Matters for Global Capitalism, Akerlof and Shiller explore a new avenue to understand macroeconomy and Keyness notion of animal spirits is the inspiration for their thesis. The authors of this book make an important point about animal spirits and policy making in the context of a credit crunch. In a garden variety recession, expansionary monetary and fiscal policies have the ability to revive economic activity. However, the combination of an economic recession and a credit crunch needs a special remedy.
Benjamin Strong and Milton Friedman - Ironically, Something in Common?
by Paul Kasriel of Northern Trust,
Had Milton Friedman not passed away in 2006 and were alive and writing today, he would be arguing forcefully in favor of continued Federal Reserve quantitative easing. Friedman argued that had Benjamin Strong been alive to influence Federal Reserve policy in 1930 and 1931, the recession of 1929 would not have degenerated into the Great Depression. If Milton Friedman were alive today to influence the current Federal Reserve monetary policy debate, the near stagnant economic environment we find ourselves in would not need to persist.
Fed 'Twisting' Will Stimulate Economic Activity for Bond Traders
The consensus view is that after adjourning from its September 20-21 meeting the FOMC will announce a plan to lengthen the maturity structure of its securities portfolio by increasing the proportion of longer-maturity securities in the portfolio.
If Some Dare Call It Treason, Was Milton Friedman a Traitor?
by Paul Kasriel of Northern Trust,
The principal factor accounting for the current exceptionally weak economic recovery is not unusually high uncertainty, too burdensome regulation and taxation, excessive federal government spending and/or debt or a major structural change in the economy, but rather inadequate depository institution credit creation. The reason depository institutions are not creating normal amounts of credit is that they suffered enormous losses after the residential real estate bubble burst and they remain concerned about current and/or future capital adequacy.
Jobs, Jobs, Jobs The Mantra of the Current Season
by Asha Bangalore of Northern Trust,
The unemployment rate in August 2011 stood at 9.1%. The high for the unemployment rate in the post-war period was recorded during the 1981-1982 recession when it touched 10.8% in December 1982. In this business cycle, the recovery commenced in November 1982 and by January 1985 the unemployment rate had dropped to 7.3%. This time around, the high for the unemployment rate is 10.1% (October 2009) and the recovery is 26 months old with a jobless rate, as noted earlier, of 9.1%. Consequently, the level of concern about a persistently high unemployment rate has risen significantly.
The August 9 FOMC Decision - Ineffective at Best, Dangerous at Worst
by Paul Kasriel of Northern Trust,
The FOMCs decision to commit to holding its federal funds target in a range of zero to 25 basis points at least through mid 2013 strikes me as an ineffective way to accomplish one of its goals full employment of the labor force and potentially dangerous with regard to another of its goals stability in an index of goods/services prices. In my view, the Fed should abandon an interest-rate targeting approach to monetary policy. Rather, it should adopt a quantitative-targeting approach targeting the growth in the quantity of combined Federal Reserve and commercial bank credit.
I was sent to Washington to Change the Trajectory of Government Spending
by Paul Kasriel of Northern Trust,
In the 12 months ended Jul 11, cumulative total federal outlays were 2.7% higher than cumulative federal outlays in the 12 months ended Jul 10. The average year-over-year % change in 12-month cumulative outlays from 1956 through today has been 7.6%. And with 12-month cumulative total federal receipts growing at 8.7% the cumulative deficit in the 12 months ended Jul 11 was $1.225 trillion, $36 billion less than the cumulative deficit in the 12 months ended Jul 10. With continued fiscal progress of this nature, S&P will beupgrading U.S. debt faster than the Fed can change its forecast!
S&Ps Downgrade of U.S. Sovereign Debt Some People Actually Pay Them for these Opinions?
by Paul Kasriel of Northern Trust,
S&P stated the obvious after the U.S. markets closed on August 5 - the projected growth in U.S. public debt is on a long-term unsustainable path. Rather than paying S&P for this opinion, all you need to do is look at some past CBO projections and you would have arrived at the same opinion years ago.
U.S. Debt Ceiling If Cooler Heads Do Not Prevail
by Paul Kasriel of Northern Trust,
What would be the immediate economic effect of a sudden balancing of the U.S. federal government budget? The $1.26 trillion decline in federal outlays would represent a negative demand shock to the U.S. economy. Some entities who were expecting payments from the federal government would be disappointed. These disappointed entities might have to cut back on some of their planned spending in order to be able to honor their payment commitments to others. Alternatively, these disappointed entities might have to increase their borrowing in order to honor their payment commitments.
Washington Had a Spending Problem
by Paul Kasriel of Northern Trust,
Although Washington does not seem to have a current spending problem, what about a spending problem going forward? Specifically, if the programs specified in President Obamas February 2011 budget proposal were implemented, how would growth in federal total outlays in an eight-year Obama presidential tenure compare with growth in federal total outlays of other presidents tenures? To answer this question, I have relied on projections of total federal outlays by the Congressional Budget Office (CBO), the nonpartisan scorekeeper of all things fiscal.
U.S. Businesses Appear to Have Selective Uncertainty
by Paul Kasriel of Northern Trust,
Business hiring remains weak and business capital spending is robust. The capital spending part is illustrated in the chart below showing the 8-quarter annualized growth in shipments of nondefense capital goods deflated by the PPI for capital goods. I would think that if abnormally-high business uncertainty prevailed today, there would have been considerably slower growth in price-adjusted purchases of nondefense capital goods than what has occurred.
Continued Sluggish Economic Growth Expected Through 2012
by Asha Bangalore of Northern Trust,
Bernanke indicated that the FOMC would be prepared to make monetary policy more accommodative if things do not improve. He emphasized the importance of the employment situation improving. Our forecast does not call for an acceleration in real GDP growth in the second half of 2011 nor does it call for a decline in the unemployment rate. Rather, we see the unemployment inching higher. Although we do not envision a meaningful risk of a contraction in indexes of consumer prices for goods and services in the next 12 months, we do envision continued declines in house prices.
Will China?s Real Estate Market Become the World?s Problem?
by James Pressler of Northern Trust,
There are significant imbalances in the Chinese real estate market and that this constitutes a large asset bubble that is reaching the end of its run. While there may not be one defining event that marks its collapse, over the next twelve months we expect a marked rise in NPLs within the smaller provincial and regional banks, and some high-profile defaults. And while this will not necessarily mark the end of the Chinese miracle, it will provide a substantial shock to development policies and perhaps a renewed drive toward a more sustainable, domestically-driven economy.
Poor People or Old People - Who Do We Want to Help?
by Paul Kasriel of Northern Trust,
Milton Friedman used to talk about the "tyranny of the status quo." By that, he meant that it is difficult to change public policy because of entrenched interest groups allied with policies that have been in effect for decades. I would argue that opposition to changes in our current Social Security and Medicare programs is an example of tyranny of the status quo. The original intent of both was to provide an income support floor for our retired senior citizens. So, why do these programs supplement the income directly through Social Security and indirectly through Medicare to wealthy seniors?
Do We Have a Medicare Budgetary Problem or an Aging Population Problem?
by Paul Kasriel of Northern Trust,
If it makes sense for corporations to borrow to fund capital expenditures, why does it not make sense for the federal government to do so as well? By the gov making investments in physical capital (infrastructure) and human capital (education), the economy's future growth rate would be expected to be enhanced. This would imply higher future tax revenues (without higher tax rates) to pay the interest and principal on the debt issued to fund capital expenditures. So, rather than trying to balance the overall budget, would it not make more sense to bring into balance the operating expenses?
U.S. Monetary Policy: A Case of Self-Induced Paralysis?
by Paul Kasriel of Northern Trust,
Part of the decreased real GDP growth/increased unemployment rate central-tendency forecasts for June vs. April can be attributed to supply interruptions from Japan and higher energy prices. But given the FOMC's assumption that the supply interruptions are dissipating and that energy prices are declining, this explanation does not apply to the reduced real GDP growth and unemployment rate central-tendency forecasts for 2012. I think the central-tendency forecasts for real GDP growth and the unemployment rate are optimistic for 2011 and 2012 in the absence of continued quantitative easing.
Economy Brakes Even Before Fed Takes Its Foot Off the Accelerator
Although quantitative easing might not help stimulate domestic spending on goods, services and assets, in the words of our grandmothers-it couldn't hurt. All else the same, if the Fed purchases securities in the open market, the seller of these securities can do one or a combination of three things with them - spend them, lend them or just hold them. If sales proceeds are spent or lent, then there is a net increase in spending on something in the economy. Only if the sales proceeds are just held would quantitative easing not lead to a net increase in spending in the economy.
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