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When It Comes to Increasing Aggregate Demand, What?s Fiscal Policy Without Monetary Policy?
by Paul Kasriel of Northern Trust,
In order for an increase in government spending to result in an increase in total aggregate demand, the government's spending needs to be financed by the central bank and the commercial banking systems. Although the Fed and the banking system have helped fiscal policy to stimulate total aggregate demand through a cumulative increase in Treasury borrowing of $1,455 billion, the help was not all that spectacular. No wonder the results of the recent fiscal stimulus program were something less than awe-inspiring with regard to increasing aggregate demand.
Recipe for a Lost Decade, or Two
by Paul Kasriel of Northern Trust,
There are legitimate concerns that the U.S. could catch the 'Japanese' disease and endure a lost decade in terms of normal economic growth. As has been the case in Japan, weak U.S. money and bank credit growth is occurring in the context of very low monetary policy interest rates. The private financial system is not transforming the inexpensive credit being offered it by the Fed into credit for the private nonfinancial sector of the U.S. economy. Until this transmission mechanism between the Fed and the economy gets mended, we are unlikely to experience potential economic growth.
Navigating Fears of the Bond Market
by James Pressler of Northern Trust,
The need to keep the bond market happy while implementing often far-reaching fiscal reforms is most acute across Europe, where the outlook is for weak real GDP growth into 2011 ? albeit with significant variations between countries. Conversely, the recoveries in Asia and in the Americas have effectively eliminated fears of sovereign defaults but now concerns over economic overheating will dominate. The U.S will eventually have to address its own public debt overhang, but for now is enjoying a temporary safe-haven status.
Airplane Musings - Part Deux
by Paul Kasriel of Northern Trust,
Although U.S. federal government spending continues to increase, the rate of growth in that spending has slowed enormously. In the 12 months ended May 2010, accumulated spending by the federal government totaled $3.437 trillion, just 2.6 percent higher than the 12-month accumulated total federal spending for May 2009. This is quite a deceleration in growth from the 15.3 percent registered for the 12 months ended 2009 vs. 2008, near the trough of the last recession.
An Evaluation of the Threat of Near-Term Inflation
by Asha Bangalore of Northern Trust,
There is plenty of room for the economy to grow before the Fed slams the monetary policy brakes. Inflation expectations have moved down to 195 basis points as of June 11, from a high of 245 basis points at market close on April 29. Meanwhile, the money supply is barely growing. The ballooning of the Fed's balance sheet has not translated into rising inflation expectations. And final retail sales grew only 1.4 percent in the first quarter.
"Missing Elements" of Mr. Laffer's Incomplete Story
by Asha Bangalore of Northern Trust,
Supply-side economist Arthur Laffer recounts his experience with the Reagan administration to illustrate his arguments about the positive impact of tax cuts on economic growth with in a piece for the June 7 Wall Street Journal. Laffer predicts dire economic consequences if the Bush tax cuts are allowed to expire at the close of 2010. If Laffer's thesis is correct, however, then why, for example, did the economy post noticeable growth after the tax increases of 1993? And why did the U.S. economy undergo such a weak period of economic expansion following the Bush tax cuts of 2001 and 2003?
All We Are Sayin' Is Give Free Markets A Chance
by Paul Kasriel of Northern Trust,
Before we can determine whether or notfree markets have failed, we must actually have free markets. Central banks currently create or destroy credit by by holding a key short-term interest rate below or above the unobservable free-market equilibrium. The Securities & Exchange Commission determines which credit rating agencies receive official 'approval.' Lastly, without their debt being implicitly guaranteed by the federal government, Fannie and Freddie would not have been able to have consistently fund themselves at interest rates below other financial institutions.
Gold: Early 1930s vs. Early 2010s
by Paul Kasriel of Northern Trust,
Some argue that gold will outperform general stocks in the early 2010s, as it did in the 1930s. If this is true, then it will be for entirely different reasons. Investors currently gravitate toward gold as a hedge against future inflation, or because of a loss of faith in the fiat currency. U.S. gold mining stocks were strong performers in the 1930s, by contrast, because the U.S. Treasury was guaranteeing gold miners a steady or rising price as production costs were falling.
Greece, Portugal and Spain Are the Least of Our Economic/Financial Challenges
The debt problems that Greece, Portugal and Spain are currently facing have undoubtedly had a negative effect on global financial markets, and will probably have some negative effect on global economic activity. Problems with these countries, however, will not derail the global economic recovery that is currently underway. The biggest threat to the continuation of the global economic recovery would be some policy mistake by the Chinese economic policymakers resulting in a rapid deflation of the Chinese real estate bubble, which, in turn, would reduce Chinese real GDP growth.
Financial Regulation - The New Landscape
by Asha Bangalore of Northern Trust,
The Senate passed a new financial reform bill on May 20, while the House passed its own version in December. The next step is a reconciliation of the two bills, which should be ready for the president's signature by July 4th. The bills contain elements that will affect consumer protection, systemic risk, ?too big to fail,? derivatives, bank regulation, the Federal Reserve, credit rating agencies and securitization, and represent the biggest overhaul of financial regulation since the 1930s.
A Strategic Proposal to Combat Strategic Residential Mortgage Defaults
by Paul Kasriel of Northern Trust,
More and more we are hearing that occupants of residential real estate with mortgages far in excess of the current market value of their properties are choosing to default on their mortgage agreements. Many of these borrowers have calculated that it would take many years for the value of their properties to rise back to the amount outstanding on their mortgages. One tactic for lenders to stop these strategic defaults may be to write down the principal on the mortgage outstanding to an amount closer to the current actual market value of the property.
Lessons from Argentina on the Outcomes of a Possible Greek Default
by Richard Thies of Northern Trust,
As a member of a currency union, Greece cannot pair a restructuring with a large currency devaluation, two things that have usually gone hand in hand. That alone is enough to conclude that a Greek default would be hugely different from anything we've witnessed. As Argentina's default demonstrated, as much as it may look like the International Monetary Fund or other countries such as Germany are pulling all the strings, the decision at the end of the day is in the hands of the country's government.
A Typical European Response To An Atypical European Problem
by Victoria Marklew of Northern Trust,
Markets heaved a sigh of relief this week after European Union officials announced their $1 trillion rescue plan to save the euro. European states, however, will still have to face medium-term problems concerning fiscal deficits and economic restructuring. Demands that Spain make a renewed commitment to fiscal austerity suggest a new level of cross-country intervention. And the big issue has been swept under the carpet: how to ensure prudent fiscal policy-making across the 16 members of a monetary alliance with strong national identities and prickly memories of past hostilities.
ECB Sterilization -Trichet's Maginot Line?
by Paul Kasriel of Northern Trust,
European Central Bank president Jean-Claude Trichet has stated that the ECB will drain by other means the amount of base money it creates through sovereign debt purchases. If Milton Friedman was correct that inflation is everywhere and always a monetary phenomenon, however, then Trichet need not worry about a sustained acceleration in euro area inflation given recent declines in euro area money and credit aggregates. Northern Trust also comments on the Federal Reserve's swap lines with other central banks, and a recent small business survey.
'Tis a Short-Term Panacea, More Challenges in Store
by Asha Bangalore of Northern Trust,
The colossal rescue package from Europe consists of coordinated contributions from euro area governments, the IMF, and an EU emergency fund, amounting to a sum total of ?750 billion ($955 billion). World markets have responded positively, and have moved to calmer waters compared to recent turbulent market sessions. It is only a short-term respite, however; markets are bound to get jumpy again. The industrialized world is awash with public debt at levels never before seen in peacetime.
Gold Prices ? Just the Facts (and other notes)
by Asha Bangalore of Northern Trust,
The gold bug is alive and kicking. The current gold price of $1169.50 is more than three times the long-term average of $320.10. Uncertain economic conditions and sovereign debt issues have modified the place of gold in portfolios. Self-sustaining economic growth in one or more of the G-7 nations is necessary to reverse the course of gold because the low interest rate environment yields poor returns on interest-bearing assets. Northern Trust also comments on gains in the housing market due to the impending expiration of the homebuyer tax credit.
Declines in Bank Loans - Write-Downs or Pay-Downs?
by Paul Kasriel of Northern Trust,
The record decline in commercial bank loans/leases the U.S. experienced in 2009 was dominated by pay-downs (payments on loans) rather than write-downs (reductions in recognized value). Pay-downs have negative implications for new aggregate demand whereas write-downs are irrelevant with regards to new aggregate demand. Declines in capital limit the ability of banks to create new credit. The continued contraction in commercial bank loan/lease balances is cause for caution with regards to near-term growth in economic activity.
It's Been a While
by Paul Kasriel of Northern Trust,
Inflation is forecast to be 1.7%, rather than 2.5% as in Northern's previous forecast. Lack of credit creation in the private sector will result in a muted recovery, with GDP growing 2.8% in 2010. They are are in agreement with the Federal Open Market Committee that ?economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.?
Federal Deficit Reduction - Growth Helps at the Margin
The Congressional Budget Office tell us that we cannot grow our way out of the long-term federal budget deficit. The acceleration in real and nominal economic growth the U.S. economy has experienced in the past two quarters, however, is helping to reduce the deficit in the short-term. When growth picks up, corporate profits and household income do too. Thus, tax revenues pick up, or at least do not contract as much, while expenditures such as unemployment insurance benefits and food stamps slow down, not to mention government capital injections into teetering financial institutions.
Interest Rates are Creeping Up
by Asha Bangalore of Northern Trust,
The Fed is on hold in the near term, with nearly all its emergency programs either closed or expired. The effective federal funds rate has moved up in recent weeks, to an average of 16 bps in March, as have yields on other Treasury securities. The upward trend of Treasury market yields places the Fed is a tight spot, because the objective of easy monetary policy is defeated if Treasury market yields continue to move up and raise the cost of credit. Northern Trust's best bet is that interest rates will decline somewhat in the weeks ahead as bearish economic news comes out.
Guess Hu's Coming to Dinner at the White House - Much Ado About Very Little?
by Asha Bangalore of Northern Trust,
Chinese President Hu Jintao will attend a summit in Washington, D.C. on April 12-13. His plans have set off speculation that the Chinese government is prepared to let the yuan appreciate versus the U.S. dollar. Some in Congress want to brand China as a currency manipulator and impose protectionist penalties against the country. Chinese central bank balance sheets from last year, however, do not suggest that China engaged in extraordinary foreign exchange intervention. Bangalore also comments on impending reflation, and the expiration of the home buyer tax credit.
Guide to Distortions of Payroll Numbers from Census-Related Hiring
by Asha Bangalore of Northern Trust,
The employment report for March will contain hiring related to data collection for the 2010 census. Hiring for the census should result in wide swings of headline payroll estimates during the March-September period. Hiring in the private sector will thus be the true indicator of whether labor demand improved in March, rather than the headline number. Year to date, private sector employment shows a significant improvement in the pace of declines versus a year ago. Bangalore also comments on the U.S. dollar's continued reserve currency status.
Central Banks in 2010 - The Cacophonous Sound of Exit Music
by Asha Bangalore of Northern Trust,
Recent developments suggest that the uncertainty of the past three years has left central banks skittish. Otherwise strong economies have been slow to normalize rates and central banks that are following inflation targets have been more willing to risk breaches than growth. The remainder of the year will be characterized by differing exit strategies and their intended and unintended consequences. As central banks around the world begin tightening before the Fed and the ECB, there will be further implications for global capital flows and exchange rates.
Macro Effects of Patient Protection and Affordable Care Act at 30,000 Feet
by Paul Kasriel of Northern Trust,
The macroeconomic effect of the Patient Protection and Affordable Care Act will depend on whether the $900 billion shift of resources from the private sector to the government over the next ten years it brings will adversely affect labor productivity and technical progress, and by how much. On one hand, PPACA could result in a healthier and more productive workforce. On the other hand, increased government spending associated with PPACA may also have been spent by the private sector on health care, only in a less efficient manner: in the emergency room rather than on preventative care.
Budget Deficits: The Challenge Ahead in a Picture
by Asha Bangalore of Northern Trust,
Congressional Budget Office projections indicate federal outlays as a percentage of GDP will consistently exceed revenues even after the peak in outlays associated with the financial crisis and the recession. The fundamentals of the economy offer little hope for strong performance in the years ahead. A graying population and associated social costs will continue to add to projected outlays. Bangalore also comments on January's record low in the inventory-sales ratio, indicating strengthening demand.
Protectionism: Not-So-Tall Cotton
Brazil announced new tariffs on a wide range of U.S. exports totaling $591 million as part of an ongoing dispute over American cotton subsidies, and said it will announce an additional $298 million in tariffs focused on changes to intellectual property laws on March 23. These tariffs are sanctioned by the World Trade Organization, and may harm employment by U.S. exporters. Political prospects for reforms on cotton subsidies, however, may be unlikely. Bangalore also notes that equity prices have moved up significantly since their March 8, 2009 trough.
On Watch List among the Many Other Details
by Asha Bangalore of Northern Trust,
The employment report for February showed small improvements in the economy from the prior month, but with some worrisome aspects still in place. No inflationary threat seems to be around the corner. The growing balance sheet of the Federal Reserve will not pose a threat until excess reserves are converted into credit. Finally, it is unclear whether the rise in the effective federal funds rate to 17 basis points on March 5 from 11 basis points on February 24 was a one-off event, or the Fed's exit strategy in operation.
As Greece Goes, So Goes the U.S.?
Greece's debt crisis may not make much of an impact on U.S. economic growth. In the third and fourth quarters of 2009, total U.S. exports increased at annual rates of 24.6 percent and 28.1 percent, respectively. South America and the Pacific Rim accounted for a combined 31.7 percent of U.S. exports in the fourth quarter of last year, while Europe accounted for just 23.1 percent. Kasriel and Bangalore also comment on the likely prospects for a low federal funds rate in the long term, and record lows for new home sales.
I Am Worried about the Government Debt My Descendants Will Inherit
Each American was responsible for an average of $38,651 in gross federal debt in 2009. That figure will grow to $62,808 by 2020, according to Congressional Budget Office projections. Short of changing Social Security and Medicare, all we can do to alleviate the strain on our descendents is increase our current savings rate. Kasriel and Bangalore also examine slipping consumer confidence figures and a rising home price index.
Hey Big Spender?
by Paul Kasriel of Northern Trust,
The most serious fiscal challenge ahead is spending, not deficits and debt. And the most serious spending challenge the government will face relates to the diversion of productive resources to future retirees, which will build over the next 20 years are more baby boomers retire. The second spending challenge facing government is ballooning interest payments on prior debt issued. Prior federal policies that established retiree entitlement programs and funded rapidly rising spending with the issuance of debt are to blame for these problems.
Inflation is Contained, Fed Focus on Growth and Jobs Remains in Place
by Asha Bangalore of Northern Trust,
The January consumer price index report shows no inflationary pressures. The CPI rose 0.2 percent last month following similar gains in the previous four months. The Federal Reserve will continue to focus on economic growth and jobs, while eliminating emergency measures put in place as the economic crisis unfolded in August 2007.
Not So Fast!
Annualized growth rates over the first three quarters of 2010 will be less than one half of the 5.7 percent growth rate in the fourth quarter of 2009. Consumer inflation showed signs of slowing in January. Other than a costmetic increase in the discount rate, the Fed will probably find no pressing reason to tighten monetary policy this year.
Net Interest Outlays in the U.S. Federal Budget - Let the Picture Speak for Itself
by Asha Bangalore of Northern Trust,
Asha Bangalore says in Northern Trust's daily global commentary that the U.S. federal government's debt service burden is a problem, but that it is not as bad Moody's recent warning made it out to be. The country's net interest outlays are projected to peak at 3 percent of GDP by 2017, from 1.3 percent in 2009.
Chairman Bernanke on Fed's Exit Strategy/ Trade Gap Widens in December
by Asha Bangalore of Northern Trust,
Asha Bangalore discusses the ?exit strategy? from quantitative easing, and notes that the interest rate on reserves could soon replace the federal funds rate as the Federal Reserve's main policy tool. The large volume of reserves in the current banking system and the resulting loss of activity and liquidity in the federal funds market have made the federal funds rate less reliable as an indicator. The Q4 trade deficit data are also discussed.
Near-term Gains for the US Dollar?/Prospects for Japanese Recovery
In Northern Trust's daily global commentary, Asha Bangalore says speculation against the euro could result in a near term gain for the dollar. The dollar appreciated 5.6 percent against the euro in the four weeks ending February 5. James Pressler looks ahead to Japan's release of fourth quarter GDP data next week. He predicts a growth figure of 0.6 percent, despite the consensus estimate of 0.9 percent.
January Employment Situation - Mixed Report, Deduce Carefully
by Asha Bangalore of Northern Trust,
Although the jobless rate declined and the pace of job losses has slowed noticeably, the labor market situation remains a source of serious concern. A total of 8.4 million jobs have been lost since the recession commenced in December 2007 and the jobless rate is high. Consistent back-to-back gains in employment are necessary to declare the worst is behind us. One monthly decline of the jobless rate is adequate to act on; the FOMC is predicted to stay on hold for several more months.
Does Anyone in Washington Know What Needs to Be Done to Create Jobs?
by Paul Kasriel of Northern Trust,
?If what small- and medium-sized businesses need to increase their hiring is increased sales, then it would seem that fiscal stimulus coupled with Fed-created credit is the right medicine.? The current ($787 billion) stimulus has only been partially spent, and policy makers should not push for another stimulus until more of the remaining funds have been spent.
Ballooning Treasure Deficits - It Takes both Outlays and Receipts to Tango
by Paul Kasriel of Northern Trust,
...although high growth in federal spending is contributing mightily to our record federal deficit, the rate of growth in that spending is slowing. What often is forgotten is that the rate of contract
Results 1,401–1,450
of 1,458 found.
