France did not go for the current EU constitution. I guess this means that it is the end of the world as we know it. The US's trade deficit is going to explode because of the lack of trade that some of the proponents of the constitution pointed at. Oh my, the Federal Reserve's monetary policy is in ruin. BushCo. is going to blame the every widening trade deficit on Newsweek, whoops, I mean they'll blame it on France.
This is, of course, not my opinion. I think 54% of the citizens of France analysis what was happening across the pond and decided they wanted no part of it. Not only would the EU constitution have devastated their Socialize Society, but it would have also meant a few trillion francs of private debt, a few trillion francs of government debt and a few trillion francs of trade deficit. France could have looked forward to a few million, uncontrollable illegal and legal alien migration. It would have also meant that France's economy would be dependent on an unregulated, global credit derivatives market. France does not have the benefit of a few multi-billion francs that a few hurricanes can release from various insurance companies directly into their economy.
I guess what they really wanted was not to lose control of their government.
Monday, May 30, 2005
Thursday, May 26, 2005
Federal Reserve and Monetary Policy: A Bubbling Crude, Definitely Not Texas Tea
Too much froth in the housing market. Greenspan has said it. It was mention during the FOMC's May third meeting. Atlanta Fed Bank's Jack Guynn
Continuing the Pattern of Growth and Low Inflation Certified Professional Home Builder LuncheonAtlanta, Georgia May 25, 2005
has also said it. So, what is the problem. I think the question should be “what are the problems”?
There are two problems that a linked.
Problem number 1: the buying and selling of dwellings not yet built. This is a “futures” market. Also, one can throw in the buying and reselling of existing homes. As in any futures market, the future price is dependent on the value of the property, the value of the US currency and the expectations of the future buyer's that the property will not lose its value. In general, the housing market is not subject to violent price swings, but it can be if the underlying link is also in flux.
Problem number 2: Creative financing of homes. Again, this is not a problem on to itself. Creative financing dependents on the expectations that the home buyer does not run into financial trouble as he/she occupies the home. Again, no problem as long as the link is not in trouble.
The Link is the $7 trillion dollar derivatives market. Corporations that finance the housing market use the derivatives market to protect themselves against prepayments, defaults and interest rates movements. Unfortunately for these corporations, the derivative market is also home to other players that are in it for the short term gain due to some sort of a price mis-match or a counter bet. If these players get into trouble, the link is in trouble.
Can one deduce if there is a potential problem based on just one event? I'm going to say yes. One can point to the rumored problems of hedge funds that were short on GM and Ford's stock, but long on their bonds. The credit down grade supposedly caught them by surprise. One can key on the knowledge that their bonds were going to be downgraded. Why did they not pull out of the trade? Were they looking for some sort of information that they thought was going to be announced (or leaked) before the down grade? Were they looking for pricing level? This tells me that a lot of fund managers do not understand the “business” of business nor the mathematics of the instruments they use. One should expect more rumors of hedge funds in trouble as the months progress. This is due to the fact that the Fed is raising short term interest rates. The removal of the carry trade always causes trouble.
It will be really funny if California (the state) declares bankruptcy due to poor bond structure (Orange County, Cal.) and those who hold interest only mortgages to lose their property and then find out that China owns a large part of southern California because they hold the deeds.
My expectations for the future of the US economy. The third quarter is going to be below Wall Street's expectations. Activity in the first and second quarter is due to tax refunds being sent and spent. This stimulus will not be in play during during the third quarter. It will be vacations over shopping. The fourth quarter and the year's GDP will be made if four hurricanes hit the high population regions of the southern shoreline (it took four last year). One or more making landfall in the swamps, will be the starting gun for excuses and finger pointing on Wall Street and Washington DC.
There is no phantom job market. There will be the usual Equity to Liquidly being substituted for labor in GDP ($700 billion worth). Mortgage rates may be low, but the cost of closing the deal will increase because of the cost of the US currency will be higher (US dollar strength). The cost of risk management will also be higher due to a decrease in the number of willing buyers.
All bets are off if there are problems in the oil pits or if there is a major meltdown in the derivatives markets.
Continuing the Pattern of Growth and Low Inflation Certified Professional Home Builder LuncheonAtlanta, Georgia May 25, 2005
has also said it. So, what is the problem. I think the question should be “what are the problems”?
There are two problems that a linked.
Problem number 1: the buying and selling of dwellings not yet built. This is a “futures” market. Also, one can throw in the buying and reselling of existing homes. As in any futures market, the future price is dependent on the value of the property, the value of the US currency and the expectations of the future buyer's that the property will not lose its value. In general, the housing market is not subject to violent price swings, but it can be if the underlying link is also in flux.
Problem number 2: Creative financing of homes. Again, this is not a problem on to itself. Creative financing dependents on the expectations that the home buyer does not run into financial trouble as he/she occupies the home. Again, no problem as long as the link is not in trouble.
The Link is the $7 trillion dollar derivatives market. Corporations that finance the housing market use the derivatives market to protect themselves against prepayments, defaults and interest rates movements. Unfortunately for these corporations, the derivative market is also home to other players that are in it for the short term gain due to some sort of a price mis-match or a counter bet. If these players get into trouble, the link is in trouble.
Can one deduce if there is a potential problem based on just one event? I'm going to say yes. One can point to the rumored problems of hedge funds that were short on GM and Ford's stock, but long on their bonds. The credit down grade supposedly caught them by surprise. One can key on the knowledge that their bonds were going to be downgraded. Why did they not pull out of the trade? Were they looking for some sort of information that they thought was going to be announced (or leaked) before the down grade? Were they looking for pricing level? This tells me that a lot of fund managers do not understand the “business” of business nor the mathematics of the instruments they use. One should expect more rumors of hedge funds in trouble as the months progress. This is due to the fact that the Fed is raising short term interest rates. The removal of the carry trade always causes trouble.
It will be really funny if California (the state) declares bankruptcy due to poor bond structure (Orange County, Cal.) and those who hold interest only mortgages to lose their property and then find out that China owns a large part of southern California because they hold the deeds.
My expectations for the future of the US economy. The third quarter is going to be below Wall Street's expectations. Activity in the first and second quarter is due to tax refunds being sent and spent. This stimulus will not be in play during during the third quarter. It will be vacations over shopping. The fourth quarter and the year's GDP will be made if four hurricanes hit the high population regions of the southern shoreline (it took four last year). One or more making landfall in the swamps, will be the starting gun for excuses and finger pointing on Wall Street and Washington DC.
There is no phantom job market. There will be the usual Equity to Liquidly being substituted for labor in GDP ($700 billion worth). Mortgage rates may be low, but the cost of closing the deal will increase because of the cost of the US currency will be higher (US dollar strength). The cost of risk management will also be higher due to a decrease in the number of willing buyers.
All bets are off if there are problems in the oil pits or if there is a major meltdown in the derivatives markets.
Friday, May 20, 2005
Federal Reserve and Monetary Policy: A Sticky Situation
Greenspan's conundrum still has no explaination. I think it is related to the housing market. One needs a change of perspective to understand this. The current thinking is that housing value is related to labor's income. In other words, the Neoclassic Theory of Production's output function can be written as Y = f(L, K, I) where Y is the output function, L is the labor number, K is capital and I is investment.
Labor produces wealth by depositing their wages into the bank which in turn generates more wealth. We know that people are taking equity out of their homes by various means. The equity to liquidly processes must be the mechanism by which Greenspan's conundrum is based. The equity to liquidly process is independent of the labor force (my opinion, no proof), yet it adds to output. The equity to liquidly process is also independent of a home's price (the value of the credit received is dependent , but not the actual process of equity to liquidly). Therefore, the production function can be written as Y = f(L, K, I, E-L) where E-L is the production factor due to the Equity to Liquidly process. In other words, the E – L factor term has its own supply and demand curves and the equilibrium is set by the intersection of these two curves. The E – L factor is independent of labor, capital and investment which are the conditions for usage in the Neoclassical Theory of Production.
The Equity to Liquidly factor has the time span of home equity line of credit time span or short time span reqire to recoup a housing investment (flipping etc...). This is the new constraint on how interest rates are distributed (the shape of the yield curve). One can use a production function of the following: Y = f(L, E-L). This production function has an L, E-L isoquant. The L, E-L has an elastic substitution function.
The biggest problem with this process is that the lenders use various neutral risk strategies to protect themselves. As interest rates rise, so does the cost of these neutral risk strategies. This is were the problem is in the housing market. It is not that the price of homes have gone up, it is the fact that Equity to Liquidly process is at risk of failing due to failing hedge funds or a reduction of risk exposure.
There is a connection between GDP and the Equity to Liquidly process. If the E – L process produces less output, this in turn will decrease GDP. A lower GDP will reduce demand for housing which will decrease the demand for E – L. So on and so on... If the Federal Reserve steps on the US economic brakes too hard, they will cause a melt down in the hosing market due to a lack of funding for the neutral risk strategies which in turn will cause Fannie Mae and Freddie Mac to go to the US Treasury to bail them out.
Greenspan has, yet again, repeated his opinion that there is no risk in the GSE which makes them ripe for a hard fall. If Fannie and Freddie are forced to reduce their ability to function in the secondary market and if the other financial companies also reduce their exposure to the housing market, then it is “good night” for the US economy and hello “soup line”.
Labor produces wealth by depositing their wages into the bank which in turn generates more wealth. We know that people are taking equity out of their homes by various means. The equity to liquidly processes must be the mechanism by which Greenspan's conundrum is based. The equity to liquidly process is independent of the labor force (my opinion, no proof), yet it adds to output. The equity to liquidly process is also independent of a home's price (the value of the credit received is dependent , but not the actual process of equity to liquidly). Therefore, the production function can be written as Y = f(L, K, I, E-L) where E-L is the production factor due to the Equity to Liquidly process. In other words, the E – L factor term has its own supply and demand curves and the equilibrium is set by the intersection of these two curves. The E – L factor is independent of labor, capital and investment which are the conditions for usage in the Neoclassical Theory of Production.
The Equity to Liquidly factor has the time span of home equity line of credit time span or short time span reqire to recoup a housing investment (flipping etc...). This is the new constraint on how interest rates are distributed (the shape of the yield curve). One can use a production function of the following: Y = f(L, E-L). This production function has an L, E-L isoquant. The L, E-L has an elastic substitution function.
The biggest problem with this process is that the lenders use various neutral risk strategies to protect themselves. As interest rates rise, so does the cost of these neutral risk strategies. This is were the problem is in the housing market. It is not that the price of homes have gone up, it is the fact that Equity to Liquidly process is at risk of failing due to failing hedge funds or a reduction of risk exposure.
There is a connection between GDP and the Equity to Liquidly process. If the E – L process produces less output, this in turn will decrease GDP. A lower GDP will reduce demand for housing which will decrease the demand for E – L. So on and so on... If the Federal Reserve steps on the US economic brakes too hard, they will cause a melt down in the hosing market due to a lack of funding for the neutral risk strategies which in turn will cause Fannie Mae and Freddie Mac to go to the US Treasury to bail them out.
Greenspan has, yet again, repeated his opinion that there is no risk in the GSE which makes them ripe for a hard fall. If Fannie and Freddie are forced to reduce their ability to function in the secondary market and if the other financial companies also reduce their exposure to the housing market, then it is “good night” for the US economy and hello “soup line”.
Tuesday, May 17, 2005
Federal Reserve and Monetary Policy: Hands Across the Ocean
Treasury Dept released its Report to Congress on International Economic and Exchange Rate Policies May 2005
a major blunder was this part:
“While China’s ten-year-long pegged currency regime may have at times contributed to stability, it no longer does so. The peg blocks the transmission of critical price signals, impedes needed adjustment of international imbalances, attracts speculative capital flows and is a large and increasing risk to the Chinese economy. Indeed, Chinese officials have publicly acknowledged the need to move to a more flexible system, have repeatedly vowed to do so and have undertaken the necessary and appropriate preparations. It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions. Treasury will continue to engage with China and closely monitor changes in its foreign exchange policy over the coming weeks and months.”
The peg of the Yuan is about 40% less than the dollar. This means that $1 billion dollars invested in China is worth $1.4 billion in China. I say that this gives US mega-corporation 40% more of incentives to STOP China from floating its currency. From a Neoclassical Production, Growth and Distribution theories, China is a “BLACK HOLE” with respect to US investments. China is a crises from an economic stand point that the free market mechanism of the US economy can not deal with.
The Bush administration is hopping that China will intervene in the North Korea nuclear crisis. China has refused to put pressure on North Korea and blames the Bush administration for “stirring up the mud”.
Are we getting our money's worth out of China. Let's see: they refuse to help on the North Korea nuclear crises. They refuses to “isolate” North Korea to get them back to the 6 way talks. Yet, we are sending them billions of dollars in trade and they still have not revalue their currency. China holds hundreds of billions of dollars in US Treasuries. Yep, China has reached out across the ocean and has Bush's throat with one hand and a firm grasp on the wallets in US mega-corporation pockets with the other hand. To be fair, Bush has his hands in those same mega-corporations' pockets with a firm grasp on the same wallets.
There is no way the Federal Reserves Monetary Policy can stabilize the US dollar against other major currencies. India and China are US investments drains due to their large population/labor force. The continuing upward pressure of inflation (slow, but steady) is going to place US corporation in the fire of Wall Street's expectations. It's going to take another 4 major hurricanes making landfall in high density population regions to make GDP goals. High, costly, impact events are needed to transfer money into the US economy now days. See link: Damages and Insurance Settlements for the Third-Quarter Hurricanes Third quarter 2004. If it wasn't for the direct infusion of $105.2 billion dollars into the US economy, GDP will have never been as high as it was reported for 2004.
It is only a matter of a few months before Fannie Mae and Freddie Mac forces the US Treasury to buy their bonds and bail them out of a cash flow jam. Shareholders will be walking away with their dividends, of which neither GSE had cut, while Wall Street and Washington DC. blame each other. Those of us on Main Street can only watch as the US economy is flushed down the toilet. Events like this happens when hedge funds goes belly up and there are no buyers of the GSEs' options, swaps and other neutral risk instruments and strategies.
Side note, see link: Fannie Mae's 2004 10K page 20.
“Our charter authorizes us, upon approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. At the discretion of the Secretary of the Treasury of the United States, the U.S. Treasury may purchase obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. This facility has not been used since our transition from government ownership in 1968. Neither the United States nor any agency thereof is obligated to finance our operations or to assist us in any other manner. The Federal Reserve Banks are authorized to act as depositories, custodians, and fiscal agents for Fannie Mae, for the Bank’s own account, or as fiduciary.“
Fannie Mae and Freddie Mac are TBTF. (Too Big To Fail)
a major blunder was this part:
“While China’s ten-year-long pegged currency regime may have at times contributed to stability, it no longer does so. The peg blocks the transmission of critical price signals, impedes needed adjustment of international imbalances, attracts speculative capital flows and is a large and increasing risk to the Chinese economy. Indeed, Chinese officials have publicly acknowledged the need to move to a more flexible system, have repeatedly vowed to do so and have undertaken the necessary and appropriate preparations. It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions. Treasury will continue to engage with China and closely monitor changes in its foreign exchange policy over the coming weeks and months.”
The peg of the Yuan is about 40% less than the dollar. This means that $1 billion dollars invested in China is worth $1.4 billion in China. I say that this gives US mega-corporation 40% more of incentives to STOP China from floating its currency. From a Neoclassical Production, Growth and Distribution theories, China is a “BLACK HOLE” with respect to US investments. China is a crises from an economic stand point that the free market mechanism of the US economy can not deal with.
The Bush administration is hopping that China will intervene in the North Korea nuclear crisis. China has refused to put pressure on North Korea and blames the Bush administration for “stirring up the mud”.
Are we getting our money's worth out of China. Let's see: they refuse to help on the North Korea nuclear crises. They refuses to “isolate” North Korea to get them back to the 6 way talks. Yet, we are sending them billions of dollars in trade and they still have not revalue their currency. China holds hundreds of billions of dollars in US Treasuries. Yep, China has reached out across the ocean and has Bush's throat with one hand and a firm grasp on the wallets in US mega-corporation pockets with the other hand. To be fair, Bush has his hands in those same mega-corporations' pockets with a firm grasp on the same wallets.
There is no way the Federal Reserves Monetary Policy can stabilize the US dollar against other major currencies. India and China are US investments drains due to their large population/labor force. The continuing upward pressure of inflation (slow, but steady) is going to place US corporation in the fire of Wall Street's expectations. It's going to take another 4 major hurricanes making landfall in high density population regions to make GDP goals. High, costly, impact events are needed to transfer money into the US economy now days. See link: Damages and Insurance Settlements for the Third-Quarter Hurricanes Third quarter 2004. If it wasn't for the direct infusion of $105.2 billion dollars into the US economy, GDP will have never been as high as it was reported for 2004.
It is only a matter of a few months before Fannie Mae and Freddie Mac forces the US Treasury to buy their bonds and bail them out of a cash flow jam. Shareholders will be walking away with their dividends, of which neither GSE had cut, while Wall Street and Washington DC. blame each other. Those of us on Main Street can only watch as the US economy is flushed down the toilet. Events like this happens when hedge funds goes belly up and there are no buyers of the GSEs' options, swaps and other neutral risk instruments and strategies.
Side note, see link: Fannie Mae's 2004 10K page 20.
“Our charter authorizes us, upon approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. At the discretion of the Secretary of the Treasury of the United States, the U.S. Treasury may purchase obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. This facility has not been used since our transition from government ownership in 1968. Neither the United States nor any agency thereof is obligated to finance our operations or to assist us in any other manner. The Federal Reserve Banks are authorized to act as depositories, custodians, and fiscal agents for Fannie Mae, for the Bank’s own account, or as fiduciary.“
Fannie Mae and Freddie Mac are TBTF. (Too Big To Fail)
Monday, May 16, 2005
Federal Reserve and Monetary Policy: Elvis has left the building
The Federal Reserve has just come out with CREDIT RISK MANAGEMENT GUIDANCE FOR HOME EQUITY LENDING
Note, this is for guidance note requirements.
There are rumors of hedge funds in trouble because they were caught off guard when Ford and GM's bonds were down graded to junk. It doesn't take much to scare off new buyers of securities. It also doesn't take much to remove old buyers from the bond and credit derivatives instruments. The Federal Reserve has released a survey of credit risk management, see The January 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices
and Greenspan has made a comment on risk management, see Remarks by Chairman Alan Greenspan Risk Transfer and Financial Stability To the Federal Reserve Bank of Chicago's Forty-first Annual Conference on Bank Structure, Chicago, Illinois(via satellite) May 5, 2005
I think it is too late. The removal of the carry trade has already cause trouble in the derivatives market. See Federal Reserve and Monetary Policy: Federal Reserve's Challenge for my reasons why I think that the problems in the derivatives markets are going to blow through the Fannie Mae and Freddie Mac back door.
It also doesn't help if the US can not attract the foreign investments to cover the trade deficit. $45.7 billion, down from $84.1 billion, but not enough to cover the $54 billion trade deficit.
Note, this is for guidance note requirements.
There are rumors of hedge funds in trouble because they were caught off guard when Ford and GM's bonds were down graded to junk. It doesn't take much to scare off new buyers of securities. It also doesn't take much to remove old buyers from the bond and credit derivatives instruments. The Federal Reserve has released a survey of credit risk management, see The January 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices
and Greenspan has made a comment on risk management, see Remarks by Chairman Alan Greenspan Risk Transfer and Financial Stability To the Federal Reserve Bank of Chicago's Forty-first Annual Conference on Bank Structure, Chicago, Illinois(via satellite) May 5, 2005
I think it is too late. The removal of the carry trade has already cause trouble in the derivatives market. See Federal Reserve and Monetary Policy: Federal Reserve's Challenge for my reasons why I think that the problems in the derivatives markets are going to blow through the Fannie Mae and Freddie Mac back door.
It also doesn't help if the US can not attract the foreign investments to cover the trade deficit. $45.7 billion, down from $84.1 billion, but not enough to cover the $54 billion trade deficit.
Friday, May 13, 2005
Federal Reserve and Monetary Policy: Fraught with Contradictions
Remarks by Vice Chairman Roger W. Ferguson, Jr.To the Association for Financial Professionals Global Corporate Treasurers Forum, San Francisco, California (via videoconference)May 12, 2005
Globalization: Evidence and Policy Implications
is fraught with contradictions. He cites papers that are no longer relevant in todays economic conditions and he makes comments that he says are good, that reality has be proved to be false. Here are some example that really stands out:
The Pew estimates that the change of Hispanic population for 2002:4 to 2004:4 was 2219. If one makes the assumption that this rate of change is valid for the 2000 to 2002 , then the number of illegal aliens is about (2219 + 2219) x 0.7 = 3.106 million unaccounted for in the Census Bureau data. The Census Bureau do not keep tabs on illegal aliens. This influx of illegal aliens clearly affects the population sample. The Federal Reserve has to use the Employment Situation Report in its communications with those in Washington DC. They know it is fraught with sampling and non-sampling errors. Some of these errors are not corrected for. Every body keeps pointing out on how well the data points to a “strong” job market without pointing out the qualifiers the Federal Reserver speakers plug into their speech: “... the slack in the job market is ...”. This qualifier should give a really big hint that things are not as they seem.
Here is another dozy.
“Economists who have studied rising income inequality in America generally conclude that, although international trade and migration have contributed slightly, the main factor by far has been progress in information technology, which has boosted the demand for educated workers relative to those with low skills.“
“Yet another potential implication of globalization is that the distribution of incomes across countries will shift. Professors Edward Leamer of UCLA and Peter Schott of Yale have recently suggested that the significant gains in Chinese and Indian per capita income over the past twenty years may have come at the expense of income growth in the so-called "middle income" developing countries such as Argentina and Brazil. Per capita incomes in many middle-income countries have stagnated while per capita incomes in the industrial countries have continued to grow. Leamer and Schott argue that few Chinese or Indian products compete with products made in the industrial countries, whereas many Chinese and Indian products do compete with products made in the middle-income countries. This is an interesting and provocative hypothesis, but as yet it has not been subjected to careful testing.”
Yet Dallas fed president has stated this in a recent speech:
“India has become a major information technology and business-processing center for U.S. companies, and jobs are shifting to Bangalore from Baltimore and to Delhi from Dallas”.
That does not sound like India is stealing from “middle-income” countries. The threat to the US economy is not the GDP of China nor India, it is the very cheap labor. It is interesting that both of these officials are trying to say that the US economy is strong and that trade will increase the wealth of US citizens. I guess they haven't heard that the trend of staying in one home has changed and people are now looking to leverage their future wealth in the hopes of striking it big in the real estate market.
The Federal Reserve is now sounding like a bunch of old guardish puppets that I'm going to change my mind about the up coming removal of the carry trade and its impact on the US economy. Greenspan opinion on hedge funds not being a problem is in doubt.
Because of the lack of respect I have for the current Federal Reserve officials, I'm going on record and say that the removal of the carry trade will cause an economic collapse in the US. The problems in the derivatives market WILL blow through the Fannie Mae and Freddie Mac back door and take out the US housing market. This event will force foreign investors to pull their cash out of the US. This in turn will force the Fed to pick up the pace of hiking Fed Funds Rate. This has happen before, except it was gold the Fed was trying to stop from flowing out. A currency collapse is imminent.
See you in the soup line.
Globalization: Evidence and Policy Implications
is fraught with contradictions. He cites papers that are no longer relevant in todays economic conditions and he makes comments that he says are good, that reality has be proved to be false. Here are some example that really stands out:
The Pew estimates that the change of Hispanic population for 2002:4 to 2004:4 was 2219. If one makes the assumption that this rate of change is valid for the 2000 to 2002 , then the number of illegal aliens is about (2219 + 2219) x 0.7 = 3.106 million unaccounted for in the Census Bureau data. The Census Bureau do not keep tabs on illegal aliens. This influx of illegal aliens clearly affects the population sample. The Federal Reserve has to use the Employment Situation Report in its communications with those in Washington DC. They know it is fraught with sampling and non-sampling errors. Some of these errors are not corrected for. Every body keeps pointing out on how well the data points to a “strong” job market without pointing out the qualifiers the Federal Reserver speakers plug into their speech: “... the slack in the job market is ...”. This qualifier should give a really big hint that things are not as they seem.
Here is another dozy.
“Economists who have studied rising income inequality in America generally conclude that, although international trade and migration have contributed slightly, the main factor by far has been progress in information technology, which has boosted the demand for educated workers relative to those with low skills.“
“Yet another potential implication of globalization is that the distribution of incomes across countries will shift. Professors Edward Leamer of UCLA and Peter Schott of Yale have recently suggested that the significant gains in Chinese and Indian per capita income over the past twenty years may have come at the expense of income growth in the so-called "middle income" developing countries such as Argentina and Brazil. Per capita incomes in many middle-income countries have stagnated while per capita incomes in the industrial countries have continued to grow. Leamer and Schott argue that few Chinese or Indian products compete with products made in the industrial countries, whereas many Chinese and Indian products do compete with products made in the middle-income countries. This is an interesting and provocative hypothesis, but as yet it has not been subjected to careful testing.”
Yet Dallas fed president has stated this in a recent speech:
“India has become a major information technology and business-processing center for U.S. companies, and jobs are shifting to Bangalore from Baltimore and to Delhi from Dallas”.
That does not sound like India is stealing from “middle-income” countries. The threat to the US economy is not the GDP of China nor India, it is the very cheap labor. It is interesting that both of these officials are trying to say that the US economy is strong and that trade will increase the wealth of US citizens. I guess they haven't heard that the trend of staying in one home has changed and people are now looking to leverage their future wealth in the hopes of striking it big in the real estate market.
The Federal Reserve is now sounding like a bunch of old guardish puppets that I'm going to change my mind about the up coming removal of the carry trade and its impact on the US economy. Greenspan opinion on hedge funds not being a problem is in doubt.
Because of the lack of respect I have for the current Federal Reserve officials, I'm going on record and say that the removal of the carry trade will cause an economic collapse in the US. The problems in the derivatives market WILL blow through the Fannie Mae and Freddie Mac back door and take out the US housing market. This event will force foreign investors to pull their cash out of the US. This in turn will force the Fed to pick up the pace of hiking Fed Funds Rate. This has happen before, except it was gold the Fed was trying to stop from flowing out. A currency collapse is imminent.
See you in the soup line.
Thursday, May 12, 2005
Federal Reserve and Monetary Policy: Change the Tune
Bush has made a statement today that CAFTA will promote Democracy in Central America. For me, that statement was what I've always thought. (See previous post) Bush has been using fast track authority as a dodge around Congress to implement his foreign policy. This process has made the job of the Federal Reserve more difficult.
On one hand, this process has made the calculations of how much more the US economy can continue to fund its current account deficit more difficult. See Is the Current Account Sustainable? The term that is at risk is the unilateral transfers (foreign aid). Bush is trying to shift the burden of foreign aid from all taxpayers to the middle class. In other words, income redistribution from the middle class to the poor of those countries. Sounds like the Communism Doctrine is being promoted by the leader of the free nations.
On the other hand, labor arbitrage lowers the income in the US and makes the job of forecasting inflation and inflationary expectations more difficult and less accurate.
On one hand, this process has made the calculations of how much more the US economy can continue to fund its current account deficit more difficult. See Is the Current Account Sustainable? The term that is at risk is the unilateral transfers (foreign aid). Bush is trying to shift the burden of foreign aid from all taxpayers to the middle class. In other words, income redistribution from the middle class to the poor of those countries. Sounds like the Communism Doctrine is being promoted by the leader of the free nations.
On the other hand, labor arbitrage lowers the income in the US and makes the job of forecasting inflation and inflationary expectations more difficult and less accurate.
Wednesday, May 11, 2005
Federal Reserve and Monetary Policy: Trade is Protectionism
Dallas's Federal Reserve Bank's President Fisher's speech is an indication that this president has know ideal what the US economic future is. He has this to offer the US citizen:
“I am convinced that India would not have gotten on the ball if it were not for the example of China. India has been growing at a 7 percent clip, though for a shorter time. It has some disadvantages that China does not suffer from—a lack of gender equality, an underdeveloped educational system for the masses and the lingering problem with castes. But it has some enormous advantages in addition to a colonial legacy of widespread use of English, foremost among them a respect for intellectual property and the rule of law.
When it comes to China and India, I ask you to think beyond the headlines—beyond the hype—and keep their burgeoning economic miracles in perspective. Measured in dollars, the economic output of China is roughly that of one U.S. mega-state, California. India’s economy is 20 percent smaller than that of Texas.
As fast as China and India are growing, these two countries have a long way to go before they overpower the United States, as some alarmists claim they will. We are a $12 trillion economy. Let’s do the math together. Pick a number of, say, 3 percent for real U.S. growth—well within our recent experience. Just to match the dollar value of our annual increase in production, China would have to grow 21 percent. India would have to grow 56 percent.
That said, it is true that they are growing like “gee whiz”—thanks, to a great extent, to U.S. consumers of goods and services. China’s exports to the United States have doubled since we inked our bilateral World Trade Organization deal and by 1,600 percent over the past 15 years. India has become a major information technology and business-processing center for U.S. companies, and jobs are shifting to Bangalore from Baltimore and to Delhi from Dallas.”
China is a ”COMMAND ECONOMY” not a free market economy. China also pegged its currency to the dollar to weaken it (~40% less). A command economy is an inefficient economy. In effect, it is a monopoly with respect to a free market. The pegged means that China can attract foreign investors because their investment dollar goes 40% further. China's GDP is not what threatens the US. It is the cheap labor.
His India crack just shows he has no ideal how much of the US economic future is pinned on IT. IT was suppose to be the saving pitch for the US economy now that manufacturing is fleeing into China.
CAFTA is a “free trade” agreement. In reality, its is an other labor arbitrage path, the off shoring of labor. See Neoclassical Theory. From a “global work force” point of view, trade (international trade) is protectionism. Trade maintains the GDP of a country. This is in direct opposition to labor arbitrage, which equilibrates GDP.
“I am convinced that India would not have gotten on the ball if it were not for the example of China. India has been growing at a 7 percent clip, though for a shorter time. It has some disadvantages that China does not suffer from—a lack of gender equality, an underdeveloped educational system for the masses and the lingering problem with castes. But it has some enormous advantages in addition to a colonial legacy of widespread use of English, foremost among them a respect for intellectual property and the rule of law.
When it comes to China and India, I ask you to think beyond the headlines—beyond the hype—and keep their burgeoning economic miracles in perspective. Measured in dollars, the economic output of China is roughly that of one U.S. mega-state, California. India’s economy is 20 percent smaller than that of Texas.
As fast as China and India are growing, these two countries have a long way to go before they overpower the United States, as some alarmists claim they will. We are a $12 trillion economy. Let’s do the math together. Pick a number of, say, 3 percent for real U.S. growth—well within our recent experience. Just to match the dollar value of our annual increase in production, China would have to grow 21 percent. India would have to grow 56 percent.
That said, it is true that they are growing like “gee whiz”—thanks, to a great extent, to U.S. consumers of goods and services. China’s exports to the United States have doubled since we inked our bilateral World Trade Organization deal and by 1,600 percent over the past 15 years. India has become a major information technology and business-processing center for U.S. companies, and jobs are shifting to Bangalore from Baltimore and to Delhi from Dallas.”
China is a ”COMMAND ECONOMY” not a free market economy. China also pegged its currency to the dollar to weaken it (~40% less). A command economy is an inefficient economy. In effect, it is a monopoly with respect to a free market. The pegged means that China can attract foreign investors because their investment dollar goes 40% further. China's GDP is not what threatens the US. It is the cheap labor.
His India crack just shows he has no ideal how much of the US economic future is pinned on IT. IT was suppose to be the saving pitch for the US economy now that manufacturing is fleeing into China.
CAFTA is a “free trade” agreement. In reality, its is an other labor arbitrage path, the off shoring of labor. See Neoclassical Theory. From a “global work force” point of view, trade (international trade) is protectionism. Trade maintains the GDP of a country. This is in direct opposition to labor arbitrage, which equilibrates GDP.
Friday, May 06, 2005
Federal Reserve and Monetary Policy: Time will Tell
The Employment Situation Report looks good on the surface, however, I find a few items disturbing. Making the assumption that the household data is, marginal, then I can not find anything really wrong. The unemployment rate held steady at 5.2%. The marginal attached labor force, see tables A-12, subsection U-5 went from 6.4% to 5.9% (not seasonly adjusted), 6.2% to 6.1% (SA). This is a good indication that at least for some people, they find that the job creation has picked up. This number is good news if it holds. It is bad news for long term inflation and inflationary expectations because the labor force buffer is apparently shrinking.
The established survey data is worrisome. BLS reports that payrolls grew by 274, 000, but the net birth/death model contributed 257, 000. Secondary evidence such as the duration of the unemployed, table A-9, indicated that with the exception of less than 5 weeks, all of the other time duration has gone down. GDP will indicate whether the 257, 000 is a mathematical artifact. (See "Federal Reserve and Monetary Policy: Greenspan's testimony on Captial Hill was as I feared" for my objections to the birth/death model)
The above analysis assumes that the large influx of illegal aliens has not corrupted the population samples. (see previous post)
At this current time, I will say that the Federal Reserve will raise short term interest rates by 25% at the next FOMC meeting. I will also say that the bond market is still correct in their collective thinking that the long term inflation risk is low.
The established survey data is worrisome. BLS reports that payrolls grew by 274, 000, but the net birth/death model contributed 257, 000. Secondary evidence such as the duration of the unemployed, table A-9, indicated that with the exception of less than 5 weeks, all of the other time duration has gone down. GDP will indicate whether the 257, 000 is a mathematical artifact. (See "Federal Reserve and Monetary Policy: Greenspan's testimony on Captial Hill was as I feared" for my objections to the birth/death model)
The above analysis assumes that the large influx of illegal aliens has not corrupted the population samples. (see previous post)
At this current time, I will say that the Federal Reserve will raise short term interest rates by 25% at the next FOMC meeting. I will also say that the bond market is still correct in their collective thinking that the long term inflation risk is low.
Tuesday, May 03, 2005
Federal Reserve and Monetary Policy: Inflation is Well Contained
Is long term inflation well contained? Two key data indicate that this is true (so far). Capacity Utilization is at 79.4% (the fed is usually worried when this number is around 85%) and there is still slack in the labor market. Notice, I did not say that there is inflation and inflationary expectations due to the labor market at full employment. In other words words, an unemployment rate at 5.2% is not the true measure of how close the US is toward full employment. One needs to read the details of the household survey.
See table A-12 of the Employment Situation Report. Subsection U-5: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job.
The current numbers are 6.4% not seasonal adjusted and 6.2% seasonal adjusted. Notice that I did not include the part timers who are working part time for economic reasons (9.4% NSA 9.1% SA subsection U-6). I did this because these can still increase inflation and inflationary expectations.
Some peoples' insistence that the household data shows that there is a phantom job market is misplaced. All one needs to do is to read the details of the Technical Paper 63RV: Current Population Survey - Design and Methodology, issued March 2002 (in PDF format). It only takes a wrong population projection to turn marginal data into useless data. Right off the bat, I can think of one error that is not corrected in the population projection. Having 3 million illegal aliens enter this country each year, according to Time, is enough to throw the population samples off.
It is my opinion that the fed is not concerned about long term inflation because the removal of the carry trade will do their job. Fed Funds Target at 3% can be perceived, by some, as the end of free US dollars. The first indication of the removal of the carry trade will be in the commodities market. Prices should fall as no new contracts are picked up because of the cost of the US dollar. The US dollar now has some cost associated with it. Expect an increase in the volatility in the commodities' pits. Also, expect this volatility to spread into the derivatives market.
Watch out for falling rocks. The financial markets are in for an earthquake type ride in the coming months. Well at least it should look like an earthquake if one looks at the graphs.
See table A-12 of the Employment Situation Report. Subsection U-5: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job.
The current numbers are 6.4% not seasonal adjusted and 6.2% seasonal adjusted. Notice that I did not include the part timers who are working part time for economic reasons (9.4% NSA 9.1% SA subsection U-6). I did this because these can still increase inflation and inflationary expectations.
Some peoples' insistence that the household data shows that there is a phantom job market is misplaced. All one needs to do is to read the details of the Technical Paper 63RV: Current Population Survey - Design and Methodology, issued March 2002 (in PDF format). It only takes a wrong population projection to turn marginal data into useless data. Right off the bat, I can think of one error that is not corrected in the population projection. Having 3 million illegal aliens enter this country each year, according to Time, is enough to throw the population samples off.
It is my opinion that the fed is not concerned about long term inflation because the removal of the carry trade will do their job. Fed Funds Target at 3% can be perceived, by some, as the end of free US dollars. The first indication of the removal of the carry trade will be in the commodities market. Prices should fall as no new contracts are picked up because of the cost of the US dollar. The US dollar now has some cost associated with it. Expect an increase in the volatility in the commodities' pits. Also, expect this volatility to spread into the derivatives market.
Watch out for falling rocks. The financial markets are in for an earthquake type ride in the coming months. Well at least it should look like an earthquake if one looks at the graphs.
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