US Archives - Page 2 of 3 - the patient investor

December 6, 2011

FRBSF Economic Letter: Asset Price Booms and Current Account Deficits

Just as the United States was not the only country posting a large current account deficit, so too it was not the only country that experienced asset price booms. Figure 2 shows that countries with large current account deficits in 2006 also tended to have larger house price increases. Of course, there are exceptions. For example, China has experienced rapid house price appreciation despite its enormous current account surplus. But, in general, house price appreciation and current account deficits appear to have been positively associated across many countries.

via FRBSF Economic Letter: Asset Price Booms and Current Account Deficits (2011-37, 12/5/2011).

Colin Twiggs: ~ There appears to be a general rule that large current account deficits lead to asset price booms. But to prove the rule researchers need to address why Japan experienced a massive asset price boom in the 1980s, and why China experienced a similar boom over the last decade, when both were running current account surpluses.

November 26, 2011

The scourge of government debt – macrobusiness.com.au

A report on a talk by Yanis Varoufakis, author of The Global Minotaur, gives some nice history of how we got here. The Minotaur is a marvelous metaphor for what governments have allowed to occur in the global financial system. Now they, and all of us, are being skewered by its horns:

“In the immediate post-war era, Varoufakis claims, “the Americans begin to take seriously the redemptive mission to save capitalism from itself.”

But in doing so, against its apocalyptic competition with the Soviet Union, America spread itself too thin. Or too thick. By the time it was funding LBJ’s Great Society reform programme, alongside the dire weight of the Vietnam war effort, America stopped being a surplus nation. It went into deficit.

What followed was a worldwide project to balance everyone else’s books in line with the Americans own – what Paul Volcker, American economist and head of the Federal Reserve from 1979-1987, called the “controlled disintegration of the world economy”…..

Towards the end of his speech, Varoufakis claimed: “The Left and Right miss the significance of this current juncture. It is not terminal for capitalism, but it has ended the conglomeration of illusions in how we viewed the world. It ended the illusion we had that we had something called free market capitalism.”

via The scourge of government debt – macrobusiness.com.au | macrobusiness.com.au.

November 23, 2011

Menzie Chinn » “Solving America’s Debt Crisis”

In principle, solving the nation’s debt problems is easy. Almost all experts agree that a combination of reduced spending and increased tax revenues is needed. Cuts in spending and increases in tax revenues equal to about 5 percent of GDP are required to prevent an increase in the debt-to-GDP ratio. If a constant debt-to-GDP ratio were achieved with spending cuts alone, annual non-interest government spending would have to be reduced by about 20 percent. Alternatively, if a constant debt-to-GDP ratio were achieved by relying solely on increased tax revenues, taxes would have to be raised by about 33 percent. It is impossible to imagine that Congress would ever adopt spending cuts or tax increases of these magnitudes.

The logical conclusion is that only a balanced approach to solving our debt crisis, one that includes both spending cuts and increased taxes, is feasible. That being said, neither spending cuts nor tax increases will be politically easy to enact.

via EconoMonitor : EconoMonitor » “Solving America’s Debt Crisis”.

November 22, 2011

Unemployment Rates Drop in Most States – Real Time Economics – WSJ

Thirty-six states and Washington, D.C. posted declines in their unemployment rates in October. Nine had no change and five showed increases. Nationally, the unemployment rate declined to 9% from 9.1% last month. Fifteen states and Washington have rates higher than the national rate.

via Unemployment Rates Drop in Most States – Real Time Economics – WSJ.

November 18, 2011

The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate

Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:

Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
It is also important that the benefits of economic growth be shared across the entire community, reducing income inequality and related social instability.
Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.

“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”

via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.

November 11, 2011

EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s.

The current structure of Europe cracks under the slowly rising stress of vendor financing: export-based prosperity for some, debt-financed consumption by others. Unless reformed, this can only end badly. The global economy has similar imbalances. In 2010 the trade surpluses of China, Russia, and East Asia (China being half the total) were almost equal to the US trade deficit of $560 billion. OPEC, Germany, and Japan accumulated another $518 billion surplus. These numbers continue year by year, accumulating stress that will eventually break the current global financial order.

We should watch and learn from Europe’s experience in the months to come. We, and the rest of the world, may follow them sooner than we expect.

via EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s..

November 2, 2011

Creditors can huff but they need debtors – FT.com

China already runs its own risk of massive losses on the currency reserves – now worth $3,200bn – it has accumulated. That was a public capital outflow aimed at supporting its trade surpluses. But, in its attempts at managing the currency relationship with the US, it is the latter that controls the central bank. China can huff and puff. But it must either buy the money the US creates, to preserve competitiveness, or stop doing so. If it buys, it throws good money after bad. If it stops buying, it imposes a shock on itself.

via Creditors can huff but they need debtors – FT.com.

November 1, 2011

Economist Editor: 2012 is going to be pretty sluggish

Economist Editor: 2012 is going to be pretty sluggish — with risk of “self-induced” stagnation

[gigya src=”http://d.yimg.com/nl/techticker/site/player.swf” width=”576″ height=”324″ quality=”high” wmode=”transparent” allowFullScreen=”true” flashVars=”browseCarouselUI=hide&repeat=true&vid=27114562&”]

October 26, 2011

Richard Koo: The effect of de-leveraging after a banking crisis

This video from 2010 is particularly important. Richard Koo explains how the private sector paying off debt leads to a rapid contraction in national income.

INET interview with Richard Koo, Chief Economist at Nomura Research

October 10, 2011

Median U.S. Household Income Continues to Fall after the Recession – Financial News

Gordon W. Green Jr. and John F. Coder, former Census Bureau officials, wrote a report based on Census data that explored household incomes during and after the recession. They found that starting in June 2009, at the official end of the recession, up to June 2011, the inflation-adjusted median household income fell 6.7 percent to $49,909.

This is a significant drop from the 3.2 percent decrease experienced between Dec. 2007 and June 2009–the official period of the recession as determined by the National Bureau of Economic Research.

Researchers found a possible reason for this is a freeze in pay, which has remained stagnant or even dropped in many cases–a large number of people who lost their jobs during the middle or end of the recession remained out of work for months and took pay cuts in order to be hired again.

A separate study conducted by Henry S. Farber, an economics professor at Princeton, revealed that people who lost jobs in the recession and later found work earned an average of 17.5 percent less than they had in their old jobs.

via Median U.S. Household Income Continues to Fall after the Recession – Financial News for the Best Bank Rates | Go Banking Rates.