Monday, December 28, 2009

Fed Wants to Drain Reserves

Today, the Fed announced hopes of crafting a policy which would drain banks of their reserves[1]. Apparently, this is to keep reserves from being lent out[2], suggesting the possible initiation of a stronger dollar policy, or at least stop it from weakening further.

I've been commenting for awhile about the increase in base money supply by over $1T since September 2008. At the same time, it has not had an impact on the actual money supply because it all seems to be sitting in bank reservers not doing much of anything. So, does the Fed want that money back? I have doubts.

Anyway, this is all in the "announcement" phase and far from the "planning" or "action" stage. I prefer to wait until the action stage, or the planning stage at the earliest, before commenting on anything. However, the articles have an interesting statistic: The Fed's balance sheet is now $2.2T with the intent of absorbing $1.25T in mortgage-backed securities through March.

Since most of these securities are probably toxic with minimal chance of being paid back, this amounts to a pure infusion of around $1T into the economy.

This kind of money should be inflationary, however we continue to see deflation, particularly in the housing market, due to the much greater contraction of credit, both through defaults, and the general resistance and reduced ability of the the public to take on more credit.

1. Fed Proposes Term-Deposit Program to Drain Reserves.
2. Fed Proposes Tool to Drain Extra Cash.

Saturday, December 26, 2009

Debt Ceiling $12.4T

Santa's elves have been busy. Also on Christmas eve, and with minimal fanfare, the Senate approved increasing the national debt ceiling by $290B (or $2105 T*Bux) to $12.4T overall.[1] While this isn't a huge percentage increase, it does suggest the prior limit of $12.1T will be reached shortly, if not already.

Another figure I recently saw was a expansion of public debt to $7.7T, nearly $2 trillion dollars higher than $5.9T owed at the end of 2008. "Public debt" is the portion of the national debt owed on treasury bonds. The rest, I understand, is debt owed to the American citizenry for Social Security and Medicare entitlements.

Federal tax revenues collected in 2008 was $2.3T

1. Congress Increases Debt Limit.

Thursday, December 24, 2009

Merry Christmas... Suckers!

Sadly, Obama used this Christmas eve to announce there will be no limits to the amount of taxpayer subsidy to support Fannie Mae and Freddie Mac.[1,2] When the program was instituted in September 2008 under Bush, bailout limits were set to $200B. Obama then doubled limits to $400B, and today he announced no limits.

Effectively, banks can shift toxic loans on to the tax base by selling them to Fannie Mae and Freddie Mac. With the government buying, likely worthless mortgage securities will be bought at full price. This amounts to very generous support of Wall Street courtesy of taxpayers. Reportedly, so far $110B of mortgage securities have been picked up, so this pre-emptive expansion of government support seems a little enthusiastic.

Also, the CEOs of these two failed government-run programs are once again eligible for bonuses of up to $6M.[3]

1. U.S. Promises Unlimited Financial Assistance to FNM, FMC.
2. U.S. Move to cover Fannie, Freddie Losses Stirs Controversy.
2. Regulators Approve Millions for Fannie, Freddie Execs.

Tuesday, December 22, 2009

FDIC Limit Extension

Late news but I thought I'd pass it on.

In September 2008, to mitigate cash flight from banks, the FDIC limit was raised from $100k to $250 per bank, good through 2009. If memory serves, this was connected to the TARP legislation.

Last May, the increased rate was extended through 2013.

Thursday, December 17, 2009

Man of the Year

Ben Bernanke won Time Magazine's "Man of the Year."[1] The article opens with: "A bald man with a gray beard and tired eyes is sitting in his oversize Washington office, talking about the economy. He doesn't have a commanding presence. He isn't a mesmerizing speaker. He has none..." and it goes on further like this. You know, Time, when I'm up for nomination for forecasting the fate of the dollar, you can just go ahead and pick the other guy.

In what has to be regarded as an embarassing setback for Bernanke, a hold has been placed by Bernie Sanders (I-Vt.) on his confirmation for another term as Fed Chairman.[2] This means he will require 60 votes for confirmation. Almost surely he will get that, but this stretches out the process and gathers unwanted attention in an area of politics that I imagine tends to prefer quiet and usually enjoys support from both parties. In today's panel hearing he won by what must have been a concerning 16-7 margin. Though he will be confirmed, this cannot be regarded as a victory.

Sen. Jim Bunning (R-Ky.) noted that past recipients of Time's "Man of the Year" included Adolf Hitler, Josef Stalin (twice), Yasser Arafat, Vladimir Putin and Richard Nixon (twice).

1. Person of the Year 2009 (Time).
2. Senate Panel Endorses Bernanke for Second Term (LA Times).

Citi's Stock Selloff

Back in March I wrote a regrettable post angrily denouncing the media for crediting the emerging turnaround in the DJIA (then in the mid-6000's) to Citigroup's declaration of quarterly profits. As we now know, over the subsequent months the DJIA has advanced briskly and broadly to the mid-10,000 range. The last line of the post I would like more than anything to delete, in fact the whole post I would—it really was written in the heat of the moment—but integrity dictates it has to stay. This "dead cat bounce" wasn't the huge surprise to me that the line suggested, though later I did make a top call in the 8500 range.

Today, a substantial slide in the DJIA was again attributed to Citigroup—this time because they "sold stock at a discount."[1] Again, I'm tempted to poo-poo this as having any sort of relevance to the broader economy, but experience has shown me I have much to learn.

1. Stocks Fall on Citi Sale, FedEx Forecast (BusinessWeek).

Wednesday, December 16, 2009

FOMC December

Today the Fed kept rates the same[1], at close to 0%. Nor where there any additions to quantitative easing or lending instruments. They anticipated the U.S. economy is in the early stages of recovery, and as recovery moves foward there will be changes to tighten money supply, but nothing new for today.

Personally, I see no economic fundamental driving the recovery other than an easy money policy directed at Wall Street and Corporate America.

1. Fed Press Release (12/16/09).

Tuesday, December 15, 2009

"Public Debt"

In the last post I came upon an interesting number from the CIA World Factbook, that the U.S. public debt is around $5.4T, which seemed odd, considering the debt clock has us over $11T nearing the spending cap of $12.1T.

So I looked it up. There is public debt, which is $5.4T for the USA as of 2008 (but likely a trillion dollars higher now), which is the amount owed to holders of Treasury bonds. Then there is gross debt, which is that number plus what it owed by intra-governmental trust funds like Social Security. It is gross debt which is nearly $12T in the U.S.

This blog will continue to try to make sense of scattered concepts and figures one finds when attempting to nail down the level of government indebtedness.

Monday, December 14, 2009

Mexico Downgraded

Downgrading of national debt I expect to become more commonplace in coming months, and one day will reach Europe and the United States. But today Mexico is in the spotlight, dropping from a BBB+ rating to BBB rating. Business week[1] cites a high reliance on oil taxes and a reluctance to implement a national sales tax as pivotal to the debt downgrade.

The CIA world factbook for Mexico (2008) cites a GDP of $1.56T, with a public debt at 36% of that, or around $560B, and revenues at $257B, with state expenditures at $258B. It varies depending on where you look, though; vague and inconsistent figures are a common pattern when it comes to the unsustainability of government spending.

In other news, political tensions seem to be heating up in Italy, where the prime minister spent some time in the hospital after taking a hit to the face from a gothic cathedral replica[2]. No reason was given to what motivated the 42-year-old assailant, who seems to be getting more fame than notoriety from it—but Italy has one of the higher debt-to-GDP ratios in Europe.

For Italy (2008): GDP is $1.83T, public debt is 106% of GDP (or nearly $2T), revenues are $1.07T, and expenses are $1.13T. A debt-to-revenues ratio of 2 is a pattern in Mexico, Italy, and Greece.

Using the same method for the USA (2008) we have: GDP $14.44T, Public Debt at $37.5% of GDP (or $5.4T, which I wonder how they calculate when we have debt ceiling of $12.1T), revenues at a scant $2.52T (or around $16,000 T*Bux), and expenses at $3T.

1. For Want of Higher Taxes, Mexico's Debt is Downgraded.
2. Italy Ponders Wounds as Berlusconi Mends from Attack.

Friday, December 11, 2009

Even Steven

The U.S. Dollar Index has nearly fully retraced gains made from the start of this blog in April 2008, through March 2009. Had I said in March to divest from the dollar and jump into the stock market, I would be the smartest blogger on the Internet, and had I done so myself I would be around 40% richer. Part of the rebound was the expected "dead cat bounce" seen commonly in deflationary corrections. Part is from recent bailout activity. How much is which I cannot say due to the seeming reduction in transparency of bailouts over the past few months.

Anyway, the dollar has not quite fully retraced its path but it is close and it easily could. Given this, I'd like to reflect on the purchasing power of the dollar over this time.

From March 2009 through today, clearly it has not been as good an investment as the stock market, or against foreign currencies. But has it been bad? Comparing today to April 2008, I would rather buy a house today. I think now is a better rental environment as well. I would rather fill my car with gas today then back then. I would rather hire an employee today. Prices of food and everyday goods remain similar—however deflation would first present as increased rates of items on sale. Has there been that? I think so, but overall my grocery tab feels about the same. At least it hasn't increased further as it had been doing though most of this decade. I'd even rather buy stocks now than a year-and-a-half ago, though if I had wanted to I missed my opportunity last March. Generally, since the start of this blog, deflationary forces have been prevailing, and the purchasing power of the dollar is stronger.

Of course, one thing that I wouldn't rather buy now is gold, that recently peaked at $1214/oz. From the start of this blog until today, gold has had some ups and downs but is up around 25%.

The U.S. Dollar Index is limited in that it compares the dollar against other currencies. If all currencies were to devalue simultaneously, which isn't far fetched as central banks frequently act together, the index in that case would stay even, while the purchasing power of the dollar is lost. Mostly the purchasing power of the dollar has held steady or strengthened, with the main exception being gold.

Wednesday, December 9, 2009

Greece Downgraded

Greece is in the news today. Their government bonds are facing a hefty downgrade, and interest rates demanded are rising briskly[1]. In short, the Greek government is running out of options to finance itself, to the point where a possible bailout from the European Union has been raised.

The article gives a puzzling statistic, which I think is a mistake. It reports Greek national debt is 125% of GDP, which would be a very manageable level of debt—better than major European economies as well as the U.S., all running in the ballpark of 150% of GDP, or Japan which is close to 200%. I wonder if they mean 125% in excess of GDP, or 225%.

This is an interesting number to me because it defines the point where governments are forced to stop deficit spending. In a recent post, I offered a debt-to-GDP ratio of somewhere between 2 to 6 based on examples we have from different countries. If the Greek balance sheet is going into a tailspin at 2.25, then we may be reaching government spending limits even sooner than I was guessing.

ADDENDUM: So I've been researching national debts, and I find numbers all over the place. 125% is a common number I see for Greece, with the U.S. and much of Europe hovering around 60-70%, and Japan at 170%. So clearly there are different ways to calculate the figure. Will post further when I see better consensus data. Here is some 2008 data, though, as we know, when it comes to public spending, 2009 was a busy year. What really matters is that national debt to tax collection ratio, of which GDP may be seen as a ballpark indicator of taxes the government can collect.

From the CIA World Factbook for Greece (2008): GDP is $344B, National Debt is 97.4% of GDP, Revenues are $127B, and expenditures are $144B.

1. Greece Government Bond Tumble Fails to Entice Pictet

Friday, December 4, 2009

Base Money Surpasses $2T

A little over a year ago, before September of 2008, base money had plateau'd at around $800B. Within three months there was a sudden spike to $1.8T, where it had stabilized for the better part of 2009. Around September of this year it has begun to drift upward again, now just over $2T.

Bank reserves follow exactly the upward trend in base money supply, meaning any new money created is just sitting in banks. Obviously the Fed and the Treasury Department gave it to them to lend out to "jump start" the economy and support inflated asset prices. But banks seem to be hesitant to lend it out.

So because the added money is sitting in banks, this is the equivalent of printing a trillion dollars and then burying it in coffee cans in the desert. There is no meaningful effect it is having on the overall supply of money in circulation. Not that a trillion dollar expansion is not of concern, but that is how it is playing out.