Two top advisers to Alan G. Hevesi, the former state comptroller, were charged Thursday in a 123-count grand jury indictment that said they had turned New York’s $122 billion pension fund into a criminal enterprise. The scheme netted them and other Hevesi associates tens of millions of dollars in kickbacks from firms investing the fund’s money, the indictment said.
The Labor Department reported Wednesday that consumer inflation rose 0.4 percent in February, the biggest one-month jump since a 0.7 percent rise in July. Two-thirds of last month’s increase, which was slightly more than analysts expected, reflected a big jump in gasoline pump prices.
Core inflation, which excludes food and energy, rose 0.2 percent in February, also slightly higher than the 0.1 percent rise economists expected.
I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months.
This is a problem. But the Fed is going to solve it. From a Federal Reserve press release….
To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.
Buying agencies is old hat. The Federal Reserves started doing that around the same time foreign central banks stopped buying them. It is the long dated treasuries that are new. The Belmont Club has a round up of how various newspapers are reacting to this news.
What will the effects of this be? The Times reports in a different context….
The Bank of England believes that it may take “many months” before the full benefits of its radical strategy of creating new money to boost the economy will be felt, it emerged today.
The same could be said for any negative effects.
The Federal Reserve reported that industrial production fell 1.4% in February, and output in February was 11.2% below February 2008. The capacity utilization rate for total industry fell to 70.9%, matching the historical low set in December 1982.
He also has a post on the record lows set by New York’s manufacturing index.
This essay from the Atlantic presents a view of China that is different from the one generally held here at the Ethereal Voice. But facts in the article are generally the same ones that we would use to support our view. That is what makes it interesting.
From The New York Times…
The Chinese prime minister, Wen Jiabao, spoke in unusually blunt terms on Friday about the “safety” of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to offer assurances that the securities would maintain their value.
If that does not worry you, read the Wall Street Journal article…..
The Obama administration rejected China’s concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.
In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.
“There’s no safer investment in the world than in the United States,” said presidential spokesman Robert Gibbs.
Every time during this current crisis someone has claimed that something was safe, it has run into trouble within six months. But such worries are old hat. If all there was to this story was somebody expressing worry about the ability of the Untied States to handle its debt load I would not even bother posting it. But what is more interesting about this story is how everyone seems to be willfully misinterpreting it.
This story has been all over the news, and yet everywhere I go people are talking about how China is looking for assurances. But that does not come close to passing the smell test. You don’t have a leader of a country seek assurances. You do that through private diplomatic means. When a leader of a country speaks, it is to shape public perception and to warn the world about actions that might be forthcoming.
Yet everyone is bending over backwards to convince themselves that this is nothing more than China looking for assurance. Every article on the subject is filled with experts who assure us that China has not real choice and that it must continue to buy US assets. I think Brad Setser falls into this trap when he says…..
1) China both wants to maintain the RMB’s link to the dollar and avoid adding to its already large dollar exposure. Yet so long as China pegs to the dollar and runs a sizable current account surplus, it is hard to see how China can avoid adding to its dollar holdings.**
2) China is torn between its interest as a creditor and its interests as an exporter. China’s commercial interests would be best served by an even larger US stimulus, one that helped spur US demand for China’s goods. China’s reserve managers though worry that the US won’t be able to finance a large stimulus and thus are worried that a rise in Treasury supply would reduce the value of China’s existing Treasuries.
The problem with Mr. Setser’s analysis is that he assumes that the question of what is best for China’s economy and the question of what is best for the value of China’s reserves are two separate issues in the minds of China’s policy makers. But while this was certainly true is the past, there is no reason to assume that this is true today.
In the past it was clear that China was willing to sacrifice the value of its reserves in order to facilitate economic growth. But that was back when China was exchanging the value of its reserves for a booming trade surplus. Today China’s trade surplus is falling like a rock. In January, China’s trade surplus was $39.1 billion dollars. In febuary, its trade surplus was only $4.84 billion dollars. If China’s trade surplus keeps falling at its current rate, China will swing into a trade deficit next quarter. If that happens, China will need to sell some of its dollars assets to fund its imports.
This scenario is currently regarded as unthinkable by most commentators. But it is the logical result of China trying to stimulate domestic demand. In fact, if China wants to prop up domestic demand (like it has promised to do) without running a huge fiscal deficit (like it has promised not to do) then they have no choice but to engage in a massive sell down of their reserves.
So the reason that China is making it very public that they expect the US to insure the value of China’s investments may have something to do with the fact that China is starting to think that it may need those assets to keep its own economy afloat.
Regardless of whether I am right or not, the idea that that Prime Minster of China is looking for assurance is bunk. The US government has already committed to standing behind the agency debt. The treasuries have it in writing that they are backed by the full faith and credit of the US government. How are more words going to assure the Chinese? There is something more going on here.
There are numerous people on the internet trying to help us understand the magnitude of the money that’s been talked about these days. I found this illustration helpful. It helped me visualize the order of magnitude shift between billion and trillion.
The global financial crisis has taken its toll on China, sending exports from the workshop of the world tumbling in February, slashing its trade surplus and raising the possibility of a deficit.
Exports in February slid 25.7 per cent from a year earlier, dwarfing forecasts of a 5.0 per cent fall, while imports dropped 24.1 per cent, close to projections of a 25.0 percent decline.
The resulting trade surplus was only $4.84 billion (£3.5 billion), a three-year low, compared with $39.1 billion in January and a record $40.1 billion in November, the customs administration said.
That was far short of market expectations of a figure of $27.3 billion.
In the last couple of weeks it has seemed like the Economist was not worth the time it took to read. But this week I was reminded of why I read the magazine. Some of the highlights…..
The article on Japan called Rebalancing act. The article suffers from the usual Economist foible of trying to spin something as positive what is a total disaster. Take this paragraph, for example. . .
JAPANESE households used to be among the world’s biggest savers and, as a result, the country ran a massive trade surplus. But no longer. They now save less of their income than American households, and Japan’s trade balance moved into deficit last year (see top chart). A long-overdue—and painful—economic rebalancing is under way.
Rebalancing is such stupid word for spending down your savings in the face of economic disaster. For years I have had to suffer through listening to fools arguing that Japan’s problem was that its people saved too much. Now that the savings rate in Japan is practically zero (see the charts in the article) things are going just dandy, right?
But if you can get past the fact that the facts presented in the article are completely at odds with the idea that Japan is going through some kind of positive “rebalancing,” the article is a very interesting read.
Another interesting read is the article entitled The bees are back in town . You can read the article as both refuting some of the wilder fears about the collapse of the honey bee population and as a warning on the dangers of extreme mono cultures. Though it is clear that the writer’s intent is only the former and not the latter.
The article entitled About face was also interesting. It made me wonder how creditworthy I looked. It also made me think of Abraham Lincoln’s famous contention that after a certain age you could blame a man for how he looked (meaning their moral character would start to show through, not that people should all be handsome. He had enough self knowledge to know that nobody could accuse him of being handsome).
Those are only the highlights of this week’s Economist. There were other articles that I found interesting as well. But you can scan what is in this week’s edition for yourself if you are so inclined.
My apologies for anyone who struggled through reading this before I whacked off his worse grammatical errors. Please remember that even the brilliant Albert Einstein occasionally forgot where he lived; just because our Ape Man cannot always remember the difference between “passed” and “past” does not necessarily indicate he is in the habit of drooling. We apologize for the technical difficulties, and we hope that you will find his ideas worth reading in spite of his occasional struggles with coherency.
Sincerly,
The Troll
This is a “top secret document” from AIG. (h/t Calculated Risk)