Supposedly we had some good inflation data recently. Raise your hand if it reflects your personal experience.

Also read this from Naked Capitalism….

What did the Boskin Commission think was out of line? According to Wikipedia:

The report highlighted four sources of possible bias:

Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.

Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.

Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.

New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

So the Boskin report would have us believe that if I switch from steak to hamburger because beef prices are up, we should only capture the change in how I consume (ie, inflation is new hamburger/old steak price, not new steak/old steak). That is patently bogus. Similarly, the outlet substitution seems rife for abuse (“Ooh, the number is going to be really bad this month! Can we find anywhere selling X cheaper so we can put that in the model instead?”).

From USA Today….

Consider Tamara Campbell, who raided her 401(k) after her husband was laid off from his job as an occupational technician, and they fell behind on their mortgage for several months. “If I hadn’t done that, we would have been foreclosed on last year,” says Campbell, who lives in a Denver suburb.

Such hardship withdrawals began rising last year and, by January this year, had exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group.

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home. And Principal Financial (PFG) reports that in January it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.

For workers, the consequences can be severe. About 85% of employers bar employees from making 401(k) contributions for six months after taking a hardship withdrawal, says Pamela Hess, director of retirement research at Hewitt Associates. (HEW) Worse, employees who pull money out of tax-deferred 401(k) plans before age 591/2 generally must pay a 10% penalty on top of the taxes owed.

We were trying to avoid selecting another Sippican Cottage blog post for rant of week. We did not want to make it seem like every rant of the week was going to come from him. But this one was just too good to pass up.

For those that don’t already know it, we should point out that Sippican Cottage lives in the great state Massachusetts. Recently, that state passed a law requiring people to purchase health insurances. That means that if the state deems that you can pay for it, you have to pay for it. Otherwise you have to pay a large fine.

To say that Sippican Cottage was unhappy about this new law would be an understatement. When it was first past he just about blew his top. Now that it has been in place for a while, his rant is not as explosively angry as his first one was. But his rant still has the air a barely suppressed rage as he warns America what to expect from universal health care.

A new job position was recently posted which overlaps my current job. This is happy news, since it should leave me with less to do. But now I do not know what entirely my job will comprise of, and whether it will become more interesting or more dull.
I am eligible to apply for the new Click Here to continue reading.

In theory, America is nation that believes in a free market. In reality, we just have our own version of socialism. If you make money, Americans believe you be be able to keep it. If you lose money, Americans believe your losses should be shared by everyone.

So we bail out banks. From the Naked Capitalist…..

We had warned a couple of months ago that a colleague with serious connections into the Treasury and Fed told us they were working on plans for a quasi-nationalization of the banking system. Their view was that while banks would technically be solvent, they’d have enough bad credits that they would be unable to extend new loans.

Steve Waldman, in a terrific post at Interfluidity, concludes that nationalization is underway, via the expansion of the Term Auction Facility and Fed’s new 28 day repo program.

Readers may know that there has been a lot of disquiet regarding the negative non-borrowed banking reserves that resulted form the TAF. Bond market mavens, such as commentator Caroline Baum at Bloomberg, dismissed those worries as reflecting a lack of understanding of Fed operations.

I remained troubled, not by the negative non-borrowed reserves figures per se, but by the fact that the Fed was downplaying an operation which was extraordinary. The TAF is a discount window of sorts, but with somewhat longer-term loans and no stigma. Note the TAF accepts the same types of collateral at the same haircuts as the discount windows.

But the discount window is a “break glass in case of emergency” facility. It’s when liquidity is so scarce that banks can’t borrow on normal terms, so they go to the Fed, post collateral, and get dough. The fact that a supposedly temporary operation has become semi-permanent and was increased (it was initially $40 billion, then it was quietly increased to $60 billion) was a troubling sign, yet the Fed acted as if this was business as normal.

We are looking for ways to bail out those who borrowed more money than they could afford to buy a house
From Market Movers…..

Martin Feldstein has a bright idea: allow homeowners to refinance 20% of their mortgage balances with the government, where the new loans amortize over 15 years and reset every two years at the interest rate on 2-year Treasury bonds (currently 1.6%).

Mark Thoma worries that participation won’t be high; I worry rather that participation will be too high

And how do we pay for everyones losses while enabling everyone to keep their gains? We depend on our favorite communist nation to lend us money at cheap rates. From Brad Setser…..

Reuters reports that China’s reserves increased by $61.6b in January alone.

That is a stunning sum. $60b is roughly the size of the US monthly trade deficit. Annualized, the implied increase in China’s reserves tops $700b.

And the real increase in China’s foreign exchange holdings could be even bigger. We don’t know what happened with the banks’ (large) fx position. It could have fallen, increasing the reserves of the central bank. Or it could have increased. My friend Logan Wright told Michael Pettis that China hiked its reserve requirement in January and the banks were required (oops, encouraged) to meet that requirement by holding even more dollars. If Logan is right, the total accumulation of foreign exchange by China’s state then could have topped $80b.

To be precise, the $61.6 increase includes some valuation gains. Strip out the effect of the euro’s January rise, and the “real” increase in China’s reserves was “only” $55b — or about $20b more than can be explained by FDI inflows and China’s January trade surplus. Some of the difference — maybe $6 to $7b — is explained by interest income on China’s existing reserves. Some likely reflects ongoing “hot money” inflow.

A $55b monthly increase works out to an annual increase of around $660b. That is big — but not implausible. In my January paper on China’s foreign asset accumulation I estimated that China’s state added at least $500b and perhaps as much as $600b to its foreign assets in 2007, with much of the increase “hidden” in the state banks. $660b is only a modest acceleration.

The sums involved are so staggering that I suspect that they have lost their ability to shock.

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It is sometimes cathartic to write out dismal circumstances, and sometimes depressing. Most often it is depressing to considering writing and cathartic to do it. So I muster myself to post this, not yet having accepted the cards I’m deal this hand.
The circle of life has turned over, like a opossum playing dead, and we Click Here to continue reading.

This week’s rant of the week comes from Warren Buffet. With characteristic wit, he skewers the way that most companies are accounting for their pension costs. Unfortunately, this rant is buried deep down in his annual report. So you will need to scroll down to page 18 to read it. Start at the subheading entitled Fanciful Figures – How Public Companies Juice Earnings.

This from Robert Rapier….

We could still potentially see $4 gasoline by summer, but it is looking increasingly less likely. Inventories should start to come down as turnaround season gets into full gear, but we are starting this year in a more comfortable place than last year. Presuming oil prices don’t go on a big run this spring, unless we have a repeat of last year’s steep draw down I doubt we will get close to $4 before summer.

Read the whole blog post for the supporting information. But the bottom line is that gasoline inventories are unusually high this year. The last time they where this high was back in 94. This should have a moderating impact on the price we pay at the pump.

Of course, there are still high oil prices and a generally inflationary environment working on prices from the other end. Still, we can hope that those who are predicting $4 a gallon gasoline will turn out to be wrong.