It's Still The Economy, Stupid

Friday, October 17, 2003  

Pittsburgh near bankruptcy

Pittsburgh credit rating is sent to junk status.

Pittsburgh's credit rating was slashed five levels to the lowest of any major U.S. city after Mayor Tom Murphy's threats to file for bankruptcy over the state's failure to allow a tax increase.

Pittsburgh was downgraded yesterday to "BB" from "A-" by Standard & Poor's, affecting $879 million of general-obligation bonds.

My guess is that this isn't the last city to have problems. It also sends a shudder through risk markets as muni bonds are all insured. Joe Myzak points this out in Bloomberg today:

This is a political fight...Until the fight is settled, the bondholders are hostages. Actually, the bond insurers are the hostages, because all of the city's general obligation debt is guaranteed.

This is no way to treat the investors who are going to be part of the solution to the city's budget problems. Desperation makes politicians do weird things. With the nation's economic recovery still only sputtering along, expect it to get weirder before it gets better. Bond buyers beware.

Not only are bondholders hostages, but public employees too. 700 city employees and 100 vacant positions have already been eliminated. An oversight committee bill is being proposed that would mandate proposed cuts to restore a balanced-budget. One of these is to merge the fire and emergency response services as well as the city and county government, eliminating dozens more jobs.

posted by Teddy | 1:50 PM |

Russia may convert oil transactions to Euros

Iraq's conversion of oil transactions to Euros was considered by a number of people to be one reason or even the main reason for the rush to war on Iraq. When Germany and Russia came out against the U.S. war, conversion of Russian oil transactions to Euros was discussed as a way to balance American monetary dominance. This process has picked up steam, with both Vladmir Putin and ECB chair Wim Duisenberg making favorable statements this week.

I doubt whether this change will have a major effect on the dollar, but it will add to pressure on the Euro/dollar exchange rate, which has risen from $0.82 to $1.16 since January 2002. It will also put upward pressure on the CPI, in which oil and gas are major components. The magnitude of the effect will depend on how much the other oil producers play along. To get their local currency, an oil producer will have to sell Euros if that is what they are paid in. The only consequence is if more reserves are held in Euros.

Currently, about 70% or so of international reserves denominated in dollars, this would have a massive deflationary impact on global assets if the dollar were to collapse. No country wants this, so instead we're seeing a gradual statement against the dollar hegemony on international financial transactions; an incremental abandonment of the dollar on a bilateral basis: the EU and Russia, perhaps China and Japan as either the Yuan or the Yen takes over as the Asian regional currency.

It is also not clear what the replacement monetary system will look like. A return to gold is a minor possibility, but this system has a thousand-year history of failure, with too much of the metal in private hands. More likely, there will have to be an international basket set up, much like the "bancor" Keynes proposed back in the 1940s, based on the Euro, Yen, Swiss Franc, and possibly even third world currencies like the South American peso or the African Franc. In this way the rest of the world would be gradually weaned from the dollar system, but the transition would take years and require a ton of cooperation to pull off smoothly.

Regardless, the process is already underway. The Bush administration does not help with a belligerent attitude. They may coerce cooperation for the present, but it only strengthens the resolve of the rest of the world to set up a non-dollar future.

posted by Teddy | 10:12 AM |

Defeat for Bush?

Senate Defies Bush On Iraq Assistance.

I certainly would not see this as a defeat for Bush. In fact, I should see this as a very positive step for withdrawing with honor or advancing the Neocons plans for the Middle East. What better way to keep an elected Iraqi government under control than a huge debt to U.S. interests? This is how we keep the entire third world in line. We've already awarded all the oil contracts to U.S. companies, the IMF and WorldBank are ready to go in and make development loans, and the UN has just legitimized the U.S. as an occupying authority.

The only remaining hurdle to the U.S. is somehow having an election without having an election. I wouldn't be surprised if the U.S. quickly submits a plan that essentially legitimizes the current interim government for a year, implements U.N. security forces to let us pull the majority of our troops out from police activities (perhaps by moving them to forward bases where we could attack Iran/Syria), and sets elections for 12 months, barring some "unforseen" event.

The quotes would indicate that a U.S. attack against Iran for supporting cross-border terrorist attacks (that just happened to destroy their nuclear facilities by-the-by), would put off elections for however long is needed. It would also mean if a elected Shi'ite government got out of line the U.S. military would be in position to march right back in under the pretence of U.S. (economic) interests.

I think the Democrats that voted for this are going to get sucker-punched when they discover this split is really not a split at all, but rather a ploy to get Democrats to support Bush plan B.

posted by Teddy | 8:49 AM |

Thursday, October 16, 2003  

Homernomics 101

From the same article.

Social Security beneficiaries will get a 2.1 percent cost-of-living increase next year, providing an extra $19 a month for the typical retiree.
Next year's boost, announced Thursday by the Social Security Administration, is up from this year's increase of 1.4 percent, but still reflects an economy with low inflation.


But for most older Americans, much of the increase will be wiped out by a 13.5 percent hike in Medicare premiums that also takes effect next year. Premiums will rise $7.90 a month to $66.60.


posted by Teddy | 1:31 PM |

I'm busy today...

Alan Krueger tries to figure out why middle and lower class people vote for tax cuts for the rich.

Consider Alabama, which in September voted down a tax referendum championed by the state's Republican governor. Alabama's threshold for paying state taxes is the lowest in the country at just $4,600 for a family of four; taxes are highly regressive. The referendum would have raised the threshold to $17,000, increased the tax rate for higher earners, ended the state's full deductibility of federal income taxes, and expanded the sales tax. The revenue would have more than offset the state's record budget deficit, with the surplus earmarked for a reading program for elementary-school children, higher teacher salaries in at-risk schools, and college scholarships.

Lower-income families clearly would have benefited. Yet only 36 percent of voters in the bottom half of counties ranked by median household income supported the referendum, just slightly more than 32 percent in the top half.

This is a bit misleading. If you're taking the bottom half of counties ranked by income, you're not really getting a "purer" sample of lower-income individuals. The income distribution is not terribly different between counties, regardless of their median income.

Secondly, the tax proposition had a critical section that rolled back Alabama's "current use" exemption. Large corporations like Weyerhauser and Boise Cascade, that employ people and own lots of land in rural areas (which tend to have the lowest median incomes), would have been the most seriously impacted. Lower income employees of these companies likely would not vote for a measure that could possibly cut back jobs and corporate spending in rural areas, particularly when many rely heavily on as few as one employer.

Thirdly, lower income individuals have lower registration and voting rates across the entire spectrum of elections.

Finally, the whole proposition is just not true. Consider voters in Alabama's predominantly black counties:

For most people in the Black Belt, the Tax Reform Package is a win-win proposition. The income tax component of the plan actually reduces state taxes for lower income families by raising the beginning tax level from $4,600 annually to approximately $20,000 annually. According to U.S. Census Bureau figures, the per capita income levels for Sumter, Greene, Marengo, Hale, Perry and Choctaw counties all fall below the $20,000 mark and median income levels are only slightly higher.

And how they actually voted

But there were counties where the tax package actually passed, according to numbers released by the Associated Press. Counties in the "Black Belt" were the leading counties in support of the package, with Bullock, Hale, Greene and Dallas Counties all voting in favor of the amendment. Surprisingly, Lee County, traditionally one of the most conservative counties in Alabama, also passed the amendment. Other conservative strongholds, however soundly defeated the package. Baldwin, Calhoun and Mobile Counties all voted in opposition to the package - as did Covington, Crenshaw, Pike and Escambia Counties.

So it would appear voters act a bit more in their own enlightened self-interest than people would give them credit for. The problem seems to be that a large majority in Alabama did not see the tax increase in their self-interest - which is not surprising. If you're passing off dealing with deficits to future generations, there's no harm in getting, however small, free money that you won't have to pay for. The altruistic vote isn't going to get you 51%. Neither is the "think about the children" vote.

Thinking about next year's election: attacking Bush's tax cuts is going to be a non-starter, because even I liked the tax cuts. It's better to focus on just how few jobs have been created, how overtime pay is being cut back, and health care benefits are being slashed, along with veteran's benefits and pay for the troops. Better for the Democrats not to even let the words "tax cut" leave their lips.

posted by Teddy | 12:07 PM |

Shorter Tom Friedman

On Listening

If the administration had listened to me, we would have attacked Iraq out of love rather than out of fear.

Credit to D^2 Digest for originating the shorter concept. I thought I'd give it a whirl.

posted by Teddy | 11:33 AM |

UN Security Council Resolution

Not that this has to do directly with economics (except that the U.S. is trying to use UN member states to defray the cost of occupation), but I'm surprised the Security Council is so indecisive.

If you read the text of resolution 1441, which allowed weapons inspectors in Iraq (and allowed the U.S. ammo to unilaterally invade), nearly every point is a decision - particularly ones like this:

4. Decides that false statements or omissions in the declarations submitted
by Iraq pursuant to this resolution and failure by Iraq at any time to comply with,
and cooperate fully in the implementation of, this resolution shall constitute a
further material breach of Iraq’s obligations and will be reported to the Council for
assessment in accordance with paragraphs 11 and 12 below;

The current resolution has no "Decides" statements, exept that within one year it will review the role of the U.S./U.K. occupying force and will remain "seized of this matter".

The other paragraphs of the resolution are: "reaffirms", "welcomes", "supports", "affirms", "calls upon", "invites", "resolves", "requests", "takes note", "requests", "requests", "determines", and "urges". About the only thing the U.S. gets out of it is the legitimization of the Coalition (a "multinational force under unified command"). Foreign money and military support is called for, but not decided, so each member country can decide whether to support the U.S. effort or not. Not much change from before except it's been written down and duplicated 200-odd times.

I'm guessing foreign support for this was resolution on the basis that the U.S. will eventually GET OUT and transition to a legitimate government. Syria probably came aboard because while it condemns the harboring of elements that hurt the security situation in Iraq (terrorists and members of the former regime), it does not decide to take action. The definition of legitimate and the timetable for leaving is still under U.S. control, but as corporations are perpetual entities, they can wait for all the juicy CPA contracts to expire.

My question is how costly this is going to be to Halliburton and Co.? They now have a vested interest in the U.S. never leaving (at least until the economy turns around). It also sets this transition up for permanent review before the United Nations, which means our success in Iraq will next come up for review about one month before the 2004 elections and every year thereafter. This will be good or bad depending on how the situation is improving. If you read anything over at Daily Kos or Kos alumni Steve Gilliard, you know the answer to this question.

posted by Teddy | 10:02 AM |

Welcome 384,000 new unemployed!

Join the 3.67 million already there. TBogg has the details.

posted by Teddy | 9:26 AM |

Displacement and the Dollar

Mark Faber makes a good point in his 10/14 commentary about the South Sea and Mississippi bubbles over at The Daily Reckoning.

The "bubble" model always involves a "displacement", which leads to extraordinary profit opportunities, overtrading, over-borrowings, speculative excesses, and swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale comes to light, then by the closing act during which the outraged public calls for the culprits to be taken to account. In each case, excessive monetary stimulus and the use of credit fuels the flames of irrational speculation and public participation, which involves a larger and larger group of people seeking to become rich without any understanding of the object of speculation.

Compare this to Paul Krugman's statements on the U.S. dollar in his commentary on the same day.

But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.

What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.

For a long time, the U.S. has used its leverage as the world's biggest debtor. We've got a $500 billion trade deficit? Our net investment position is negative $2.5 trillion? Foreign interests hold 40% of our treasury debt? Who cares! Where else are they going to park that kind of money?

If the above paragraph is true, it stands to reason that we should be worried more about other countries presenting good alternative investment opportunities (like the Japanese stock index now topping 11,000 after nearly 14 years of losses, as well as rallies in other East Asian bourses), that in any crisis of confidence in the United States.

For a long time, the Japanese had to use the "yen carry" to keep investment gains flowing to their crippled financial sector. Now that Japanese interest rates have risen off the zero line, this seems to be displacing a number of Japanese private investors. This is one probable reason why the Japanese Central Bank had to buy over $75 billion in U.S. treasuries in the first seven months of the year, breaking the record intervention set in all of 1999.

Much like our attitude toward the U.N. during the Iraq conflict, the U.S. has thumbed its nose at the East Asian countries that have been major players in recycling our trade deficit back to us. Based on the second quarter flow of funds data, it was this foreign inflow alone that kept our dollar strong and funded our massive increase in federal borrowing required by the tax cuts. This in turn is displacing huge amounts of capital that could probably be more profitably invested in foreign production than U.S. speculative assets. Foreign countries, especially China and Japan, are certainly looking at ways to break out of this cycle of trade dependence on the U.S.

This is why the Fed's reflation attempts are dangerous. Domestically, the displacements they are creating are bankrupting our senior citizens with low interest rates on their pensions relative to big jumps in their medical costs. It's impoverishing our younger generation with rising tuition but no jobs upon graduation. It's also sent a message to foreign asset holders that we intend to devalue the dollar. As a result, it is displacing a lot of global capital into commodities, global stock markets, anything better than U.S. dollar assets. If investors find non-U.S. assets preferable, we may have just given foreign capital somewhere else to go. Our policy may inflate the rest of the world - at our expense. At home, we risk higher interest rates, which would cripple either a debt-laden consumer sector or a financial sector rapidly locking itself into lending massive amounts money at 50-year lows. We seem to be rapidly heading toward the conclusions of Richard Cantillon in his 1730s "Essai" (first pointed out to me by Doug Noland, of course.)

“If more money continues to be drawn from the mines all prices will owing to this abundance rise to such a point that not only will the landowners raise their rents considerably when the leases expire and resume their old style of living, increasing proportionably the wages of their servants, but the mechanics and workmen will raise the prices of their articles so high that there will be a considerable profit in buying them from the foreigner who makes them much more cheaply. This will naturally induce several people to import many manufactured articles made in foreign countries, where they will be found very cheap; this will gradually ruin the mechanics and manufacturers of the state who will not be able to maintain themselves there by working at such low prices owing to the dearness of living.”

“When the excessive abundance of money…has diminished the inhabitants of the state, accustomed those who remain to a too large expenditure, raised the produce of the land and the labour of workmen to excesses prices, ruined the manufactures of the state by the use of foreign productions on the part of landlords and mine workers, the money produced by the mines will necessarily go abroad to pay for the imports: this will gradually impoverish the State…The great circulation of money, which was general at the beginning, ceases; poverty and misery follow and the labour of the mines appears to be only to the advantage of those employed upon them and the foreigners who profit thereby.”

posted by Teddy | 7:29 AM |

Longer Teddy Salad

Toot, toot. John Crudele. This sort of makes up for the Cubs loss last night...not.

posted by Teddy | 6:56 AM |

Wednesday, October 15, 2003  

No problems here?

General Motors reported improved earnings. If you read the release, note that only about 8% of the profit was from making cars. Expect higher profits later as auto workers have agreed to a rather unfavorable contract. Isn't it strange how GDP is growing 5% yet many workers have to beg to keep their pay and jobs?

posted by Teddy | 7:18 AM |

Pension Guarantee will need bailout

The prime culprit: a series of major bankruptcies, mainly involving airlines and steel companies, that required the agency to step in and assume the costs of funding the companies' pensions.

Even though the agency has been forced to take over thousands of failing private pension funds, Congress is preparing to pass legislation that would let corporations put $26 billion less into their retirement plans over the next two years.

Though that may seem counterproductive at first glance, virtually everyone involved in the debate over pensions agrees that allowing reduced contributions is necessary -- for now -- in order to avoid even more pain for workers, companies and stockholders.

Indeed, corporations and workers support the legislation so strongly that the House approved the bill to reduce contributions last week on a 397-2 vote. The Senate has not yet voted on the pension legislation.

Just one more way we (continue to) spend today for a poorer tomorrow. What does 5% GDP growth mean when your choices are to be fired or not have a pension? And what's with this double-counting of companies and stockholders? The priorities here apparently are, workers could lose a job, their livelihood, their financial future or corporations could miss earnings expectations and the owners might take a dividend cut.

posted by Teddy | 7:05 AM |