Daily Digest

Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, Sovereign Debt Risks Grow, Global Bond Rout Deepens

Thursday, December 9, 2010, 11:00 AM
  • Two Flawed Currencies
  • Collect(ion) Call
  • Wanted – Political Leadership In Europe
  • U.S. Fiscal Health Worse Than Europe's: China Adviser
  • Sovereign Debt Risks Grow as Stimulus Pumps Asset Prices
  • Passing the Pension Time Bomb?
  • Iran Sees $100 Oil Price 'Quite Normal', Crisis Ahead
  • Global Bond Rout Deepens On Us Fiscal Worries

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Economy



Two Flawed Currencies (pinecarr)



Despite America's economic problems, the US dollar has maintained its respected status the world over - and has even managed to maintain value in comparison to other currencies. It appears that the dollar will likely finish 2010 at the same levels that it started. Even today's announcement of more tax cuts and stimulus, which will guarantee widening federal deficits for years to come, could not put a dent in the dollar. The dollar's charmed life stands in strong contrast to the euro, which is currently suffering from its internal flaws and the Europeans' unfortunate recognition of reality. Given Washington's monetary irresponsibility over the past decade and a half, many market observers have wondered if the euro could one day become the world's top currency. In the early to mid-2000s, when the euro surged more than 60% against the dollar, this was in fact a popular view. But unlike all other currencies on the planet, the euro is not a sovereign currency managed by a single country. It is dependent on the collective political will of the leaders of the European Union (EU).

Collect(ion) Call (pinecarr)



Japan’s extreme borrowing needs over the next couple of years are, at this point, locked in – which almost certainly means that Japanese interest rates will rise – potentially by a lot – relative to the near zero yields now on offer. Yet it should be obvious from the IMF data that Japan simply can’t afford to have the cost of servicing its massive debt rise even a little, let alone a lot. Which is another way of saying that something has to break, and soon.

Wanted – Political Leadership In Europe (johan)



Celebrating his 92nd birthday later this month, former German Chancellor Helmut Schmidt is as penetrating as ever in his political and economic judgments, as a long conversation with him in his Hamburg office shows. The full interview is being published in the Monthly Bulletin of the Official Monetary and Financial Institutions Forum (OMFIF) on 7 December. David Marsh is co-chairman of OMFIF and international chairman, Stern Stewart & Co.

U.S. Fiscal Health Worse Than Europe's: China Adviser (will)



Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized. "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," Li said, when asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans.

Sovereign Debt Risks Grow as Stimulus Pumps Asset Prices (doug)



Paul Farrell provides ten worthwhile observations in his forecast of a coming banking crisis. Essentially, he argues against buying stocks in an environment where market indices are about 70% off their lows. He sees two stock markets in America — one for the rich and another for everyone else. He explains how Wall Street skims from Main Street, rigs markets, and grasps vast winnings from socially worthless activities. He worries, for good reason, that Wall Street may yet turn Social Security into a casino. Finally, he predicts another Wall Street crisis no later than 2020 and probably well before. He worries that the crisis might come quickly enough to catch many people off guard.

Passing the Pension Time Bomb? (pinecarr)



So let me get this right, it's fair to close defined-benefit plans to new teachers, police officers, firemen, and civil servants?!? Why not just use a proper discount rate, increase contributions and bolster the governance of these plans so that pension fund managers are properly compensated based on risk-adjusted returns over the long-term? In other words, don't condemn defined-benefit plans, but look into other structural weaknesses of the US pension model and try to incorporate Canadian-style pension governance. And if you think there aren't governance issues at New York's pension funds, just look at Attorney General (now governor) Cuomo's probe into misconduct and fraud at NY State's pension fund. Sure, it could happen in Canada too, but I bet you it's much more prevalent in the US where pension fund officers are poorly compensated and politics permeate pension funds.

Iran Sees $100 Oil Price 'Quite Normal', Crisis Ahead (ivo)



Iran's OPEC governor believes the supply of oil with at a price of $100 price is quite normal in short term, warning that the world would face a looming oil supply crisis because of production declines of up to 10% from producing fields. "The world faces great uncertainties in security of energy supply and that the price of crude is still undervalued and set to hit $100 in the short term," Mohammad-Ali Khatibi told the Mehr news agency.

Global Bond Rout Deepens On Us Fiscal Worries (pincer)



The yield on 10-year Treasuries – the benchmark price of money worldwide and the key driver of US mortgages rates – has rocketed to 3.3pc, up 35 basis points since President Barack Obama agreed on Monday to compromise with Senate Republicans on tax cuts. The Treasury sell-off has ricocheted through the global system, triggering bond sell-offs in Asia, Europe and Latin America. Japan's finance ministry braced as borrowing costs on seven-year debt jumped by a sixth in one trading session, while German Bunds punched through 3pc.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

12 Comments

saxplayer00o1's picture
saxplayer00o1
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...

"Dubai: In the context of the global economy emerging multi-polar in nature and the financial system becoming increasingly decentralised, the world needs a stable reserve currency that is independent of the fiscal weaknesses of individual nations, said Nasser Saidi, chief economist of the Dubai International Financial Centre.

Presenting a paper, The Role of Gold in the New Financial Architecture by Saidi and Fabio Scacciavillani, Director of Macroeconomics and Statistics at the DIFC, Saidi said under the new economic realities faced by the world, a single reserve currency issued by a country whose relative economic share is dwindling, exposes the world economy to severe instability and becomes a source of global systemic risk."

"For decades, Americans have gotten away with gorging on debt and inflation because the dollar is the world’s reserve currency, says bank-rating specialist Christopher Whalen.

Now the day of reckoning may finally be at hand.

If the Federal Reserve keeps printing money and spreading inflation around the globe, creditors will turn against the U.S., writes Whalen in his new book, “Inflated: How Money and Debt Built the American Dream.” "

"NEW YORK (CNNMoney.com) -- Can't sell your home for a decent price? You're not alone.

American homes are expected to be worth $1.7 trillion less in 2010 than they were worth last year, according to a report released Thursday by real estate website Zillow.

This year's drop in home values is 63% bigger than the $1 trillion dip in 2009, and brings the total value lost since the housing market's peak in 2006 to a whopping $9 trillion"

"California’s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown, who takes charge of the most-populous U.S. state next month. A cash shortage may force the use of IOUs by July, Controller John Chiang said.

The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.

“I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,” Chiang said."

"San Francisco’s Public Utilities Commission, which supplies water to 2.5 million people in the Bay Area, postponed $524 million in competitive offerings, including $350 million in Build America Bonds, as yields soared.

The average yield on taxable Build Americas climbed to 6.35 percent Dec. 7, the highest since Jan. 7, according to a Wells Fargo index. "

"(Reuters) - The Treasury market has been distorted by the Federal Reserve's policies, causing yields to be "too low for too long," and the market faces volatility next year, a top fixed-income strategist with TCW said on Wednesday.

The Treasury market sold off viciously over the last two days as traders began to unwind earlier bets on the Fed's second round of quantitative easing, Tad Rivelle, chief investment officer of U.S. fixed income at TCW, told the Reuters 2011 Investment Outlook Summit.

He called the trend "a return to bond vigilantism," invoking a term coined by economist Ed Yardeni in 1984 to describe why major investors were demanding higher yields to compensate for perceived risks of rising inflation as a result of large deficits.

"The deeply distorted Treasury market is not an unintended but a very direct consequence of what the Federal Reserve as well as other policy actors have been attempting to foster and bring about," Rivelle said."

freeeeeman's picture
freeeeeman
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...

in case people wanted to continue the discussion from yesterday... i think it's a pretty critical one.

rhare wrote:

Why?  Do you not trust in yourself to handle and choose which of these items are important to you?  It they are important why not pay a private company to supply those services to you?

phecksel wrote:

Freeeeman,

We had a medical emergency at our residence.  Volunteer (paid per call) fire department responded with a fire truck, rescue squad, two police cars.  While I appreciate the attention, that was a bit overkill.

Main street was recently re-paved, all two lanes wide for .7 mile, at a cost of something like 4 million dollars!

I drove through another community yesterday that was blowing leaves off the grass, into the street and then using a street sweeper to pick them up.  I counted 7 people, three city trucks, and multiple push blowers.

These are not effective or productive uses of taxpayer money.

thank for all the thoughtful answers. i love this site!

i won't deny that the phecksel examples seem like inefficiencies and that we've gone too far w/ the size of the fed govt. however, i've worked in and been around enough large companies to know they have TONS of inefficiency too. the problem is the size of the project, human limitations and politics involved, not necessarily whether or not it's public/private.

b/c of the incentives, public entities have their issues just like private companies. private companies have the goal of making profit first and everything else is secondary. so if a company can repave a street for 1/2 the price, but it only lasts 20 years instead of 40, they'll do it if it's profitable. (the free market doesn't really work in that scenario.) btw, how expensive is it for a private company to pave 0.7 miles? i have no idea, but it can't be cheap. especially after we need to pay them enough to make a profit and advertise, etc.

and as for the street sweeper example... if you already have a street sweeper cleaning the streets (odds are they do), i'd say that's really efficient to just blow leaves into the street. if the sweeper was only there to pick up the leaves, that does seem inefficient. i agree. that has more to do w/ human error than public/private.

private volunteer operations (if not for profit) do seem like a great choice b/c their goal is only to make enough money to stay afloat but then provide the service the way they think it should be. hospitals around here (san diego) used to be non-profit in the 70s and things were definitely cheaper/better back then. i'm a big believer in this option.

so for items like my TV, laptop, couch, piano... i know how to spend my $ better. i agree. but i'd rather have a govt entity that is (sort of) accountable to the people maintaining roads, fire department, libraries, etc. the line "you know how to spend your money better" seems to be a republican talking point for cutting out govt spending in places i don't think we should cut (welfare, food stamps, etc).

 

earthwise's picture
earthwise
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...
freeeeeman wrote:

so if a company can repave a street for 1/2 the price, but it only lasts 20 years instead of 40, they'll do it if it's profitable. (the free market doesn't really work in that scenario.) btw, how expensive is it for a private company to pave 0.7 miles? i have no idea, but it can't be cheap. especially after we need to pay them enough to make a profit and advertise, etc.

 

I recently participated with my neighbors in getting quotes to pave our common private road, a little less than a mile long. Quotes generally averaged about $1.25 per square foot including grading, prepping,and installing asphalt pavement.

There are 5,280 feet per mile times .7= 3,696 linear feet. At a width of 12 feet per lane x two lanes = 24 feet wide, let's add 3 feet each side for a shoulder which gives an overall width of 30'.

At 3,696' long x 30' wide we would be paving 110,880 square feet. At $1.25 ( California prices, YMMV but are probably lower) we have private companies who would pave that road new for $138,600. Even if repairs are more expensive than replacement (could be for various reasons), let's double that number---$277,200. So for a little over a quarter million you coulda got a new road, but instead paid $4 million for a retread. Sounds like it's time for a new City Council. One that will privatize contracts for public improvements.

freeeeeman's picture
freeeeeman
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...
earthwise wrote:

At 3,696' long x 30' wide we would be paving 110,880 square feet. At $1.25 ( California prices, YMMV but are probably lower) we have private companies who would pave that road new for $138,600. Even if repairs are more expensive than replacement (could be for various reasons), let's double that number---$277,200. So for a little over a quarter million you coulda got a new road, but instead paid $4 million for a retread. Sounds like it's time for a new City Council. One that will privatize contracts for public improvements.

i'm not sure there's more to the story and the comparison is apples to apples, but if there isn't, that sounds like the city is getting a horrible deal. i'd be curious how they justify the 4 million.

anecdotal evidence aside, it's good to realize that there are things the govt is better suited to do despite it's limitations just as there are things that private-for-profit and private not-for-profit are suited. to simply state that "lowering taxes is always better b/c you know how to spend your money better than the govt" (as the guy in the video did) seems to dumb down civil discourse.

 

phecksel's picture
phecksel
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...
earthwise wrote:

Sounds like it's time for a new City Council. One that will privatize contracts for public improvements.

There is a lot more to the story.  It started off a 9M bond issue.  City actually had a good city manager, but he made the mistake of forward thinking and beginning to cut costs.  There was an incredible uproar from the city employees, I think a child molestor would have gotten less press.  An illegally appointed city council member was the swing vote to fire him, and it went downhill from there. The community has burned through 100% of their rainy day fund, still spending more than their revenue, and state law does not permit negative budgets.  It's a small scale of what state and soveriegn nations are going to have to deal with. What I don't understand is how normally intelligent people miss the fact this spending is so far out of control.

vinnya's picture
vinnya
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...

Gerald Celente American Empire is collapsing

http://vinceseconomicblog.wordpress.com/2010/12/09/celente-american-empi...

idoctor's picture
idoctor
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...

MarkM's picture
MarkM
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...

idoctor,

I have two unrelated patients that are both old timers that have spent their entire engineering careers in missle systems. I questioned both about this event and both said they had no doubt it was a missile launch.

yoshhash's picture
yoshhash
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missile launch?

Damnit!  Where's Assange when we need him?  Oh yeah, he's in jail.  Damnit!

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yoshhash
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Woodman
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...

Earthwise et al,  I'm cautious about comparing paving costs on a private road to a municipal road.  Your private road may not have had any engineering design, permits, traffic control, construction oversite, etc.  A municipal road usually has more rigorous standards and requirements.  Pavement repair costs can vary widely depending on if you are talking trench patches, overlays, full width reclamation, or full depth reconstruction including complete replacement of gravels, plus how thick the pavement is itself.  How much other improvements are part of a road project, such as water, sewer, drainage utilities, curbing, sidewalks, etc. makes a huge difference too.  Plus funding requirements e.g. Davis Bacon wage rates. 

I work as a private consulting engineer for a lot of municipalities, providing design and construction management services.  I find local leaders are the ones best suited to make the best long term decisions for their communities, well beyond their appointed term of office because they live there and seem to take "ownership".  This is in contrast to the regulators at the federal level who seem just too far removed; a lot of federal grant money to local communities seems to just get eaten up in administration costs.

earthwise's picture
earthwise
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Re: Daily Digest 12/9 - U.S. Fiscal Health Worse Than EU?, ...
Woodman wrote:

Earthwise et al,  I'm cautious about comparing paving costs on a private road to a municipal road.  Your private road may not have had any engineering design, permits, traffic control, construction oversite, etc.  A municipal road usually has more rigorous standards and requirements.  Pavement repair costs can vary widely depending on if you are talking trench patches, overlays, full width reclamation, or full depth reconstruction including complete replacement of gravels, plus how thick the pavement is itself.  How much other improvements are part of a road project, such as water, sewer, drainage utilities, curbing, sidewalks, etc. makes a huge difference too.  Plus funding requirements e.g. Davis Bacon wage rates. 

I work as a private consulting engineer for a lot of municipalities, providing design and construction management services.  I find local leaders are the ones best suited to make the best long term decisions for their communities, well beyond their appointed term of office because they live there and seem to take "ownership".  This is in contrast to the regulators at the federal level who seem just too far removed; a lot of federal grant money to local communities seems to just get eaten up in administration costs.

I would agree that this probably isn't an "apples to apples" comparison. But consider this. Our proposed project was required to meet county standards (paving was a prerequisite for the granting of a lot split/subdivision) for composition and thickness for a municipal road and included engineering, permits, and construction of two culverts with headwalls for drainage across the road. Now I'm sure the project that phecksel referred to probably had additional factors that would drive up the cost. But by a factor of thirty two? Only government can waste money at that magnitude.

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