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    Daily Digest – May 29

    by Davos

    Friday, May 29, 2009, 3:10 PM

  • Huge Drop in Central Bank Liquidity Swaps (Chart)
  • Central Banks Announce Global Coordinated Liquidity Measures (Mish wrote this in September of 2008)
  • Can We Inflate Our Way out of this Mess? (Chart on page)
  • Are Worries About Rising Federal Debt Misplaced?
  • UPDATE 1-Chrysler submits $448 million electric car plan
  • Two-Thirds Off on Manhattan Office Space
  • Exploding debt threatens America
  • How Far From the Bottom? (Video)
  • JPMorgan’s $29 Billion windfall
  • Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look
  • Mental health center closes
  • Police officers saved by stimulus may still lose jobs
  • Police chief warns of deep cuts
  • Toledo police layoffs leading to gun buying
  • Americans’ credit scores fall as they struggle to pay bills
  • IRS tax revenue falls along with taxpayers’ income


Huge Drop in Central Bank Liquidity Swaps (Chart)

Central Banks Announce Global Coordinated Liquidity Measures Mish wrote this in September of 2008)

This effort will fail because the problem is a solvency issue not a liquidity issue. [emphasis mine]

Can We Inflate Our Way out of this Mess? (Chart on page)

Three ways the U.S. can decrease the level of nominal debt as a percent of GDP:

  • Default (not going to happen… at least while we still own the printing press)
  • Increase productivity (and GDP), while paying down or maintaining the debt load
  • Inflate our way out of it (decreases the value of debt in real terms)

Of the three, in theory, inflating our way out of it will be the easiest, as it does not require true real economic growth. In Wolfgang Munchau’s recent FT article ‘We Cannot Inflate our Way out of this Crisis’ he states that it may not be all that easy after all. Wolfgang details:

Of course, it can be done, but only for as long as the commitment to higher inflation is credible. Inflation is not some lightbulb that a central bank can switch on and off. It works through expectations. If the Fed were to impose a long-term inflation target of, say, 6 per cent, then I am sure it would achieve that target eventually. People and markets might not find the new target credible at first but if the central bank were consistent, expectations would eventually adjust. In the end, workers would demand wage increases of at least 6 per cent each year and companies would strive to raise their prices by that amount.

Yves at Naked Capitalism agrees that it is a challenge, but possibly due to a different reason:
You may have noticed a crucial assumption…."workers will demand wage increases." Pray tell, how? Workers have no bargaining power in the US. Merely goosing interest rates does not a a tight labor market make.

Stagflation was seen as impossible until it took place. I wonder if we could wind up with rising bond yields due to concerns about large fiscal deficits, with a lower rate of goods inflation due to the lack of cost push (wages are a significant component of the cost of most goods, save highly capital intensive ones). In fact, we could see stagnant nominal wages with mildly positive inflation, which means wage deflation. If that was also accompanied by high yields, you would have much of the bad effects of debt deflation per Irving Fisher (high real yields and reduced ability to service debt) since real incomes would be falling in the most indebted cohort.
The key point is that in the current environment, workers have no power. While we all know about the spike in the unemployment rate, the other side of the story is the cliff dive in the number of new job openings. The odd thing is I first became fully aware of this information in Sunday’s NY Times article Bleak Picture, Yes, But Help Still Wanted that made the case that the market was actually FULL of opportunity.

Consider that in March, nearly 700,000 jobs disappeared. But now consider this: At the end of March, there were 2.7 million job openings. What tends to get lost in the data picture is that just as some companies are laying off workers, other companies are hiring. In fact, the business world is changing at such a dizzying rate that some companies are cutting and hiring workers at the same time.

Uh…. no. 2.7 million is down from 4.8 million openings as recent as the Summer of 2007; when 6 million less people were unemployed. In other words, the number of job openings has halved, while the number of those unemployed has doubled. That is not "bleak"… that is frightening.

Are Worries About Rising Federal Debt Misplaced?

UPDATE 1-Chrysler submits $448 million electric car plan

ETROIT, May 26 (Reuters) – U.S. automaker Chrysler LLC said on Tuesday it submitted proposals totaling $448 million to the U.S. Department of Energy to research and develop electric vehicles and plug-in hybrid models.

Chrysler and its "partners," plus the Department of Energy, would pay $224 million each should the proposals be approved and would include an investment of up to $83 million to build a new technology and manufacturing center in Michigan to help develop and assemble these vehicles. That complex should be functional by 2010 and produce more than 20,000 vehicles a year, Chrysler said.

The applications for matching funds were made as part of two initiatives at the Department of Energy that are designed to speed up the development and manufacturing of electric vehicles and plug-in hybrids.

Chrysler has been operating in bankruptcy since April 30.

The announcement of Chrysler’s proposal came a day before a judge is expected to rule on the automaker’s plans to sell its most valuable assets to a new company owned by the U.S. and Canadian governments, Chrysler’s union and Italian car maker Fiat SpA (FIA.MI).

It also came a week after U.S. President Barack Obama announced tough new fuel economy standards for automakers.

As of 2007, when Chrysler was still part of German automaker Daimler AG (DAIGn.DE), the U.S. automaker had the lowest fleet mileage of any of the major automakers.

That same year the company set up its ENVI unit to develop fuel-saving vehicle technology.

Chrysler said on Tuesday the vehicles it aimed to develop include the Dodge Ram 1500 plug-in hybrid, the Chrysler Town & Country plug-in hybrid and the Chrysler Town & Country electric vehicle. Continued…

Two-Thirds Off on Manhattan Office Space

From the NY Times: Manhattan’s Sublet Office Market Is Bursting (ht Sunil)

In Midtown Manhattan … 13 percent of … Class A space — was available in April, up from 7.2 percent a year earlier, according to Colliers ABR, a commercial real estate services company. And sublets now account for some 40 percent of the space available in Midtown, compared with 30 percent of the much smaller total that was available a year ago, the company said.

Robert Sammons, the managing director in charge of research at Colliers ABR, said that sublet space in trophy office towers along Madison Avenue and Park Avenue has been leasing for as little as one-third of what that space might have commanded in early 2008, at the height of the roaring market.

“A year and a half ago, this space might have leased for $150 per square foot,” Mr. Sammons said, while he has heard of recent sublets in high-end buildings in this office corridor with annual rents of as little as $40 to $50 per square foot. “This is the most remarkable turnaround in pricing that I’ve ever seen in such a short period of time.”

No wonder S&P is concerned about CMBS.

Note: that $150 sounds high, so maybe it’s just half off!

Exploding debt threatens America

Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up.

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.


How Far From the Bottom? (Video)

JPMorgan’s $29 Billion windfall

JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

"There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American — a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. "You could pay for it regressively and have people at the bottom come out better off — maybe. Or you could pay for it progressively and they’d come out a lot better off," said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for health-care reform. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.


Mental Health Center Closes

The steady increase of mentally ill residents combined with Sacramento County’s budget woes forced the county’s main psychiatric hospital late Friday to close its doors to new patients.

The doors remained closed through Tuesday – and might stay closed for several more days, officials said, until its caseload falls.

Officials said the scene could repeat itself throughout the year as local and state funding continue their decline.

The situation, officials and advocates say, suggests the state is at the brink of a mental health catastrophe.

"I think that Sacramento County – like all counties in California – is facing a mental health crisis," said Dorian Kittrell, executive director of the Mental Health Treatment Center. "Unfortunately when (budget) cuts are needed, health care is often at or near the top of the list over and over again. And unfortunately, there’s only so much a system can bear before it breaks."

The Mental Health Treatment Center handles the most severe psychiatric cases in the county. That’s where police or concerned family members take people who pose a danger to themselves or others.

Caseloads have risen in recent years as the region’s population has grown. The crisis center now sees about 590 patients a month, compared with 540 a month in fiscal year 2004-05, Kittrell said.

The admission rate from the crisis center to the inpatient unit has remained steady at almost 48 percent, he added.

The growth has pushed the treatment center – which has a capacity of 100 in its inpatient unit – to its limits.

To alleviate overcrowding, the Board of Supervisors allocated an additional $4.3 million to the treatment center in fiscal year 2006-07 to outsource patients to other facilities. Essentially, that paid for beds in other psychiatric hospitals such as Heritage Oaks Hospital, Sierra Vista Hospital and Sutter Center for Psychiatry, Kittrell said.

The county allocated that money again in fiscal year 2007-2008 and in the preliminary budget this year. The county, however, had to cut $1.2 million of that funding from this year’s final budget in response to cuts the state made in the fall, Kittrell said.

By midyear the treatment center was out of money to send psychiatric patients to other hospitals.


Police officers saved by stimulus may still lose jobs

(CNN) — It was a success story the White House was eager to highlight: Earlier this year, President Obama attended the graduation of 25 police recruits in Columbus, Ohio, touting it as a victory for the federal stimulus package.

On March 6 in Columbus, Ohio, President Obama touted the jobs the stimulus plan would save.

Without the money, the officers never would have hit the streets. They were to be laid off before their first day of patrol, victims of city budget cuts, until the stimulus money saved the class.

But the White House said the $1.2 million grant only guaranteed their jobs until the end of the year. And facing a growing deficit and a fight to pass an income tax hike, Columbus Police on Tuesday announced massive budget cuts that could mean hundreds of layoffs.

Among those who could lose their jobs if voters reject the increase: the 25 new officers who shook the president’s hand.

Police chief warns of deep cuts (Chart)

Toledo police layoffs leading to gun buying

"I just don’t feel safe with the amount they’re laying off," says Jonna Ewing. "I think it’s going to be a longer respond time."

She is spending the day at a conceal carry class. She’s been thinking of getting a gun for awhile, but feels now’s the time due to the recent layoffs.

Americans’ credit scores fall as they struggle to pay bills

As more consumers struggle with bills, their credit scores are paying a price. From the third quarter of 2008 to the first quarter of 2009 — the latest data available — the average TransUnion credit score dropped 6 points to 651, the credit bureau says. Scores fell more dramatically in states hardest hit by the housing bust: California saw a 10-point drop, for example, and Arizona, 11.

"Consumers are feeling the bite of the current recession," says Ezra Becker, a director in TransUnion’s financial services group. "With delinquencies showing up in credit files, it’s not surprising that the average score is decreasing somewhat."

Becker believes credit scores aren’t likely to improve — and could even drop further — through the second quarter of 2010.

More than 200 million U.S. consumers have credit scores, so a change of even a few points in the national average can be significant, experts say.

IRS tax revenue falls along with taxpayers’ income

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says

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