It has been a long time since my last post. I am getting back in the mood to begin posting again.
My last post was in August 2009. A year has gone by. What has changed? It seems not much.
The economy is where it was. Though theoretically, the recession ended last June. Wow, what a relief!!!
It is amusing that only a few weeks ago, the talk was about double-dip and the fear of that happening has not subsided. Treasury is planning to buy debt to increase money supply. Increase in money supply may post an inflation threat but inflation is the least of our problems now. Given that one out of every seven American is living in poverty, unemployment has remained at high level, foreclosures continue as they did and consumers are spooked. And add to that a possibility that over the next two years, the US government may become the largest obstacle in fixing the economy. The problem is not be that the fear of inaction, but rather the fear of action.
And even when the effects of the last bubble is not yet past, the next bubble is already shaping up in several sectors - green economic segment, education loans, etc. etc. etc..
The largest possibility is education sector, as the guaranteed student loans come up for payment and there are no jobs to enable the borrowers to pay back. The for-profit education sector has been working hard at making profits, while "helping" the lay people to get loans and see the dreams. When the time comes, there will be no need for corporate bailout - that has already happened. The bailout will have to be for middle-class people. And the same questions will be arising again - did they not know before taking these loans? What were they thinking?
deja vu...
Sunday, September 26, 2010
Sunday, August 30, 2009
The Depth of This Recession
The other day I was chatting with an acquaintance who is also looking to buy their first home. And their assessment was that the home prices would begin to go up around next summer. All I wanted to say to them is that they are naive. I doubt the housing market will turn around until 2011-2012. It though will stabilize far sooner than that. But "stabilize" only means stop going down and not increase.
And one would ask why? The reason is that the basic underlying fundamentals are not in place and will not be in place for a long time. And these fundamentals include positive growth in economy and job market. There is nothing to sustain increasing housing prices.
In the meantime, some economists are asking why this recovery would be any different from the past recessions. Well, I have only two words for them - China and India. During the past recessions, US did not have any serious competition - for both skills and resources - from any other similar-sized nation in the world. But both India and China have cheaper costs and higher skilled labor market. Sustainable recovery may occur but may not positively affect American people.
And one would ask why? The reason is that the basic underlying fundamentals are not in place and will not be in place for a long time. And these fundamentals include positive growth in economy and job market. There is nothing to sustain increasing housing prices.
In the meantime, some economists are asking why this recovery would be any different from the past recessions. Well, I have only two words for them - China and India. During the past recessions, US did not have any serious competition - for both skills and resources - from any other similar-sized nation in the world. But both India and China have cheaper costs and higher skilled labor market. Sustainable recovery may occur but may not positively affect American people.
Thursday, August 20, 2009
The State of the State
Several incentives have been doled out to jump start the US economy. These include the multi-billion dollar stimulus packages, cash-for-clunkers program and other local stimulus packages. Lot of the stimulus cash has not yet been spent so the impact of this has not worked through the system. But most of these are short-term incentives. These are meant to jump start the US economy with the hope that overall consumer spending (main driver of the economy) will begin working at normal pace before the effect of these short-term stimulus packages run out.
The Federal Reserve has at this point put all of their cards on the table. They do not have any substantial tools left in their hands.
All of these have created smaller shoots of recovery only to be crushed by the larger problem with the economy. These smaller signs of recovery are not leading to sustainable path to recovery. The latest one being just last week, when some numbers implied that things were better. And of course, Wall Street has a tendency to make a trend out of a single data point. Consumer spending should inch up at this time of the year due to back-to-school shopping. But even that does not seem to have materialized.
The chronic problem with the US economy is lack of job creation. The unemployment numbers are substantially underestimating the reality as many people are underemployed and are not counted in the numbers. At the same time, these consumers have lost a substantial chunk of their retirement savings and home values. And so the vicious circle continues.
Any expectation of either China, India or any other nation pulling us out of this recession will not materialize. The principle reason here is that they just do not have the purchasing power needed to not only pull out their respective economies from doldrums but also help the US. Unless of course the US Dollar falls so low as to substantially increase their purchasing power. But such a dramatic fall in the US Dollar would mean substantial and permanent contraction in the US economy and that would be disastrous.
The Federal Reserve has at this point put all of their cards on the table. They do not have any substantial tools left in their hands.
All of these have created smaller shoots of recovery only to be crushed by the larger problem with the economy. These smaller signs of recovery are not leading to sustainable path to recovery. The latest one being just last week, when some numbers implied that things were better. And of course, Wall Street has a tendency to make a trend out of a single data point. Consumer spending should inch up at this time of the year due to back-to-school shopping. But even that does not seem to have materialized.
The chronic problem with the US economy is lack of job creation. The unemployment numbers are substantially underestimating the reality as many people are underemployed and are not counted in the numbers. At the same time, these consumers have lost a substantial chunk of their retirement savings and home values. And so the vicious circle continues.
Any expectation of either China, India or any other nation pulling us out of this recession will not materialize. The principle reason here is that they just do not have the purchasing power needed to not only pull out their respective economies from doldrums but also help the US. Unless of course the US Dollar falls so low as to substantially increase their purchasing power. But such a dramatic fall in the US Dollar would mean substantial and permanent contraction in the US economy and that would be disastrous.
Wednesday, July 08, 2009
Green Shoots
The news about green shoots in the economy are now old. And a lot of talk about green shoots may have helped consumer confidence for a few days/weeks. But now the green shoots seem to have withered like the gardens in New England after many weeks of almost non-stop rain.
As I have said earlier (http://smitaworld.blogspot.com/2009/03/what-keeps-me-awake-at-night.html), the first sign of economic pickup is normally an uptick in manufacturing. But here there is a small technical problem.
And that is - since the US has lost substantial manufacturing capacity, it remains to be seen how this manufacturing uptick will transpire. With continuing job losses and our inability to put the stinulus $$$ to productive usage right away, the recovery does not seem as imminent. Shall we see the green shoots of manufacturing uptick in China (and other manufacturing nations) and if so, how that trickles down to benefit US is a big question mark.
Stay tuned...
As I have said earlier (http://smitaworld.blogspot.com/2009/03/what-keeps-me-awake-at-night.html), the first sign of economic pickup is normally an uptick in manufacturing. But here there is a small technical problem.
And that is - since the US has lost substantial manufacturing capacity, it remains to be seen how this manufacturing uptick will transpire. With continuing job losses and our inability to put the stinulus $$$ to productive usage right away, the recovery does not seem as imminent. Shall we see the green shoots of manufacturing uptick in China (and other manufacturing nations) and if so, how that trickles down to benefit US is a big question mark.
Stay tuned...
Friday, July 03, 2009
Accountability & Ethics
The other day BBC America World News interviewed a mortgage professional (that was her function if not designation) in Baltimore, MD. According to her account, she used to work for Wells Fargo. During the heady days of housing bubble, she won awards year-after-year for both quantity and dollar amount of sub-prime mortgages she closed. She was quite proud of her achievement. So far so good.
But when the reporter asked her if she felt guilty or in some way responsible for lending money to people at sub-prime rate or for the current housing debacle specially in Baltimore, MD. Her reply was quite simple - that was part of her job.
Hmmmm... Can anyone please explain why we had Nuremberg Trials? Most of the Nazis were just doing their job. Now you can of course say that there is a difference between the two. That difference being that Nazis killed over 6 million Jews and what we now have is a Great Recession. My answer to that this Great Recession has killed (figuratively if not literally) far more than 6 million people around the world.
And that's what is missing today in America. Lack of accountability and ethics. Not just from that mortgage professional in Baltimore but also from a lot of other people elsewhere. We are all just doing our jobs without understanding or even attempting to understand the consequences of our actions.
But when the reporter asked her if she felt guilty or in some way responsible for lending money to people at sub-prime rate or for the current housing debacle specially in Baltimore, MD. Her reply was quite simple - that was part of her job.
Hmmmm... Can anyone please explain why we had Nuremberg Trials? Most of the Nazis were just doing their job. Now you can of course say that there is a difference between the two. That difference being that Nazis killed over 6 million Jews and what we now have is a Great Recession. My answer to that this Great Recession has killed (figuratively if not literally) far more than 6 million people around the world.
And that's what is missing today in America. Lack of accountability and ethics. Not just from that mortgage professional in Baltimore but also from a lot of other people elsewhere. We are all just doing our jobs without understanding or even attempting to understand the consequences of our actions.
Saturday, April 04, 2009
The Economy, Afghanistan, G-20, IMF, China, et al
Just a few points about all of the above not necessarily in any specific order.
Well, we continue to hemorrhage jobs. No change there. And of course, this does not include those who have either stopped searching for jobs, are underemployed or working part-time.
G-20 was not much of a win for President Obama. G-20 agreed to contribute over a trillion dollars to IMF. But if past history is any indication, IMF have not really performed (specially in today's world where everything is and should be performance-based). Many of the developing nations whom IMF "helped" in the past, have to some extent as a backlash turned far to the left. I am not sure what is going to change there. It may just mean money down the drain and more corruption. Not only that, IMFs' excessively stringent requirements for austerity have caused great pain and suffering for the people in the nations being "helped".
And of course, this will not be real money. But SDRs. SDRs are akin to printing money without printing money. This means a potential to cause inflation in the receiving country.
And last but not the least, these are promises. How much money will actually be contributed remains to be seen. Only time will tell.
The world (Or the G-19) seem to want business as usual. That means Americans should continue buying and China should continue financing those purchases. Or as a guest was saying on the local NPR station that the Chinese sold America poisonous toys and candies (melamine in milk-based) and America sold China toxic debt and so we are even.
But I think at least from American consumers' standpoint that behavior is history for the time being (and may be a very long time being). It is high time that the US consumers stop buying "stuff" for the sake of buying stuff and provide stimulus for themselves by saving more for the future.
In the meantime, Chinese are concerned that all the stimulus that the US is providing is going to make their trillions worthless. Well, few things to ponder here.
Well, that's all for now. Write to you again soon.
Well, we continue to hemorrhage jobs. No change there. And of course, this does not include those who have either stopped searching for jobs, are underemployed or working part-time.
G-20 was not much of a win for President Obama. G-20 agreed to contribute over a trillion dollars to IMF. But if past history is any indication, IMF have not really performed (specially in today's world where everything is and should be performance-based). Many of the developing nations whom IMF "helped" in the past, have to some extent as a backlash turned far to the left. I am not sure what is going to change there. It may just mean money down the drain and more corruption. Not only that, IMFs' excessively stringent requirements for austerity have caused great pain and suffering for the people in the nations being "helped".
And of course, this will not be real money. But SDRs. SDRs are akin to printing money without printing money. This means a potential to cause inflation in the receiving country.
And last but not the least, these are promises. How much money will actually be contributed remains to be seen. Only time will tell.
The world (Or the G-19) seem to want business as usual. That means Americans should continue buying and China should continue financing those purchases. Or as a guest was saying on the local NPR station that the Chinese sold America poisonous toys and candies (melamine in milk-based) and America sold China toxic debt and so we are even.
But I think at least from American consumers' standpoint that behavior is history for the time being (and may be a very long time being). It is high time that the US consumers stop buying "stuff" for the sake of buying stuff and provide stimulus for themselves by saving more for the future.
In the meantime, Chinese are concerned that all the stimulus that the US is providing is going to make their trillions worthless. Well, few things to ponder here.
- Nobody (including the US) forced China to hold all their reserves in US Dollars. Whatever happened to diversification!!!
- China for many years have artificially kept their currency under-valued so that their exports would be cheaper (aka dumping). This helped the Communist government create jobs for rural billions and prevent them from being restless and agitate for more democratic rights. Now, of course the situation is unraveling.
Well, that's all for now. Write to you again soon.
Sunday, March 22, 2009
What Keeps Me Awake at Night?
Besides the usual daily happenings of life, what else keeps me awake at night?
Well, it is the thought of the fine line which the Federal Reserve and Treasury and their counterparts elsewhere in the world are doing. It was only a few weeks ago, that the UK added $75 billion (or was it pounds) added to the money supply. And more recently, the US added $1 trillion. I get shivers up my spine thinking about the inflationary pressure that this would create. At the slightest signal that the economy is picking up, Fed would have to step in and begin raising interest rate. That is not as complex as it sounds, except for the fact that the US economy may not be as strong at that moment.
With consumer spending expected to remain anemic and continued job losses, what would be the signal that the economy is picking up? One indicator may be a slight uptick in manufacturing (except that the US does not make much of anything). This uptick would imply that inventories are running low. That somehow seems to be a distant future. Hence, Mr. Bernanke's assertion that recovery will begin in 2010.
But, yes there is always a but. And that is what will derail this recovery? First and foremost, is the unwillingness of banks to attempt to better identify the extent of toxicity in their balance-sheets combined with the hesitation on the part of the Administration to move quickly identify and isolate toxic assets and as I have said earlier move them into an entity akin to Resolution Trust Corporation v. 2.0. I know...I know that the CDOs made it very difficult to identify individual assets. But there is something in the computer world called "reverse-engineering". Because the longer we take to fix this problem, the greater the chance of entering an era of prolonged stagflation when the increased money supply begins to chase too few goods. And also the longer it takes to isolate the toxicity, that much longer the credit markets will remain locked up, and that much longer the job losses will continue to mount leading to more foreclosures and more misery.
And this may yet become America's Lost Decade (similar to what 90s was to Japan). I would almost venture to say that under the current circumstances, speed is more important than accuracy.
And so that's what keeps me awake at night.
Well, it is the thought of the fine line which the Federal Reserve and Treasury and their counterparts elsewhere in the world are doing. It was only a few weeks ago, that the UK added $75 billion (or was it pounds) added to the money supply. And more recently, the US added $1 trillion. I get shivers up my spine thinking about the inflationary pressure that this would create. At the slightest signal that the economy is picking up, Fed would have to step in and begin raising interest rate. That is not as complex as it sounds, except for the fact that the US economy may not be as strong at that moment.
With consumer spending expected to remain anemic and continued job losses, what would be the signal that the economy is picking up? One indicator may be a slight uptick in manufacturing (except that the US does not make much of anything). This uptick would imply that inventories are running low. That somehow seems to be a distant future. Hence, Mr. Bernanke's assertion that recovery will begin in 2010.
But, yes there is always a but. And that is what will derail this recovery? First and foremost, is the unwillingness of banks to attempt to better identify the extent of toxicity in their balance-sheets combined with the hesitation on the part of the Administration to move quickly identify and isolate toxic assets and as I have said earlier move them into an entity akin to Resolution Trust Corporation v. 2.0. I know...I know that the CDOs made it very difficult to identify individual assets. But there is something in the computer world called "reverse-engineering". Because the longer we take to fix this problem, the greater the chance of entering an era of prolonged stagflation when the increased money supply begins to chase too few goods. And also the longer it takes to isolate the toxicity, that much longer the credit markets will remain locked up, and that much longer the job losses will continue to mount leading to more foreclosures and more misery.
And this may yet become America's Lost Decade (similar to what 90s was to Japan). I would almost venture to say that under the current circumstances, speed is more important than accuracy.
And so that's what keeps me awake at night.
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