Weekend Open Thread (2011-01-28)

Here is your open thread for the weekend beginning Friday January 28th, 2011. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.

Be sure to also check out the forums, and get your word in the user-driven discussions there!

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

90 comments:

  1. 1
    Blurtman says:

    “The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything. It caused a lot of anger. Too much is too much. The world was stupefied to see one of five biggest U.S. banks collapse like a house of cards. We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That’s what happened… There is an ocean between flexibility and the scandal we saw. So if people present me as obsessed with regulation, it’s because there is a need for regulation. I don’t contest the principle of securitisation, but when one offshore country guaranteed 700 times its GDP, are we in the market economy or in a madhouse? Bonuses don’t bother me, provided there are also … draw-downs when there are losses. When things don’t work, you can never find anyone responsible. Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

    -Nicolas Sarkozy

  2. 2
    ChrisM says:

    WSJ article from 1/26 on doubting official government inflation numbers

    http://online.wsj.com/article/SB10001424052748704013604576104351050317610.html

    “Or consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn’t discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?

    Ha. Not according Uncle Sam. Using a piece of chicanery called “hedonics,” Uncle Sam calls this a price cut. His reasoning? You’re getting more for the money. Today’s $999 Mac is lighter, fancier and faster than last year’s $999 Mac. So the government calculates that the “real” price has actually fallen.”

  3. 3
  4. 4
    Blurtman says:

    In response to President Sarkozy’s comments to Jamie Diamond regarding Wall Street fraud, the harm it has done to the world econmy, and the lack of accountability, President Obama had this to say:

  5. 5

    Attention: All You Rentors With Lots of Savings Piled Up

    When I mentioned “lot’s of savings piled up” 95-99% of you left.

    Now, the 1-5% that are left….you need to take that cash and buy something real, like real estate….uhhhhh….well maybe an investmet that loses value isn’t quite real. OK, then do what China is doing, they’re hoarding wheat and steel [fill that basement with sacks/cans of food that will be worth double in a year or two]?

    BTW, in an all out collapse stage, bardering will be the norm….do you think your neighborhood survivalist will trade you ammo for gold? Hades no, but maybe a can of coffee…LOL

  6. 6
    Dawn Glover says:

    RE: Blurtman @ 4 – very funny…I agree, it’s frustrating the lack of reaction and protest to the fact that the banks through willful fraud destroyed the economy and the government let them do it. I read today though that a woman in Ohio is being criminally punished for putting her children in a school that was not in the district that she lived in to give them a shot at a better education…incredible..

  7. 7
    S-Crow says:

    off topic: was reading about the markets today at lunch and the Egyptian unrest. Apparently the government was able to shut off all internet access, facebook and twitter. This morning one of my kids said to me their school bus we behind schedule. I asked how could you know? My kid said “The 1st kid to be picked up “group texted” most of the kids on the route to be picked up. Unreal communication these days.

  8. 8
    calvis says:

    On my way to work I noticed a new house for sale. So I started doing some research on in to try to figure out why it’s for sale in this market. This is what I found out: On 9/27/2010 the property was sold in foreclosure by Northwest Trustee Services, Inc. to Federal National Mortgage Association (Fannie Mae) for $326,368. The house is currently listed by Keller Williams for $259,900.

    I am curious to why Fannie Mae is buying foreclosures at such a high price and after 4 mouths listing the property for 67,000 less than what they paid for it 4 months ago.

    And why is Fannie Mae buying foreclosures in the first place?

  9. 9
    The Tim says:

    RE: calvis @ 8 – The “sale” to Fannie Mae was just what most people think of as the foreclosure. It’s the bank taking back the house. Northwest Trustee Services is the company that basically facilitates the transaction.

  10. 10
    Haybaler says:

    RE: calvis @ 8 – in case The Tim’s answer wasn’t clear enough….. The sale/ Foreclosure to Fannie was probably for the amount owed in total on the First position mortgage……a typical underwater situation. Now the property is listed for sale at something closer to a fair market price.

  11. 11
    calvis says:

    OK, that all makes sense now.

    Thanks for the answers The Tim and Haybaler.

  12. 12
    Scotsman says:

    RE: calvis @ 8

    The “good” news is you got to pay for a small part of the loss through your taxes, assuming you’re not in the almost 50% that don’t pay federal income tax. Is this a great country, or what!?

  13. 13
    Justen L. Britain says:

    I have a question; I was reading one of Tim’s articles from a few months back about how hose prices are supposed to drop an additional 20% by 2012 and got to thinking how is this going to be possible? I am all for it, don’t get me wrong, but, most people have mortgages on their home and those that don’t see the peak of the bubble as the value of their home. Sooo, if people who are upside down in their homes cannot sell because they owe more on their house then the “market price” of 20% less than the current depressed market value and the people who have equity/own it out right wont sell because they think their home are worth more then the lower market price how are prices going to drop and have no reason to sell in a depressed market? Please don’t misunderstand me, I don’t own a home so I am hoping prices drop like rocks because I am saving my money and am planning on picking up a nice house fore cheap, I just can’t get my head wrapped around how this is going to work. Your input is greatly appreciated

    ~Justen

  14. 14
    The Tim says:

    RE: Justen L. Britain @ 13 – You’re right. Prices aren’t driven by the people who won’t or can’t sell.

    Prices are driven by the people that need to sell, and the banks selling homes that they repossessed from the people who couldn’t sell. Read today’s post about distressed listings for more of my thoughts on this exact subject.

  15. 15
    EconE says:

    RE: Justen L. Britain @ 13

    Good chance that people who are upside down will walk.

    WRT people fantasizing about bubble prices; remember…it was a bubble…a mania. So just remind yourself of the old quote by Charles Mackay…

    “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

    Of course…if you feel like supporting sombody’s delusional idea of what their house is worth…feel free. Buy away!

  16. 16
    David Losh says:

    RE: EconE @ 15

    Whatever. Get a life.

  17. 17
    BillE says:

    By Dawn Glover @ 6:

    RE: Blurtman @ 4 – very funny…I agree, it’s frustrating the lack of reaction and protest to the fact that the banks through willful fraud destroyed the economy and the government let them do it.

    They were doing god’s work.

  18. 18
    David Losh says:

    RE: Justen L. Britain @ 13

    You are asking a good question, and probably the only question about Real Estate.

    Most of the people I talk with agree what has happened is much different than other Real Estate corrections. Real Estate is supposed to be a hedge against inflation. The government is trying to forestall deflation. By infusing trillions of dollars, funny money, into the economy we should be having massive inflation. We got stability.

    In other times I would just tell you that we will inflate the price of goods, including housing, and wages, so that everything will even out. That isn’t happening. Retailers are slashing prices, housing prices are declining faster than most people expected. The last time commodity prices rose there were food riots. The promise this time is that those riots over wheat prices will topple governments.

    Topple governments.

    So to answer your question, people will sell for what they can get. It will be cheaper for property owners just to give up property that is non performing as an asset. If it isn’t building equity, if it’s losing equity, if there is no foreseeable equity position in you economic life, there is no reason to pay for it.

    If you are building an estate for your future generations then fine, you should figure out that return on what you are investing. If you are happily amortizing the mortgage, great, if you cost the payments against the future value, and it’s negative, then get rid of it.

    Housing prices will decline to meet what is a part of a working class family over all financial well being. If you are counting on good paying jobs to be the norm in this country forget about it. What every economist is saying is we have to have a manufacturing base. Figure on that to be the wage base you are banking on. If I’m wrong about the job market you come out ahead.

    In other words housing prices will fit into 25% to 30% of a working class family income. You can be sure that interest rates will go to between 6% to 7% unless we have hyper inflation, which I’m still hoping will happen. The chances of hyper inflation are slim at this point. Maybe in another five years, maybe after the election, but it’s looking pretty dim right now.

  19. 19

    The banks are apparently tweaking their ARM products to make them more attractive–5 year locks, for example.

    http://seattletimes.nwsource.com/html/realestate/2014047771_harney30.html

  20. 20
    MacroInvestor says:

    By Blurtman @ 4:

    In response to President Sarkozy’s comments to Jamie Diamond regarding Wall Street fraud, the harm it has done to the world econmy, and the lack of accountability, President Obama had this to say:

    ANYTHING a politician says can be interpreted as “vote for me”, or at least “don’t blame me”.

    Obama and the rest of them are in cahoots with Wall Street. Want proof? Not one banker has been charged with fraud even though it’s plain to everyone. There’s enough regulation. The problem is cops being told to look the other way. Maybe it needs to be a crime to not prosecute a crime.

  21. 21
    MacroInvestor says:

    RE: David Losh @ 18

    “The last time commodity prices rose there were food riots. The promise this time is that those riots over wheat prices will topple governments.”

    Half the population of the world lives on $5 or less. (Approximately, I lost the url.) We print $ trillions here to save our lovely banker’s bonuses… it causes food and fuel to price out billions of people. Hungry people won’t suffer or die quietly.

  22. 22
    MacroInvestor says:

    RE: softwarengineer @ 5

    “BTW, in an all out collapse stage, bardering will be the norm….do you think your neighborhood survivalist will trade you ammo for gold? Hades no, but maybe a can of coffee…LOL”

    It won’t happen, SWE. See my last comment. Even the poorest Americanz on food stamps are in the top 20% world wide.

  23. 23
    BillE says:

    A couple of weeks ago, there was a moving van at a house in my neighborhood. The van was there for two days and when it left, there was a bunch of junk piled up in front of the garage. I looked it up and the bank has owned it since October. Not only did the occupants live there for free through the foreclosure process, they continued to live there for two months after the bank took ownership.

  24. 24

    RE: BillE @ 23 – If they were tenants, they could have had the right to live there longer. Otherwise, from memory I think they have 20 days to vacate, and if they don’t leave the purchaser at the foreclosure sale has to start an unlawful detainer action against them. That’s one of the increased risks of buying at a foreclosure sale.

  25. 25
    pfft says:

    By Blurtman @ 1:

    “The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything. It caused a lot of anger. Too much is too much. The world was stupefied to see one of five biggest U.S. banks collapse like a house of cards. We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That’s what happened… There is an ocean between flexibility and the scandal we saw. So if people present me as obsessed with regulation, it’s because there is a need for regulation. I don’t contest the principle of securitisation, but when one offshore country guaranteed 700 times its GDP, are we in the market economy or in a madhouse? Bonuses don’t bother me, provided there are also … draw-downs when there are losses. When things don’t work, you can never find anyone responsible. Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

    -Nicolas Sarkozy

    you hurt jamie dimon’s feelings.

  26. 26
    pfft says:

    By ChrisM @ 2:

    WSJ article from 1/26 on doubting official government inflation numbers

    http://online.wsj.com/article/SB10001424052748704013604576104351050317610.html

    “Or consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn’t discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?

    Ha. Not according Uncle Sam. Using a piece of chicanery called “hedonics,” Uncle Sam calls this a price cut. His reasoning? You’re getting more for the money. Today’s $999 Mac is lighter, fancier and faster than last year’s $999 Mac. So the government calculates that the “real” price has actually fallen.”

    seems reasonable to me.

    Frequently Asked Questions about Hedonic Quality Adjustment in the CPI
    http://www.bls.gov/cpi/cpihqaqanda.htm

    I used to get sucked into that argument.

  27. 27
    pfft says:

    By Scotsman @ 12:

    RE: calvis @ 8

    The “good” news is you got to pay for a small part of the loss through your taxes, assuming you’re not in the almost 50% that don’t pay federal income tax. Is this a great country, or what!?

    would have cost more to let the economy collapse. that’s been proven beyond a doubt.

  28. 28
    pfft says:

    By EconE @ 15:

    RE: Justen L. Britain @ 13

    Good chance that people who are upside down will walk.

    WRT people fantasizing about bubble prices; remember…it was a bubble…a mania. So just remind yourself of the old quote by Charles Mackay…

    “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

    Of course…if you feel like supporting sombody’s delusional idea of what their house is worth…feel free. Buy away!

    the herd here on SB is extremely bearish…you’ll wake up like me.

  29. 29

    By pfft @ 27:

    By Scotsman @ 12:

    RE: calvis @ 8

    The “good” news is you got to pay for a small part of the loss through your taxes, assuming you’re not in the almost 50% that don’t pay federal income tax. Is this a great country, or what!?

    would have cost more to let the economy collapse. that’s been proven beyond a doubt.

    Connecting two threads, there are actually people who believe that you shouldn’t treat health conditions either. That the body or God will take care of the problem.

    I don’t believe non-intervention works well in either health care or economics.

  30. 30
    pfft says:

    By MacroInvestor @ 21:

    RE: David Losh @ 18

    “The last time commodity prices rose there were food riots. The promise this time is that those riots over wheat prices will topple governments.”

    Half the population of the world lives on $5 or less. (Approximately, I lost the url.) We print $ trillions here to save our lovely banker’s bonuses… it causes food and fuel to price out billions of people. Hungry people won’t suffer or die quietly.

    if it was the dollar why are prices going up in other currencies? it’s not just the dollar. it’s climate change. it’s shortages. just look what is happening in australia. massive flooding.

    Commodities: This Time is Different
    http://krugman.blogs.nytimes.com/2011/01/29/commodities-this-time-is-different/

  31. 31
    pfft says:

    By Kary L. Krismer @ 29:

    By pfft @ 27:

    By Scotsman @ 12:

    RE: calvis @ 8

    The “good” news is you got to pay for a small part of the loss through your taxes, assuming you’re not in the almost 50% that don’t pay federal income tax. Is this a great country, or what!?

    would have cost more to let the economy collapse. that’s been proven beyond a doubt.

    Connecting two threads, there are actually people who believe that you shouldn’t treat health conditions either. That the body or God will take care of the problem.

    I don’t believe non-intervention works well in either health care or economics.

    I agree.

    let’s remind people.

    With no special government intervention, the 2010 deficit would have passed $2 trillion, according to their model. It would have reached $2.6 trillion in fiscal 2011 and $2.25 trillion in 2012.

    http://www.creators.com/liberal/froma-harrop/washington-saved-our-economic-hide.html

    economic collapse would have meant more debt because it would have meant less tax revenue collected.

    I didn’t say that, mark zandi did. he was one of john mccain’s advisors.

  32. 32
  33. 33
  34. 34
    David Losh says:

    RE: pfft @ 30

    You are off the mark.

    I’ve yet to figure out what Krugman is talking about. It’s like he’s reporting, but he has some opinion.

    The comment was that a good part of the world lives on less than $5 per day, that means poverty. Poverty is the issue.

    China is a country that has massive poverty. We have poverty in this country, less than other places.

    We play games with our currency, that allows us greater buying power. We play economic games. China, Europe, United States, Russia play games while other parts of the world deal with starvation.

    Let’s pretend that China is hoarding, or that the problem is speculation in commodity prices. Let’s pretend that starvation is anything other than a distribution issue. Let’s even pretend the price of wheat is supply, and demand. Let’s pretend food is an economic componet like this was the 1930s.

    Governments may be playing games, but the population isn’t.

    You talk about austerity as if it works, or doesn’t work while the populations take to the streets. Dumping money into the economy is a play thing. You can’t eat dollars, or oil, or cotton, or steel. The population doesn’t care if banks go broke, or governments topple.

    We have a new problem. The problem is people.

  35. 35
    David Losh says:

    RE: pfft @ 31

    You can’t be a real person. No one could be so obtuse. You must just be making argument for the sake of creating controversy.

  36. 36

    RE: David Losh @ 34 – I think what Krugman was trying to do was again discredit the silly notion that trading in future affects future prices, without the ability to physically hoard. That’s seemingly obvious, but people who don’t understand basic economics can’t understand that. They can’t understand a lot of things, and assume the worst (e.g. price fixing) whenever prices rise.

  37. 37
    David Losh says:

    RE: Kary L. Krismer @ 36

    Good Gawd!

    The speculation is that China is prepared to buy all supply. The speculation is that all Asian markets including India are the new consumer base.

    How it manifests is off the point that food prices can create civil unrest.

    As an example, I have a client who has moved back to Kenya. They have a business that makes digital copies of documents for filing, and storage. She left her position at the Bill, and Melinda Gates Foundation to run the business. The big concern they have? Commodity prices.

    While we play games about semantics, they are concerned that open rioting will destroy their business. There again their business is urgent because of the fear of open rioting. It’s a real topic of discussion in a business setting.

    Open Rioting.

  38. 38
    Ben says:

    fRE: David Losh @ 37 – Agreed. Krugman is a political operative. Remember when US ethanol subsidies caused corn prices to ramp a few years back? It caused riots in Mexico over tortilla prices.

    The Austrian school is famously prescient for not only seeing the obvious effects of policy, but the UNSEEN effects. Global instability is Bernankes legacy.

  39. 39

    RE: David Losh @ 37 – I’m not saying commodities can’t go up. I’m saying they won’t go up because someone is buying futures in that commodity hoping they go up.

  40. 40
    Ben says:

    RE: Kary L. Krismer @ 39 – It happens every day in the stock market. Contango is arbitraged by buying the cash market. Krugman is a political operative with an agenda.

  41. 41
    pfft says:

    By Ben @ 32:

    RE: pfft @ 31 – rubbish

    economic collapse means less tax revenue which means more debt. that’s not some liberal economist. mark zandi was an economic advisor to john mccain’s campaign. if GDP and unemployment fell more we’d get even less in tax revenue. explain how that rubbish.

  42. 42
    pfft says:

    By David Losh @ 35:

    RE: pfft @ 31

    You can’t be a real person. No one could be so obtuse. You must just be making argument for the sake of creating controversy.

    economic collapse doesn’t collect a lot of taxes.

  43. 43
    pfft says:

    By Ben @ 38:

    fRE: David Losh @ 37 – Agreed. Krugman is a political operative. Remember when US ethanol subsidies caused corn prices to ramp a few years back? It caused riots in Mexico over tortilla prices.

    The Austrian school is famously prescient for not only seeing the obvious effects of policy, but the UNSEEN effects. Global instability is Bernankes legacy.

    a falling dollar would mean other currencies are rising. why would commodity prices rise then in other currencies? the US currency would fall and the rise in commodity prices would happen in dollar but not in say euros. the answer is increased demand. many countries around the world are booming. the US is slowly recovering and has low inflation as a result. it has much lower inflation than many other countries around the world. how is that possible if it’s all a dollar story? the answer is it’s not just a dollar story.

  44. 44
    pfft says:

    By Ben @ 40:

    RE: Kary L. Krismer @ 39Krugman is a political operative with an agenda.

    who does he work for and what is his agenda. how much does he get paid?

  45. 45
    Ben says:

    RE: pfft @ 43 – I’m not going to waste time tutoring you on all of krugmans fallacies as you are beyond hope.

    For the benefit of everyone else, US inflation is exported due to our currency having reserve status. Money printing has consequences. Severe ones.

  46. 46
    EconE says:

    Proof of how wrong (and possibly dishonest) Krugman can be…

    May 2008…”the oil non bubble”

    http://www.nytimes.com/2008/05/12/opinion/12krugman.html

    And a chart to show what a joker he is…

    http://www.pennyjobs.com/Images/content/oil-price-chart.bmp

  47. 47
    Mikal says:

    RE: Kary L. Krismer @ 29 – Good one. Some of these people are old rubes.

  48. 48
    Mikal says:

    RE: David Losh @ 37 – Their business is to donate money. What could possibly ruin it? You have been drinking again.

  49. 49

    By Ben @ 40:

    RE: Kary L. Krismer @ 39 – It happens every day in the stock market. Contango is arbitraged by buying the cash market. Krugman is a political operative with an agenda.

    I’m not talking about changes in the futures market. I’m talking about actual price changes in the commodities themselves over the long term.

    Yes it’s possible the commodities could follow the futures up temporarily, as suppliers hold off supply, but that too is hoarding (and others could hoard too with some commodities). In the oil market it would actually be possible for the suppliers to hoard, because that is simply not pumping it out of the ground. Once it’s out of the ground, oil is hard to hoard. And when oil is over $100 a barrel, it’s hard to not pump it out of the ground.

  50. 50

    By EconE @ 46:

    Proof of how wrong (and possibly dishonest) Krugman can be…

    May 2008…”the oil non bubble”

    http://www.nytimes.com/2008/05/12/opinion/12krugman.html

    And a chart to show what a joker he is…

    http://www.pennyjobs.com/Images/content/oil-price-chart.bmp

    You do realize that the world went through a major worldwide economic event in 2008, right? That affected demand, and that affected the price of oil.

  51. 51

    By EconE @ 46:

    Proof of how wrong (and possibly dishonest) Krugman can be…

    May 2008…”the oil non bubble”

    http://www.nytimes.com/2008/05/12/opinion/12krugman.html

    And here’s a quote from the article: “Saying that high-priced oil isn’t a bubble doesn’t mean that oil prices will never decline. I wouldn’t be shocked if a pullback in demand, driven by delayed effects of high prices, sends the price of crude back below $100 for a while.”

    Remember how before the collapse of the financial entities we were talking about the impact $4.00+ gas would have on the price of housing? That type of thing is basically what he was addressing there. But in any case, he clearly wasn’t saying oil would not drop in price.

  52. 52
  53. 53
    Ben says:

    RE: Kary L. Krismer @ 51 – Is Krugman afraid to debate his intellectually dishonest drive?

    http://www.krugmandebate.com/

  54. 54

    RE: Ben @ 52 – You’re going to have to explain what Fed policy possibly affecting future inflation has to do with futures activity not really affecting future prices.

    As to your second post, I don’t think Krugman ignoring an offer to debate means much of anything, other than the fact that the person offering to debate in that manner has relatively little bargaining position.

  55. 55
    Ben says:

    RE: Kary L. Krismer @ 54 – Kary, the water is front of you. You need only to open your mind and drink.

    So depriving the poor of at least $100k in charity is the true conscience of a liberal (hypocrite).

  56. 56

    RE: Ben @ 55 – How about trying again, and make a small amount of sense this time?

    The bottom line is futures pricing does not affect long term prices of commodities. Nothing you have said and nothing you have linked to has indicated otherwise. Again, such thoughts are just the thoughts of people who don’t understand basic economics and assume the worst whenever prices rise.

  57. 57
    pfft says:

    By Ben @ 45:

    RE: pfft @ 43 – I’m not going to waste time tutoring you on all of krugmans fallacies as you are beyond hope.

    For the benefit of everyone else, US inflation is exported due to our currency having reserve status. Money printing has consequences. Severe ones.

    but the other currency RISES so if it was JUST the dollar it would cancel out. europe is not having substantial inflation. their inflation is as low as ours. why?

    here is what is happening

    1. growth is increasing the demand of commodities beyond just the effects of the dollar

    2. cpi in other countries has a different weight for energy and food.

    3. other countries heavily subsidize food and fuel prices

    4. other countries pursue worse policies than ours. chinese inflation is soaring because their currency is fixed to ours.

  58. 58
  59. 59
    Ben says:

    The “exorbitant privilege” of the US

    http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2011/01/the_exorbitant_privilege_of_th.html

    Davos: What’s going to happen first – sensible US fiscal policy, or a global revolt against the dollar? In all my discussions about the global economy so far here in Davos, that’s the question we keep coming back to.

    In my earlier post I spoke about the “new economic reality”. The first thing you notice about this new landscape is that the successful developing countries are doing much better than the old, developed ones. The second thing you notice is the extraordinary fiscal position of the US.

    America’s exceptional approach to the public finances comes out starkly in today’s new budget forecasts from the Congressional Budget Office. These show the federal deficit rising to nearly $1.5 trillion in 2011, the highest on record. At 9.8% of GDP, it will be only very slightly higher than it was in the depths of the financial crisis, in 2009.

    In every other major advanced economy, public borrowing is going to fall in 2011. America is the only country in which both the headline deficit and the structural deficit are going up.
    That increase is entirely due to the package of tax cuts agreed last month. There is a coherent case for fiscal stimulus in the US in 2011. But, as the IMF commented on Monday, when it comes to stimulating the economy, the tax cut deal agreed with Congress does not provide much bang for the buck. And it involved a lot of bucks. The CBO says the package will add $858bn to federal borrowing over time.

    In theory, US politicians are committed to getting the deficit under control. But as I noted the other day, they have a funny way of showing it. In his State of the Union address this week, President Obama repeated his commitment to eliminating the deficit, outside interest payments. But the concrete spending cuts he suggested to help reach that target will reduce borrowing by a measly $40bn a year.

    No-one here at Davos was expecting to hear anything very different – from the President or Congress. The rule is that America gets a free pass to run larger deficits, for longer, than anybody else. Who knows, with the likes of China growing so fast, Asian and other emerging market demand for treasury bonds might even grow faster than Washington’s ability to print them.

    But you have to wonder – and everyone I speak to in Davos is wondering – how long America’s “exorbitant privilege” is going to last.

    The only other country to have had this status – and lost it – is the UK. It took several decades, and two punishingly expensive wars, for the world to tire of holding sterling. But when they did, it changed British economic policy making forever. Indeed, we are still seeing the consequences today. Rightly or wrongly, the British government believes it cannot risk borrowing a lot more from international markets. The Americans know they have a lot more leeway.

    They will have it for some time yet. But the lesson of sterling’s rise and fall is that if you run current account deficits long enough, and depreciate your currency far enough, the world will eventually stop giving you the benefit of the doubt. The biggest difference between Britain in 1945 and America now is that back then, there was a ready replacement for sterling, in the form of the dollar.

    The renmimbi can’t replace the dollar any time soon – neither China’s government nor its financial system are ready for what that would entail. Heaven knows, the euro is in no fit state to replace it either.

    But looking at the way the global economy is shifting in China’s favour, many I’ve spoken to here think the emergence of the renmimbi as a serious alternative to the greenback is only matter of time. If the past few years are any guide, this supposedly long-term change might well happen faster than we think.

    To return to where I began – the question is whether the US can stop borrowing dollars before the world stops wanting to buy them.

  60. 60
    pfft says:

    By EconE @ 46:

    Proof of how wrong (and possibly dishonest) Krugman can be…

    May 2008…”the oil non bubble”

    http://www.nytimes.com/2008/05/12/opinion/12krugman.html

    And a chart to show what a joker he is…

    http://www.pennyjobs.com/Images/content/oil-price-chart.bmp

    what exactly are you saying? he’s saying it’s not a bubble based on speculators in commodities. it’s about demand because there were no physical shortages.

    when demand waned due to high prices and the economy tanking prices tanked too. oil is back to $90.

  61. 61
    David Losh says:

    RE: Mikal @ 48

    Put the bottle down, and step away. What I said is “She left her position at the Bill, and Melinda Gates Foundation.” They left a combined salary of $260K here in the United States to work on building the business they have in Kenya to scan documents for electronic filing. They have a government grant to get started.

    The urgency, in my opinion, is that documents can get lost, or stolen in civil unrest. The discussion we had after 2008 was that the price of commodities was adding a social burden as well as economic consequences.

  62. 62
    David Losh says:

    RE: pfft @ 43RE: pfft @ 41

    Like I said you aren’t a real person. Here’s a good example of: “a falling dollar would mean other currencies are rising. why would commodity prices rise then in other currencies?”

    The answer is because other currencies are rising.

    Money, dollars, yuan, euros have no shelf life. We can trade currencies all day, every day without any thought about anything. We can always get a return. It’s kind of like people who just made a huge amount of money in the run up of gold prices. What do you want to bet gold goes up next week?

    I can buy, or build a software generated program to buy and sell any stock, future, or commodity, and get a return on my invested currency, which I can trade to increase the return.

    Mortgages? It’s a no brainer. I can buy a nonperforming Note for pennies on the dollar The lender takes the loss, writes that off against current earnings, then borrows more money from the Fed to relend at a lower rate of return, but hey, it’s all funny money anyway. I end up with a Real Property asset.

    While we discuss who Krugman is working for real people are having a real struggle so we can play with our money.

  63. 63
    Ben says:

    China central bank says Fed easing ineffective and dangerous

    http://www.reuters.com/article/2011/01/30/us-china-economy-idUSTRE70T19V20110130?feedType=RSS&feedName=businessNews

    (Reuters) – Quantitative easing by the Federal Reserve and other central banks cannot address fundamental economic problems but may lead to excessive global liquidity and competitive currency depreciation, China’s central bank said on Sunday.

    In its monetary policy report for the final quarter of 2010, the People’s Bank of China (PBOC) also confirmed that it would target 16 percent growth of the broad M2 measure of money supply this year, down from the 19.9 pct growth recorded at the end of 2010.

    The central bank said the Fed’s monetary easing was pushing up international commodity prices and asset prices in emerging markets, including China.

    “Quantitative easing policy cannot fundamentally address economic problems, and it may cause excessive liquidity on a global scale as well as risks of competitive currency depreciation,” the Chinese central bank said in its 59-page report.

    “It is creating imported inflation and short-term capital inflows, pressuring emerging markets,” it said.

    As a result, China needed to work hard to soak up liquidity from foreign exchange inflows in order to minimize the impact on the domestic economy, it added.

    The central bank reiterated that it would keep the yuan basically stable while making the exchange rate regime more flexible.

    The central bank said it would continue to use different tools, including interest rates, bank reserve requirements and open-market operations, to rein in money supply and bank credit growth as a way of handling inflationary pressure.

  64. 64

    By pfft @ 58:

    A Food Chart To Keep Handy
    http://www.businessinsider.com/food-as-a-percentage-of-cpi-in-various-countries-2011-1

    The analysis there is a bit weak. The reason you wouldn’t use monetary policy to fight an increase in price resulting from a shortage is because that is not inflation.

  65. 65
    Ben says:

    RE: Kary L. Krismer @ 56 – Futures do affect cash prices, there is no doubt about this. It depends on what you mean by “long term” as the market can remain irrational longer than you can remain solvent.

    In the last few months, commodity prices have been driven up in large part by QE2 exporting inflation, as the Chinese (post 62) and every other country will tell you. Those who do not understand that US currency depreciation has very large negative consequences have not done their homework. Google is your friend.

  66. 66
    EconE says:

    Commodity price rises aren’t about supply and demand. Money started flowing into them *heavily* a year ago…just *before* the big gains of 2010.

    http://oilprice.com/Finance/the-markets/The-Hot-Money-Likes-Commodities-These-Days.html

    Nope. Speculation doesn’t affect prices! Nooooot at all. Well…except for the big winner of 2010…Cotton. Cotton is up because all the (insert 3rd world nationality here) are no longer walking around butt naked and are now wearing cotton T’s and Levis!

  67. 67
    pfft says:

    By EconE @ 66:

    Commodity price rises aren’t about supply and demand. Money started flowing into them *heavily* a year ago…just *before* the big gains of 2010.

    http://oilprice.com/Finance/the-markets/The-Hot-Money-Likes-Commodities-These-Days.html

    Nope. Speculation doesn’t affect prices! Nooooot at all. Well…except for the big winner of 2010…Cotton. Cotton is up because all the (insert 3rd world nationality here) are no longer walking around butt naked and are now wearing cotton T’s and Levis!

    nobody said speculation didn’t effect prices.

    Cotton hoarding seems to be taking place at the level of individual Chinese farmers and factories, with no indication that they’re being influenced by the futures market. And iron ore hasn’t been available for futures-market speculation: the first futures markets there came into existence just a few days ago.

    Commodities: This Time is Different
    http://krugman.blogs.nytimes.com/2011/01/29/commodities-this-time-is-different/

    I am sure that you can look at the rare earths which aren’t traded and have gone up.

    “Cotton is up because all the (insert 3rd world nationality here) are no longer walking around butt naked and are now wearing cotton T’s and Levis!”

    ah yeah.

    Chinese imports surged 86 percent in 2010 as economic growth lifted demand from textile mills and adverse weather hurt the domestic crop.

    Cotton Soars to Record as Chinese Demand Surges, Global Production Wanes
    http://www.bloomberg.com/news/2011-01-24/cotton-soars-to-record-as-chinese-demand-surges-global-production-wanes.html

  68. 68
    pfft says:

    By David Losh @ 62:

    RE: pfft @ 43RE: pfft @ 41

    Like I said you aren’t a real person. Here’s a good example of: “a falling dollar would mean other currencies are rising. why would commodity prices rise then in other currencies?”

    The answer is because other currencies are rising.

    ?

  69. 69
    pfft says:

    By Ben @ 63:

    China central bank says Fed easing ineffective and dangerous

    http://www.reuters.com/article/2011/01/30/us-china-economy-idUSTRE70T19V20110130?feedType=RSS&feedName=businessNews

    (Reuters) – Quantitative easing by the Federal Reserve and other central banks cannot address fundamental economic problems but may lead to excessive global liquidity and competitive currency depreciation, China’s central bank said on Sunday.

    In its monetary policy report for the final quarter of 2010, the People’s Bank of China (PBOC) also confirmed that it would target 16 percent growth of the broad M2 measure of money supply this year, down from the 19.9 pct growth recorded at the end of 2010.

    The central bank said the Fed’s monetary easing was pushing up international commodity prices and asset prices in emerging markets, including China.

    “Quantitative easing policy cannot fundamentally address economic problems, and it may cause excessive liquidity on a global scale as well as risks of competitive currency depreciation,” the Chinese central bank said in its 59-page report.

    “It is creating imported inflation and short-term capital inflows, pressuring emerging markets,” it said.

    As a result, China needed to work hard to soak up liquidity from foreign exchange inflows in order to minimize the impact on the domestic economy, it added.

    The central bank reiterated that it would keep the yuan basically stable while making the exchange rate regime more flexible.

    The central bank said it would continue to use different tools, including interest rates, bank reserve requirements and open-market operations, to rein in money supply and bank credit growth as a way of handling inflationary pressure.

    who care what china says? they are creating their own inflationary problems by pegging the yuan to the dollar.

  70. 70
    pfft says:

    By Ben @ 65:

    RE: Kary L. Krismer @ 56 – Futures do affect cash prices, there is no doubt about this. It depends on what you mean by “long term” as the market can remain irrational longer than you can remain solvent.

    In the last few months, commodity prices have been driven up in large part by QE2 exporting inflation, as the Chinese (post 62) and every other country will tell you. Those who do not understand that US currency depreciation has very large negative consequences have not done their homework. Google is your friend.

    as the dollar falls other currencies rise canceling out the effects.

  71. 71
    Ben says:

    RE: pfft @ 70 – I think David is correct, you’re not a real person.

  72. 72
    David Losh says:

    RE: pfft @ 68

    You’re here to create controversy. You disregard currency trading, then plow ahead with nonsense. Your comments have no relevance, you’re like the AMS commenter who we don’t see any more.

    You contradict to be contradictory.

    When you were talking about bulls, and bears, or green shoots, or a recovery you were making some mild points. Now it’s just more noise.

    There’s no point. You’re not making a point. You’re not saying anything.

  73. 73
    David Losh says:

    RE: Ben @ 63

    Thank you. Maybe you are all forgetting that Quantative Easing was announced just before the meeting in South Korea. It’s a weapon. It’s an economic weapon.

    We can stabalize pricing within our own economy.

  74. 74
    Macro Investor says:

    By pfft @ 70:

    By Ben @ 65:

    RE: Kary L. Krismer @ 56 – Futures do affect cash prices, there is no doubt about this. It depends on what you mean by “long term” as the market can remain irrational longer than you can remain solvent.

    In the last few months, commodity prices have been driven up in large part by QE2 exporting inflation, as the Chinese (post 62) and every other country will tell you. Those who do not understand that US currency depreciation has very large negative consequences have not done their homework. Google is your friend.

    as the dollar falls other currencies rise canceling out the effects.

    Not so simple, Pft. All currencies are inflating at different rates. Owners of “real” items demand a higher price to offset the inflation. Speculators bid up prices to profit. Investors and hedgers bid up futures to protect their savings.

    It just so happens only the US is printing $1.7 trillion a year. The others are inflating as well, just not nearly as quickly.

  75. 75
    pfft says:

    By Ben @ 71:

    RE: pfft @ 70 – I think David is correct, you’re not a real person.

    I repeat. if it is just the dollar causing rising prices the effect of the prices of commodities in other currencies is a wash. currencies trade in pairs. if one goes up the other goes down. commodities are rising in ALL currencies, not just the dollar.

  76. 76
    pfft says:

    By David Losh @ 72:

    RE: pfft @ 68

    You’re here to create controversy. You disregard currency trading

    ok meaning what?

  77. 77
    pfft says:

    By Macro Investor @ 74:

    By pfft @ 70:

    By Ben @ 65:

    RE: Kary L. Krismer @ 56 – Futures do affect cash prices, there is no doubt about this. It depends on what you mean by “long term” as the market can remain irrational longer than you can remain solvent.

    In the last few months, commodity prices have been driven up in large part by QE2 exporting inflation, as the Chinese (post 62) and every other country will tell you. Those who do not understand that US currency depreciation has very large negative consequences have not done their homework. Google is your friend.

    as the dollar falls other currencies rise canceling out the effects.

    Not so simple, Pft. All currencies are inflating at different rates. Owners of “real” items demand a higher price to offset the inflation. Speculators bid up prices to profit. Investors and hedgers bid up futures to protect their savings.

    It just so happens only the US is printing $1.7 trillion a year. The others are inflating as well, just not nearly as quickly.

    the US is not printing anything. the US is issuing debt, it is not printing currency. we’re in a liquidity trap anyway so it wouldn’t matter.

    if the US is exporting inflation, why does Europe have a low inflation rate?

    this is a demand story. in the link above I showed how cotton demand increased by almost triple digits.

  78. 78

    By Ben @ 65:

    RE: Kary L. Krismer @ 56 – Futures do affect cash prices, there is no doubt about this.

    There’s no doubt for those who don’t understand supply and demand. Without ultimately affecting the supply somehow, there’s no way to affect the end price down the road.

    If that wasn’t the case, stock option prices would also affect the price of the stock long term (as opposed to just near expiration). And while yes the most outstanding options are typically near the price the stock ends up at, there are reasons for that. It’s not the tail wagging the dog.

  79. 79

    By EconE @ 66:

    Commodity price rises aren’t about supply and demand.

    I can only assume you worked for California government at the turn of the century. That’s just complete nonsense, and that’s the type of thinking that cost California state over $20B (not to mention the losses by businesses and consumers in the state).

  80. 80

    By pfft @ 75:

    By Ben @ 71:

    RE: pfft @ 70 – I think David is correct, you’re not a real person.

    I repeat. if it is just the dollar causing rising prices the effect of the prices of commodities in other currencies is a wash. currencies trade in pairs. if one goes up the other goes down. commodities are rising in ALL currencies, not just the dollar.

    I don’t follow all commodities, but all other things being equal (e.g. no flooding reducing supply of a commodity) you would expect all commodities to rise during periods of economic recovery (either worldwide or of major economies). If they didn’t rise in a particular currency in such situations, it would be because that currency is stronger than average–one of the ones that goes up while others go down.

  81. 81
    Ben says:

    RE: Kary L. Krismer @ 78 – Give it up, Kary. This is not your field of expertise. You probably did not understand when I referenced contango being arbitraged. I assumed you knew what that meant

  82. 82

    RE: Ben @ 81 – I did have to look that up. As expected it seemingly had nothing to do with the topic at hand. If you think it does, please explain. Otherwise I think it’s fair to say microeconomics is not your area of expertise. I do find it ironic though that it’s also not EconE’s.

  83. 83
    Ben says:

    RE: Kary L. Krismer @ 82 – The topic was the influence of futures prices on the cash market. Sorry if you thought it was something else.

  84. 84

    RE: Ben @ 83 – That’s exactly what I thought, except I was using the words “long term.” So please explain how you think the futures market can affect prices long term without the participants actually being able to affect the supply long term.

  85. 85
  86. 86

    RE: Ben @ 85 – By long term I would say 3-6 months. Stated differently, if tons of oil futures were bought today that would suggest a price of $120 a barrel in six months, that would not result in the purchasers being able to sell the oil at $120 in six months. Their activity would have little/no impact.

    The second part of post 65 seems to deal with currency issues, which is entirely separate. I would agree fiscal/monetary issues can affect future prices.

  87. 87
    Ben says:

    RE: Kary L. Krismer @ 86 – I thought you may have seen the wiki page (excerpt below). The last part of post 65 addresses why the rest of the world is irritated at the US (Bernanke) for skyrocketing commodites prices. It was a topic at Davos.

    http://en.wikipedia.org/wiki/Contango

    In 2005 and 2006 a perception of impending supply shortage put the crude oil market into contango. Traders simultaneously bought oil and sold futures forward. This led to large numbers of tankers loaded with oil sitting idle in ports acting as floating warehouses.[6] (see: Oil-storage trade) It was estimated that perhaps a $10–20 per barrel premium was added to spot price of oil as a result of this.

    If such is the case, the premium may have ended when global oil storage capacity became exhausted; the contango would have deepened as the lack of storage supply to soak up excess oil supply would have put further pressure on prompt prices. However, as crude and gasoline prices continued to rise between 2007 and 2008 this practice became so contentious that in June 2008 the Commodity Futures Trading Commission, the Federal Reserve, and the U.S. Securities and Exchange Commission (SEC) decided to create task forces to investigate whether this took place.[7]

    A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[8] The USO ETF also failed to replicate Crude Oil’s spot price performance.

  88. 88

    RE: Ben @ 87 – The tanker theory goes to the storage issue I’m raising. I’m pretty sure it’s BS that a lot of oil was sitting around in tankers (excluding oil in tankers actually in transit). And as I recall, inventories on land were not that high, which would also be another place of storage.

    Here’s an interesting story about Iran storing some oil in tankers in 2008.

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akLt5fJKQNr8

    Note though that was possibly due to lack of demand of their particular type of oil, and also not really the result of futures purchasing, but instead what I’ve called supplier hoarding. Assuming it was hoarding, as opposed to demand issues, it would have been simpler for them to have not pumped the oil in the first place.

    Also note, that while not entirely clear, the article does mention a relatively small number of tankers.

  89. 89
    David Losh says:

    RE: Kary L. Krismer @ 88

    Yeah, you’re out of your depth here, if you believe it’s only a theory.

    We have a massive supply of oil. Massive, more than will every be used. Ever.

    Oil hit $120 per barrel and the world balked. If I were a conspiracy theory buff I would say that the global economic collapse was because oil hit $120 a barrel.

    You must of also missed the part where, at the time, the United States had massive oil reserves?

    Man, it’s oil. It’s the life blood of the economy. All world, global, economies revolve around oil.

  90. 90

    By David Losh @ 89:

    RE: Kary L. Krismer @ 88

    Yeah, you’re out of your depth here, if you believe it’s only a theory.

    We have a massive supply of oil. Massive, more than will every be used. Ever.

    You actually believe that? I can’t even believe you can find a website that says that, and you can find anything on the web.

    But in any case, it’s not just reserves, it’s the ability to pump the oil. If the US has such incredible reserves, why do you think we’ve been importing so much oil for the past three decades?

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