When you stop and take a step back and look at our domestic economy and see all the things going on that are impacting the lives of so many people and their families, and you listen to our President and other elected officials in Washington, you can not help but wonder, are we all living in the same country?
Yesterday I watched the President’s press conference before watching Chairman Ben Bernanke answer questions before the Senate Banking Committee. A reporter asked the President about the prospect for gas prices reaching $4 a gallon by this summer. The President acted like the reporter was from another planet. He seemed shocked that gasoline may cost $4 a gallon this summer. This morning I was reading an article about the price of crude oil and what OPEC may or may not do, when I noticed a photograph next to the story that showed a gas station in San Mateo, California with gas prices posted at $4.23, $4.33 and $4.43 a gallon. It is February, not summer, and at one gas station in the United States the price of gas is over $4! Now we all realize that the President of the United States doesn’t pump his own gas. (But, on the other hand, perhaps he should.) The leadership in the White House goes about their business without the slightest acknowledgement as to what ordinary people are facing.
At what point will the strain that the high price of gas is causing for so many, grab the attention of those that don’t pump their own gas? The list of problems we are facing in the coming months is long. Housing and the fall off in new home construction is big. The sub-prime mortgage mess and the fallout from the rating agencies’ “errors” is big. The amount of money we are spending around the world helping people with their problems, plus the billions of dollars being spent in Iraq, places a huge tax on our time and resources. How bad do things have to get before our leadership starts paying attention in a consistent and meaningful way. We already have more people in prison than any other nation for our population. There are economic costs to not dealing with our problems. Is this where we will spend our resources? Is prison construction our next big growth industry?
The Economic Stimulus Act of 2008 is a good start, but I haven’t heard a word about what the price of gas is doing to family budgets or the fallout from crude oil now trading over $100 a barrel. I have written about this almost all week. I guess it is time to give it a rest.
Saturday is a good day for art. Stay tuned.
Friday, February 29, 2008
Thursday, February 28, 2008
Don't Blame The Messenger, Day Two
Today Fed Chairman Ben Bernanke spoke and answered questions before the Senate Banking Committee. The Senators, as a whole, realize that the Chairman is not Superman. Many of the Senators know the score with regards to our economy, the global economy, OPEC, other commodity prices like food and ethanol, and most importantly, the limitations of the Federal Reserve Bank. The complexity of their questions indicate this.
I would like to put forth an analogy that I hope with help drive my point about the importance of driving down or at the very least an attempt to drive down the price of oil. The bees pollinate the flowers and from that cross pollination comes fruit. People spending their money at the local level on food, clothing, shelter and gas, works its way through the economy and has a similar effect that the cross pollination of the bees have on the production of fruit. Money changes hands and money is spent and the process continues. The economists have a fancy word for this, they call it the velocity of money. Unfortunately, when we all are paying over $3 a gallon at the pump, money is leaving the system.
We need to be pro-active with regards to the rising price of oil. We can not assume that the price of oil will stabilize over the coming months. The United States must take steps to confront and deal with the rising cost of oil, regardless of what may or may not happen for the demand for oil around the world. The psychological benefits of a decline in the price of oil and gas to the domestic economy, in my opinion, can not be over stated. Yes, I know about the housing crisis, the sub-prime loan mess, the rating agencies mess, and every other economic or financial mess that is out there. But, if our government wants to send a message to every single person that pumps his or her own gas at the gas station every week, that something is being done about inflation, then let that message be reflected in the price of gas that is so prominently displayed on the big sign next to every gas station. Don’t under estimate the psychological effect across the entire nation, in every city, town and village, when the price of a gallon of gas at the pump goes down a dollar. That, my fellow Americans, would put confidence back into the consumer and a few more buck$ back into his pocket. That coupled with the check we are to receive, will get our domestic economy moving, perhaps slowly at first, but back in a positive direction.
Action should be taken to encourage the production of oil, gas and diesel here in the United States. Congress and the President need to concern themselves with our energy policy now. It can not be heavy handed, for we don’t want to discourage foreign investment in the U.S., but measures need to be taken. We are being squeezed by OPEC. That coupled with the demand for oil on a global basis has resulted in the $100 a barrel price that we are paying today.
Economic activity is driven as much by what is in a person’s mind as by what is in his wallet. Markets, like people, (which is what they are made of) operate not in a vacuum, but in real time. The confidence, the psychology, of the consumer drives the markets and the domestic economy. Lowering the price of gas at the pump will improve the confidence of the consumer across the entire country. Stay tuned.
Wednesday, February 27, 2008
Don't Blame The Messenger
Today, Ben Bernanke, Chairman of the Federal Reserve Bank, our central bank, testified before the House Financial Services Committee of Congress. I watched nearly all of the proceedings and into the question and answer period. They were finished with Chairman Bernanke by 1pm.
It is interesting to listen to the questions the members of Congress ask of the Fed chief. Some members of Congress realize that he is chairman of our central bank, while others, by their questions, would feel better if he sat before them in a Superman outfit, cape and all. Chairman Bernanke was asked questions about the US dollar, but he had to defer by saying that he was not the Secretary of the Treasury. I think, if he had a choice in time and place, he might opt to be the chairman of a central bank with a currency not under the pressure the US dollar finds itself under today. But, this is the hand he was dealt, and these are the cards he has to play. I am sure the German mark or the Swiss franc are the kind of cards any central banker in his right mind would have preferred to play. But, since that is not the case, let’s talk about the hand we were dealt.
If you have read any of my earlier pieces, you know my opinion on oil and what the price of oil is doing to our economy. You don’t have to be an Einstein to figure out that we can not pay for oil, gasoline and diesel what we have been paying and still have money left over to go shopping the way we did when gas was one dollar a gallon. Even a buck and a half a gallon looks cheap now. Chairman Bernanke is careful in choosing his words, as he should be. At least he does not talk in riddles like Mr. Greenspan. We will be very lucky if the price of gas at the pump stays where it is today for the rest of the year. I don’t think that is going to happen unless the government takes some action.
What kind of action should the government take? Well that is a good question. There are reserves that could be taped, but that is not a long term solution. What we need is a mechanism, much like the central bank, that influences the growth rate of our money supply, to influence the price of oil. I know, every conservative will want to shoot me along with the oil companies, but I think in our society, oil is the blood that carries nutrition to every facet of our economy. As I have said before, if I was given one lightening bolt from the economic gods to throw at our economy, I would throw that bolt with all my strength at the price of oil. Enough said, I think everyone now knows where I stand. And, by the way, I think the President and the cabinet could do more than they are doing with regards to bringing down the price of oil. Yesterday oil prices broke through a new intra-day high of $102 a barrel.
A few words about our Chairman Ben Bernanke. This is a good man. As they say, he has his heart in the right place, but he is no fool. One member of Congress correctly noted that he was a professor of economics at Princeton and one of the most knowledgeable men in the world on central banking. I like this guy and I encourage everyone in Congress to give him high marks. We may be in for some very tough times for our economy, so, I caution the members of Congress to realize we have the best man for the job right now. Don’t blame the messenger when the boat starts to really rock. The chairman did not get us into these waters by himself.
It is interesting to listen to the questions the members of Congress ask of the Fed chief. Some members of Congress realize that he is chairman of our central bank, while others, by their questions, would feel better if he sat before them in a Superman outfit, cape and all. Chairman Bernanke was asked questions about the US dollar, but he had to defer by saying that he was not the Secretary of the Treasury. I think, if he had a choice in time and place, he might opt to be the chairman of a central bank with a currency not under the pressure the US dollar finds itself under today. But, this is the hand he was dealt, and these are the cards he has to play. I am sure the German mark or the Swiss franc are the kind of cards any central banker in his right mind would have preferred to play. But, since that is not the case, let’s talk about the hand we were dealt.
If you have read any of my earlier pieces, you know my opinion on oil and what the price of oil is doing to our economy. You don’t have to be an Einstein to figure out that we can not pay for oil, gasoline and diesel what we have been paying and still have money left over to go shopping the way we did when gas was one dollar a gallon. Even a buck and a half a gallon looks cheap now. Chairman Bernanke is careful in choosing his words, as he should be. At least he does not talk in riddles like Mr. Greenspan. We will be very lucky if the price of gas at the pump stays where it is today for the rest of the year. I don’t think that is going to happen unless the government takes some action.
What kind of action should the government take? Well that is a good question. There are reserves that could be taped, but that is not a long term solution. What we need is a mechanism, much like the central bank, that influences the growth rate of our money supply, to influence the price of oil. I know, every conservative will want to shoot me along with the oil companies, but I think in our society, oil is the blood that carries nutrition to every facet of our economy. As I have said before, if I was given one lightening bolt from the economic gods to throw at our economy, I would throw that bolt with all my strength at the price of oil. Enough said, I think everyone now knows where I stand. And, by the way, I think the President and the cabinet could do more than they are doing with regards to bringing down the price of oil. Yesterday oil prices broke through a new intra-day high of $102 a barrel.
A few words about our Chairman Ben Bernanke. This is a good man. As they say, he has his heart in the right place, but he is no fool. One member of Congress correctly noted that he was a professor of economics at Princeton and one of the most knowledgeable men in the world on central banking. I like this guy and I encourage everyone in Congress to give him high marks. We may be in for some very tough times for our economy, so, I caution the members of Congress to realize we have the best man for the job right now. Don’t blame the messenger when the boat starts to really rock. The chairman did not get us into these waters by himself.
Tuesday, February 26, 2008
Bond Rating Services and Toxicity
My father-in-law built planes for North American Aviation his whole life. On his desk he had a piece of wood with a message that read “quality must be built into a product, it can not be inspected into it.”
When I got into the municipal bond business in the late 1960's, there were two well known bond rating services that everyone used when discussing the quality of a bond. Now there are three. Bonds receive ratings based on their ability and willingness to pay their interest and principal in a timely fashion. These ratings start at triple-A and run all the way down the alphabet to a single-C.
I remember one day the bells rang out on the munifax wire and everyone ran over to the machine to read the news. As I remember it, and this was over 30 years ago, so my memory may be a little fussy, the general obligation bonds of New York City lost their single-A rating. Everyone knew the situation with regards to the finances of New York City was not good. It was not a closely guarded secret from the investment people on Wall Street, nor for that matter any other street. Even though New York City GO bonds carried an A rating, they sold as much as 175 basis points cheaper than any other piece of A rated paper in the municipal bond market. The next day the bells rang again, only this time the news was that the rating service that lowered the rating the day before had seen the light and was now restoring New York City’s A rating. New York City GO bonds continued to sell at a huge spread to other A rated GO bonds. The rating service change did not influence the muni bond market.
After New York City went into default on their bond obligations a few years later, several of the larger investment securities firms in New York created teams of municipal bond analysts to write reports on new issues of municipal debt. I used to receive these weekly reports and I read them. I will not go into what these reports said, as I figure by now, I have lost half my readers, and I don't want to lose the other half. This practice of producing research reports for municipal debt lasted for a few years and then slowly disappeared. Several firms produced these reports each week in a booklet formate. Each firm used a different color envelope to mail their reports. I would save these envelopes and use them to sketch on. I would take these large envelopes into meetings with me to sketch on so I would not fall asleep. Once a meeting lasted more than 60 minutes at the bank, my brain went on screen saver unless I started moving my left hand.
So, what's the point? The point is this, ratings and research are important, but not many are willing to put the money into it that is necessary to produce a quality product. Young analysts don’t make much money and they want to advance in their careers. The rating services don’t pay the big bucks that the investment banking firms do. As a result, the better analysts move from the rating services to the investment banking firms. Giving debt a AAA rating is a big deal in the credit world, or at least it used to be. US Treasuries are rated AAA, and that means something. When a mortgage credit is given a AAA rating, it better have the ability and willingness to pay at the highest level. A triple-A rating should not be taken lightly, it better stand for something. If ratings are compromised the whole system of credit ratings comes under a cloud.
The Fed can ease credit, lower interest rates and accelerate the growth rate of the money supply. But, the Fed can not wave a magic wand and bring investor confidence back to the credit markets if the credit rating system has been compromised. This type of crisis takes time to heal, and if it is a major part of the mortgage crisis mess, Ben Bernanke and God can not fix it overnight.
For all of you that have hung in there so far, I salute you. Tomorrow is another day. I will try to find something to reward you. Stay tuned.
When I got into the municipal bond business in the late 1960's, there were two well known bond rating services that everyone used when discussing the quality of a bond. Now there are three. Bonds receive ratings based on their ability and willingness to pay their interest and principal in a timely fashion. These ratings start at triple-A and run all the way down the alphabet to a single-C.
I remember one day the bells rang out on the munifax wire and everyone ran over to the machine to read the news. As I remember it, and this was over 30 years ago, so my memory may be a little fussy, the general obligation bonds of New York City lost their single-A rating. Everyone knew the situation with regards to the finances of New York City was not good. It was not a closely guarded secret from the investment people on Wall Street, nor for that matter any other street. Even though New York City GO bonds carried an A rating, they sold as much as 175 basis points cheaper than any other piece of A rated paper in the municipal bond market. The next day the bells rang again, only this time the news was that the rating service that lowered the rating the day before had seen the light and was now restoring New York City’s A rating. New York City GO bonds continued to sell at a huge spread to other A rated GO bonds. The rating service change did not influence the muni bond market.
After New York City went into default on their bond obligations a few years later, several of the larger investment securities firms in New York created teams of municipal bond analysts to write reports on new issues of municipal debt. I used to receive these weekly reports and I read them. I will not go into what these reports said, as I figure by now, I have lost half my readers, and I don't want to lose the other half. This practice of producing research reports for municipal debt lasted for a few years and then slowly disappeared. Several firms produced these reports each week in a booklet formate. Each firm used a different color envelope to mail their reports. I would save these envelopes and use them to sketch on. I would take these large envelopes into meetings with me to sketch on so I would not fall asleep. Once a meeting lasted more than 60 minutes at the bank, my brain went on screen saver unless I started moving my left hand.
So, what's the point? The point is this, ratings and research are important, but not many are willing to put the money into it that is necessary to produce a quality product. Young analysts don’t make much money and they want to advance in their careers. The rating services don’t pay the big bucks that the investment banking firms do. As a result, the better analysts move from the rating services to the investment banking firms. Giving debt a AAA rating is a big deal in the credit world, or at least it used to be. US Treasuries are rated AAA, and that means something. When a mortgage credit is given a AAA rating, it better have the ability and willingness to pay at the highest level. A triple-A rating should not be taken lightly, it better stand for something. If ratings are compromised the whole system of credit ratings comes under a cloud.
The Fed can ease credit, lower interest rates and accelerate the growth rate of the money supply. But, the Fed can not wave a magic wand and bring investor confidence back to the credit markets if the credit rating system has been compromised. This type of crisis takes time to heal, and if it is a major part of the mortgage crisis mess, Ben Bernanke and God can not fix it overnight.
For all of you that have hung in there so far, I salute you. Tomorrow is another day. I will try to find something to reward you. Stay tuned.
Monday, February 25, 2008
For Debt Instruments: Time is Money
We have all heard the expression “time is money.” In the world of debt obligations, bonds , notes and mortgages, this is literally the case as there is a mathematical relationship between time, money and the rate of interest.
In the old days, when I first broke into the bond business, before there were computers and bond calculators on every desk, bond prices were looked up in something called a basis book. These books had pages filled with columns of numbers where you could look up the price of a bond if you knew the stated interest rate, maturity date and the yield to maturity. Back in the late ‘60’s when I first started out, municipal bonds literally had coupons attached to the bond that were cut off, sometimes referred to as clipping off the coupon, and presented every six months for a half year’s interest payment. The municipal bonds in those days were in bearer form and smart people kept them in a safety deposit box. It was years later that book entry replaced bearer bonds. Today with computers, I think almost if not all bonds are in book entry form.
Bonds and notes have a dated date from which the time they start paying interest, at a stated rate, is calculated. This interest rate was referred to as the coupon rate. Every bond has a maturity date, the date at which the principal and final interest payment are paid. When interest rates go up in the market, bonds already in the market come down in value (price) as the principal value must be shaved in order for the bond to be in line with the yields of the newer bonds coming to market. When a bond declines in value from its face amount, usually $1,000, it is said to be selling at a discount. Prices move both ways, up as well as down. When interest rates fall, bond prices move up in value (price) as they come in line with the newer debt offerings. This is known as the inverse relationship that yields have to price.
One percent (1.00%), is made up of 100 basis points. When a bond goes down in value because interest rates are going up, the yield to maturity of the bond goes up. A 5.00% bond, whose price falls from par (100.00), will experience an increase in yield, known as the yield to maturity. An increase in interest rates across the bond market will mathematically reduce the price (value) of bonds in the market. The longer the maturity of the bond the greater the price decline for each basis point that interest rates increase. I will discuss the yield curve and what it means another time.
Several factors can move the price of a bond, or for that matter the market. The movement of interest rates by the Fed is only one of those factors. The Fed can influence interest rates through the use of it tool bag, but other factors like credit worthiness can be beyond its control. There is a whole discussion of credit and debt and their relationship to price that has not been tackled. There is a direct relationship between credit, debt, yield, maturity and price. And, credit worthiness and the credit ratings given debt instruments by the ratings agencies, one of the non-mathematical parts of the equation. This is some of what is behind the present sub prime mortgage mess. Stay tuned.
In the old days, when I first broke into the bond business, before there were computers and bond calculators on every desk, bond prices were looked up in something called a basis book. These books had pages filled with columns of numbers where you could look up the price of a bond if you knew the stated interest rate, maturity date and the yield to maturity. Back in the late ‘60’s when I first started out, municipal bonds literally had coupons attached to the bond that were cut off, sometimes referred to as clipping off the coupon, and presented every six months for a half year’s interest payment. The municipal bonds in those days were in bearer form and smart people kept them in a safety deposit box. It was years later that book entry replaced bearer bonds. Today with computers, I think almost if not all bonds are in book entry form.
Bonds and notes have a dated date from which the time they start paying interest, at a stated rate, is calculated. This interest rate was referred to as the coupon rate. Every bond has a maturity date, the date at which the principal and final interest payment are paid. When interest rates go up in the market, bonds already in the market come down in value (price) as the principal value must be shaved in order for the bond to be in line with the yields of the newer bonds coming to market. When a bond declines in value from its face amount, usually $1,000, it is said to be selling at a discount. Prices move both ways, up as well as down. When interest rates fall, bond prices move up in value (price) as they come in line with the newer debt offerings. This is known as the inverse relationship that yields have to price.
One percent (1.00%), is made up of 100 basis points. When a bond goes down in value because interest rates are going up, the yield to maturity of the bond goes up. A 5.00% bond, whose price falls from par (100.00), will experience an increase in yield, known as the yield to maturity. An increase in interest rates across the bond market will mathematically reduce the price (value) of bonds in the market. The longer the maturity of the bond the greater the price decline for each basis point that interest rates increase. I will discuss the yield curve and what it means another time.
Several factors can move the price of a bond, or for that matter the market. The movement of interest rates by the Fed is only one of those factors. The Fed can influence interest rates through the use of it tool bag, but other factors like credit worthiness can be beyond its control. There is a whole discussion of credit and debt and their relationship to price that has not been tackled. There is a direct relationship between credit, debt, yield, maturity and price. And, credit worthiness and the credit ratings given debt instruments by the ratings agencies, one of the non-mathematical parts of the equation. This is some of what is behind the present sub prime mortgage mess. Stay tuned.
Saturday, February 23, 2008
Level Playing Field, Level Playing Field No. 2 & 3
The 3 paintings I will post for today are related to each other. Level Playing Field is the title of these 3 paintings. Some other time I will discuss the term "level playing field", and how it has been used in political discussions. The first painting is oil on board. The second and third is oil on wood, actually 2 wine box lids. I hope you will find them interesting and be willing to share your thoughts and comments. Saturday is a good day for art.
Friday, February 22, 2008
United States Hostage: Energy Policy
Interest rates, the price of oil, the anticipated rate of inflation, consumer debt, government spending and government borrowing, and consumer confidence in the economy, all play their role as we move through the coming year. And, as I have said before, if there was one piece of the equation I would single out for change, as having an impact that would effect every other segment of our economy, it is the price of oil. Every single person in the United States is effected by the price of oil. Whether you walk or drive, take a bus, a train, a cab or a subway, oil is involved.
In 1973, we experienced the first Oil Embargo from OPEC. At that point, our leaders should have recognized our vulnerability and taken steps to decrease our dependency on foreign oil. If we would had set a modest national goal, to reduce the amount of oil we import by 2% per year cumulatively, how much foreign oil would need to import 34 years later each year? Unfortunately, our leaders are not about leadership and leading. The situation we find ourselves in today with regards to the price of oil, is the result of no national plan towards self sufficiency.
The geopolitical situation in the world today and the uncertainties that we are experiencing today in the Middle East are directly related to the price of a barrel of oil. With so much of the world’s oil supply coming from this region of the world, the tensions and uncertainties in this region, and the problems with the flow and transport of oil from this region, are all factors that get inputted into the price of oil.
More should have been done before we reached this point. Unfortunately, while we all are in the same boat, those least able to pay the price for a gallon of gas at the pump are hurt the most. The nation as a whole, can not continue to spend on consumer durables and non-durables at the same rate as when gas was half the price it is now. The present gas prices are like a tax on the consumer, and it is falling heavily on those least able to pay. My remark yesterday, “you can not take the air out of the ball and expect the game to have the same bounce” is what I was driving at.
The leadership in this country, with regards to our energy policies over the last 34 years, is a blatant failure. Those interested in reading a good book that will shed light on this subject should read Sleeping With The Devil: How Washington Sold Our Soul For Saudi Crude by Robert Baer, 2003. That is enough for today, have a safe weekend. Stay tuned.
Thursday, February 21, 2008
The Fed: Between a Rock and a Hard Place
The Fed has lowered their expectations for economic growth for the coming year. This should not be a surprise to anyone unless they left the planet for the last six months. Quite simply, we are now between the proverbial rock and a hard place. Let me explain.
This country’s economy runs best when energy is cheap. Specifically, when gasoline and diesel fuel are cheap. Everything we eat, wear, drink or consume in some form or another is brought to us by train, truck or some energy consuming vehicle. Anyone who was watching the prices at the pump for the last year to 18 months could see the hand writing on the wall. Let me just say here, without pointing any fingers at anyone, more should have been done and more should be done to bring down the cost of gas and diesel at the pump. You can’t take the air out of the ball and expect the game to have the same bounce.
The housing bubble and the sub prime mortgage mess are real serious problems, and if that was all the Fed had to deal with, the easing of credit by lowering the Fed funds rate would certainly bring confidence back in many sectors. But, the economic situation the Fed now finds across the landscape is much more complicated than what simple monetary policy can fix.
Because we are dependent on foreign oil, and because our government is spending more than it is taking in and having to borrow more money in the capital markets, and because oil is traded in US dollars and the US dollar is declining in value, our central bank, The Federal Reserve Bank, (that is being asked to be the savior of our economy), finds itself between a rock and a hard place.
The Fed can only do so much. Their tool bag consists of: 1) Open Market Operations, the buying and selling of US Treasuries to add or take away reserves from the system, 2) the raising and lowering of the Fed funds rate, (something they have been doing lately quite often) and 3) setting the reserve requirement for the banks. And yet, the Congress wants miracles from Ben Bernanke and the rest of the Fed players. As a former President once said, “give me a break!”
If I had one bolt of lightening from the economic gods, I would throw it with all my strength at the price of oil, gasoline and diesel at the pump. If I could change one piece of the economic equation, I would throw that lightening bolt directly at the cost of oil. As for the sub prime mortgage mess, I will save that discussion for another time. Stay tuned.
This country’s economy runs best when energy is cheap. Specifically, when gasoline and diesel fuel are cheap. Everything we eat, wear, drink or consume in some form or another is brought to us by train, truck or some energy consuming vehicle. Anyone who was watching the prices at the pump for the last year to 18 months could see the hand writing on the wall. Let me just say here, without pointing any fingers at anyone, more should have been done and more should be done to bring down the cost of gas and diesel at the pump. You can’t take the air out of the ball and expect the game to have the same bounce.
The housing bubble and the sub prime mortgage mess are real serious problems, and if that was all the Fed had to deal with, the easing of credit by lowering the Fed funds rate would certainly bring confidence back in many sectors. But, the economic situation the Fed now finds across the landscape is much more complicated than what simple monetary policy can fix.
Because we are dependent on foreign oil, and because our government is spending more than it is taking in and having to borrow more money in the capital markets, and because oil is traded in US dollars and the US dollar is declining in value, our central bank, The Federal Reserve Bank, (that is being asked to be the savior of our economy), finds itself between a rock and a hard place.
The Fed can only do so much. Their tool bag consists of: 1) Open Market Operations, the buying and selling of US Treasuries to add or take away reserves from the system, 2) the raising and lowering of the Fed funds rate, (something they have been doing lately quite often) and 3) setting the reserve requirement for the banks. And yet, the Congress wants miracles from Ben Bernanke and the rest of the Fed players. As a former President once said, “give me a break!”
If I had one bolt of lightening from the economic gods, I would throw it with all my strength at the price of oil, gasoline and diesel at the pump. If I could change one piece of the economic equation, I would throw that lightening bolt directly at the cost of oil. As for the sub prime mortgage mess, I will save that discussion for another time. Stay tuned.
Wednesday, February 20, 2008
The Fed: A Tremendous Challenge
Every job has its challenges, but being the chairman of the Federal Reserve Bank has to rank up there for the assortment of challenges that face Ben Bernanke. The farmer has an assortment of challenges to deal with: the weather, the price of seed and fertilizer, the price and maintenance of his farm equipment, the weather at harvest time, the price of the commodity he is growing. The chairman of the Fed has his own set of challenges and they can be very formidable too.
I worked for the State of Ohio for a little over 9 years with the state agency that insured the workers’ of Ohio for job related injury, commonly referred to as workers’ compensation. The state insurance fund was in the billions of dollars. Whenever there are large pools of money in government, there is political pressure. I saw this first hand. Large pools of money attract politicians and their patrons like a cherry popsicle attracts ants on a hot sidewalk in the summer sun. The sweetness is too much to resist.
The real estate developer as well as every other kind of developer or CFO wants low interest rates. High interest rates cause projects to get scrapped or put on hold. The economy cools and growth rate of our economy declines when interest rates are moving up. On the other hand, low interest rates and an expansive monetary policy can lead to inflation, especially when the government spends wildly and needs to borrow billion$ in the capital markets. People who live from pay check to pay check, rent, and/or are on a fixed income, a pensioner, are hurt by inflation. Yes, I know what a COLA is. But a Cost Of Living Adjustment (COLA) doesn’t give equal protection to those among us who can least sustain a rapid rise in prices. Think food, oil & gas and health care. Who looks out for these people? The business person borrows, the homeowner borrows, the investor borrows and then they pay off their debts with inflated dollars, but who looks out for those unable or not capable of taking on debt?
The Fed plays that role, or should play that role in my opinion. The integrity of the dollar, our currency, is in my opinion, the most important job the Fed can do for all the American people. Growing the money supply is also important, but I think it is secondary to maintaining the value of our currency -- our money. The Fed, created by Congress, is responsible to Congress, and as such has been drawn into helping the politicians keep their jobs. This should not be one of the challenges of the central bank, but in the real world, it is. Yes, I remember g-h-g-n from my philosophy class over 45 years ago. "Greatest good for the greatest number", a good reason to keep the economy growing. But, we need balance. Congress should stand up and take responsibility for the hole we are in economically, and not foist the problems they have created through mismanagement onto the Fed or for that matter the Fed Chairman Ben Bernanke.
That’s enough for today. I will return to this theme of the Fed’s responsibility to all Americans, and not just those among us who have influence. Stay tuned.
I worked for the State of Ohio for a little over 9 years with the state agency that insured the workers’ of Ohio for job related injury, commonly referred to as workers’ compensation. The state insurance fund was in the billions of dollars. Whenever there are large pools of money in government, there is political pressure. I saw this first hand. Large pools of money attract politicians and their patrons like a cherry popsicle attracts ants on a hot sidewalk in the summer sun. The sweetness is too much to resist.
The real estate developer as well as every other kind of developer or CFO wants low interest rates. High interest rates cause projects to get scrapped or put on hold. The economy cools and growth rate of our economy declines when interest rates are moving up. On the other hand, low interest rates and an expansive monetary policy can lead to inflation, especially when the government spends wildly and needs to borrow billion$ in the capital markets. People who live from pay check to pay check, rent, and/or are on a fixed income, a pensioner, are hurt by inflation. Yes, I know what a COLA is. But a Cost Of Living Adjustment (COLA) doesn’t give equal protection to those among us who can least sustain a rapid rise in prices. Think food, oil & gas and health care. Who looks out for these people? The business person borrows, the homeowner borrows, the investor borrows and then they pay off their debts with inflated dollars, but who looks out for those unable or not capable of taking on debt?
The Fed plays that role, or should play that role in my opinion. The integrity of the dollar, our currency, is in my opinion, the most important job the Fed can do for all the American people. Growing the money supply is also important, but I think it is secondary to maintaining the value of our currency -- our money. The Fed, created by Congress, is responsible to Congress, and as such has been drawn into helping the politicians keep their jobs. This should not be one of the challenges of the central bank, but in the real world, it is. Yes, I remember g-h-g-n from my philosophy class over 45 years ago. "Greatest good for the greatest number", a good reason to keep the economy growing. But, we need balance. Congress should stand up and take responsibility for the hole we are in economically, and not foist the problems they have created through mismanagement onto the Fed or for that matter the Fed Chairman Ben Bernanke.
That’s enough for today. I will return to this theme of the Fed’s responsibility to all Americans, and not just those among us who have influence. Stay tuned.
Tuesday, February 19, 2008
An Excellent Article: The Fed and Ben Bernanke
Those interested in reading a well written article about the Fed Chairman, Ben Bernanke, and a short discussion of the history of the Federal Reserve Bank, should take a look at the Sunday New York Times Magazine from January 20, 2008. “The Decider” by Roger Lowenstein is an excellent article that I think will give almost any reader an appreciation of what the Fed does, how it does it and the man, Ben Bernanke, who leads them.
Back in the days when I was a young bond salesman, the munifax wire would ring its bells to announce the latest news from the Fed. Every Thursday afternoon the bells would ring and the figures on the money supply would be announced for the week. In the late ‘60’s and ‘70’s, money supply numbers were the big things to watch. For the bond market, a too rapid growth rate in the money supply was associated with a rise in the the rate of inflation. Inflation to the bond market and those that hold bonds in their portfolios is like kryptonite to Superman. Inflation causes interest rates to go up and when interest rates go up, bond values (prices) go down. It is an inverse relationship, one of many that I have observed in my life. However, this inverse relationship is purely mathematical.
In the second to last paragraph of his article, Lowenstein, in my opinion, gets to the nitty gritty of what we face. “The Fed faces not only the twin demons of recession and inflation but also the specter that further rate cuts would cause foreign investors -- who own more than $2 trillion of U.S. debt -- to bail out, sending U.S. interest rates soaring.”
My fellow Americans, we are truly in a world market. The political bs that is thrown around here at home holds little or no weight when it comes to the movements (buying and selling) on the stage of the world’s bond markets. This is where the rubber meets the road. What we do as a nation with our own spending and borrowing is not entirely under our own control. It is, I hope, not too late for us as a nation to revisit the amounts of spending and borrowing we do and what for.
I could write pages on this subject, but I will take a break now. Try to get your mind around the fact that we are part of a global economy and global security markets. What we do here at home in our own country effects the world bond markets and specifically the debt held in U.S. dollars. Think about that $2 trillion in U.S. debt that is out there. Stay tuned.
Back in the days when I was a young bond salesman, the munifax wire would ring its bells to announce the latest news from the Fed. Every Thursday afternoon the bells would ring and the figures on the money supply would be announced for the week. In the late ‘60’s and ‘70’s, money supply numbers were the big things to watch. For the bond market, a too rapid growth rate in the money supply was associated with a rise in the the rate of inflation. Inflation to the bond market and those that hold bonds in their portfolios is like kryptonite to Superman. Inflation causes interest rates to go up and when interest rates go up, bond values (prices) go down. It is an inverse relationship, one of many that I have observed in my life. However, this inverse relationship is purely mathematical.
In the second to last paragraph of his article, Lowenstein, in my opinion, gets to the nitty gritty of what we face. “The Fed faces not only the twin demons of recession and inflation but also the specter that further rate cuts would cause foreign investors -- who own more than $2 trillion of U.S. debt -- to bail out, sending U.S. interest rates soaring.”
My fellow Americans, we are truly in a world market. The political bs that is thrown around here at home holds little or no weight when it comes to the movements (buying and selling) on the stage of the world’s bond markets. This is where the rubber meets the road. What we do as a nation with our own spending and borrowing is not entirely under our own control. It is, I hope, not too late for us as a nation to revisit the amounts of spending and borrowing we do and what for.
I could write pages on this subject, but I will take a break now. Try to get your mind around the fact that we are part of a global economy and global security markets. What we do here at home in our own country effects the world bond markets and specifically the debt held in U.S. dollars. Think about that $2 trillion in U.S. debt that is out there. Stay tuned.
Monday, February 18, 2008
Presidents' Day 2008
I hope everyone had a nice Presidents' Day. I have posted a painting for the holiday.
Saturday, February 16, 2008
Saturday at Fred's Art Gallery
At the bottom of Moneythoughts for Saturday, February 16, 2008, I have posted 3 paintings that I thought may be of interest. These paintings are what I refer to as political satire. I will post other paintings on Saturdays of my political satire in the future. What do you think of these 3 pieces? Your comments are welcome.
Friday, February 15, 2008
The Economic Stimulus Act of 2008 Plus
Our Government has such a big heart that this year for Valentine's Day we received from our leaders in Washington an economic stimulus package to help us with our economy. It is estimated that the package will run about $168 billion, and that the Government will borrow about $117 billion over the next 2 years to cover the stimulus package. We all understand that this will enlarge our budget deficit.
Well, I had a crazy idea that I thought I would share. What if the Government in addition to the check in the mail, gave everyone that was getting a check a voucher to buy a new, made in the USA, hybrid car or SUV? Free! That would help the economy, put people to work and hopefully reduce the amount of foreign oil we import. The Government could buy your used car from the dealer and either sell them to another country or sell them for scrap. The idea I like best is for the Government to take all the used cars that must be turned in when the voucher is used, and build a wall with the used cars along our southern border with Mexico. This piece of contemporary art, much like the Cadillac Ranch piece of art on the highway outside of Amarillo, Texas, would be a masterpiece of contemporary sculpture and make Lou Dobbs happy as well. We would accomplish several things with this one idea. First, we would get more people back to work. Second, we would get a sizable number of older model cars and SUV's off the highways and roads. Third, we may actually use less gas and as a result import less foreign oil. This may also lower the price of a barrel of oil. Fourth, it would be a real boost to the acceptance of Hybrid cars by the general population. Fifth, we would create a great piece of Contemporary American Art along our southern border with Mexico. Think of all the people that would travel to the USA to see such a massive contemporary sculpture. And Sixth, it would keep out illegal aliens and restore a measure of security to Homeland Security. And, just think, all that from just one crazy idea. What about the price tag of such a stimulus package? Well, we would again have to borrow more money, but I think there would be more good to come out of this than meets the eye. And, how can we measure the amount of good feelings to come out of this about our Government? All those "free" cars will cost billions, but the good feelings that this will generate -- priceless.
I have read that the Economic Stimulus Act of 2008 will be like a shot of adrenaline to the economy. My idea is more like a shot of nitroglycerin to the economy. What do you think?
Stay tuned.
Well, I had a crazy idea that I thought I would share. What if the Government in addition to the check in the mail, gave everyone that was getting a check a voucher to buy a new, made in the USA, hybrid car or SUV? Free! That would help the economy, put people to work and hopefully reduce the amount of foreign oil we import. The Government could buy your used car from the dealer and either sell them to another country or sell them for scrap. The idea I like best is for the Government to take all the used cars that must be turned in when the voucher is used, and build a wall with the used cars along our southern border with Mexico. This piece of contemporary art, much like the Cadillac Ranch piece of art on the highway outside of Amarillo, Texas, would be a masterpiece of contemporary sculpture and make Lou Dobbs happy as well. We would accomplish several things with this one idea. First, we would get more people back to work. Second, we would get a sizable number of older model cars and SUV's off the highways and roads. Third, we may actually use less gas and as a result import less foreign oil. This may also lower the price of a barrel of oil. Fourth, it would be a real boost to the acceptance of Hybrid cars by the general population. Fifth, we would create a great piece of Contemporary American Art along our southern border with Mexico. Think of all the people that would travel to the USA to see such a massive contemporary sculpture. And Sixth, it would keep out illegal aliens and restore a measure of security to Homeland Security. And, just think, all that from just one crazy idea. What about the price tag of such a stimulus package? Well, we would again have to borrow more money, but I think there would be more good to come out of this than meets the eye. And, how can we measure the amount of good feelings to come out of this about our Government? All those "free" cars will cost billions, but the good feelings that this will generate -- priceless.
I have read that the Economic Stimulus Act of 2008 will be like a shot of adrenaline to the economy. My idea is more like a shot of nitroglycerin to the economy. What do you think?
Stay tuned.
Thursday, February 14, 2008
What's Happening to the US Dollar?
I have read and I have seen on TV that merchants in New York City (NYC) have put signs in their windows advertising that they accept payment for goods in Euros. This reminds me of when I was in the US Army and stationed in Korea in the mid 1960's. After we landed, one of the first things we did was to turn in our US money for what we called "MPC". I think MPC stood for Military Personnel Currency. The MPC came in all denominations all the way down to five cents. We were allowed to keep our pennies. This funny looking paper money, that came in various sizes and colors, was to be used to pay for goods and services. The base PX (post exchange) accepted our funny looking MPC as it was the legal tender for military personnel. But, what I found so interesting was when we went into the villages or towns, (I was stationed up north, near the DMZ) the merchants gladly accepted our MPC. Remember MPC is not Greenbacks, the paper money we all use at home. In talking with some of the older NCO's that had been to Korea before, I found out that not only did the Korean merchants accept MPC, but that many of them actually saved it as a hedge against the inflation of their own currency the Won. So what does that have to do with us here in the US over 40 years later? Think about it. Later, in another piece I will get on my high horse and talk about the US Dollar, oil priced in US Dollars and the increasing price of a barrel oil, but I will save that for another day. Money can be many things, but one of its most important qualities is that it is used to purchase goods and services. When your money buys fewer goods and services for the same dollar, we call that inflation. But money can also be a store of wealth. A silk prayer rug can be a store of wealth as can a Rembrandt painting. Rembrandt isn't flooding the market with his paintings like the US Government is flooding the market with our paper money. You may want to think about how you are going to hedge yourself against a dollar that is falling in value. Stay tuned.
Wednesday, February 13, 2008
The New Stimulus Package Signed by Pres. Bush
The stimulus package was recently signed by President Bush. The big question: Is this enough to keep the economy from falling into a recession. The economists say a recession is 2 quarters of negative growth. Another question is: If the checks start going out in May, how long will it take before that money finds its way back into the economy by way of consumer purchases. Some economists sight the fact that not everyone spends their check on new purchases and some use the cash to pay bills, while others put the money in the bank. Where is the $150 plus billion going to come from? Are we going to borrow that money from the Chinese only to buy more products made in China? When you present your government check to your bank, the bank credits your account . But where does the government get the money to honor that check? The Federal Reserve Bank credits your bank’s account at the Fed, but where does the Fed get the money to cover that check? Yes, the US Treasury will make good on that check, but where does the US Treasury get the money? They borrow it. And the beat goes on. Inflation doesn’t seem to be on too many people's minds, but for those of us that managed bond portfolios in the late 1970’s into the early 1980’s, remember what inflation can do to the price of bonds and in turn the yield curve. It is never, in my opinion, to early to be concerned about the prospects of bigger deficits leading to higher long term interest rates. With the war in Iraq, and the huge deficits that are taking place, the prospects of another round of inflationary pressures is not in the too distant future. With gas prices over $3 per gallon, the cost of everything from bread and butter to durable goods is likely to continue to rise. Stay tuned.
Introduction to Money Plus Thoughts
This blog will discuss the economy, monetary policy and other related and not so related topics. This blog is not aimed at picking stocks or bonds, but we will discuss the markets as they relate to the economy and the implementation of monetary policy by the Federal Reserve Bank. This may seem rather dry and boring, but there will be ideas tossed about that may be of interest to you. Naturally, I hope to have something to say nearly every day. I have been writing about events for the last two years in emails to friends. Now I am going to expand the process with money plus thoughts. I will write and try to make it interesting, and if you find it interesting, I hope you will share this blog with a friend.
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