• Looking Out for Our 'Future Financial Selves'

    Battles between your present self and your future self are not fair.  Your present self holds advantages and is always poised for victory.  So says Daniel Goldstein in this illuminating Ted Talk.  And Goldstein, Principal Research Scientist at Yahoo! Research, is working on developing some ways of making the battle more even.  Because if we don't find ways of helping our future selves win, then we are setting ourselves up for financial struggle.  (Spoiler alert: yes, this is about saving.)

  • Marketplace Morning Report: Gold's Dropping Value

    The value of gold has dropped more than 400 dollars per ounce since an August 2011 high of $1900, Marketplace reports.  This appears to be the result of growing confidence in the US economy, and the dollar gaining strength.  Marketplace's Steve Chiotakis and Stephen Beard discussed the iconic metal's drop in this report.

  • Stephen Roach: 'Odds of a hard landing in China and India remain low'

    We find it hard to talk about China without talking about India.  Sometimes, for the sake of economic comparison, we pit the two against each other.  Other times we pit the two, often along with South American kindred spirit Brazil, against the developed economies of the West.  india and China seemed to zag while the rest of the world zigged during the global economic crisis, and were able to grow while the US, China, and Europe stagnated.  But as 2011 ends, the two growing powerhouse economies are showing some vulnerability. 

    At Project Syndicate, Stephen Roach warns us not to carried away by concerns that China and India will struggle in the coming year.  He is a little worried about India's ability to avert crisis.  As for China, Roach says not to expect a "hard landing," as China's policymakers have taken necessary action to ward off any major downfall:

    That is particularly evident in Chinese officials’ successful campaign against inflation. Administrative measures in the agricultural sector, aimed at alleviating supply bottlenecks for pork, cooking oil, fresh vegetables, and fertilizer, have pushed food-price inflation lower. This is the main reason why the headline consumer inflation rate receded from 6.5% in July 2011 to 4.2% in November.

    Meanwhile, the People’s Bank of China, which hiked benchmark one-year lending rates five times in the 12 months ending this October, to 6.5%, now has plenty of scope for monetary easing should economic conditions deteriorate. The same is true with mandatory reserves in the banking sector, where the government has already pruned 50 basis points off the record 21.5% required-reserve ratio. Relatively small fiscal deficits – only around 2% of GDP in 2010 – leave China with an added dimension of policy flexibility should circumstances dictate.

    India, however, "is more problematic," Roach notes:

    India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.

    But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion.

    Read Why India is Riskier than China here.

  • Case-Shiller: Housing Market off to Poor Start in Fourth Quarter

    Only one of the twenty top US metro areas saw an increase in home prices from September to October, according to the latest S&P/Case-Shiller Home Price Indices release.  That market was Phoenix, where the Case-Shiller price index rose a paltry 0.3 percent.  The indices for Washington, DC and Detroit are up compared to October, 2010, while the other 18 markets are all down in year-to-year data.  Here's a look at the long term trend:

    From the release:

    “There was weakness in the monthly statistics, as 19 of the cities posted price declines in October over September,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Eleven of the cities and both composites fell by 1.0% or more during the month. And even though some of the annual rates are improving, 18 cities and both Composites are still negative. Nationally, home prices are still below where they were a year ago. The 10-City Composite is down 3.0% and the 20-City is down 3.4% compared to October 2010.

    “In the October data, the only good news is some improvement in the annual rates of change in home prices, with 14 of 20 cities and both Composites seeing their annual rates of change improve. The crisis low for the 10-City Composite was back in April 2009; whereas it was a more recent March 2011 for the 20-City Composite. The 10-City Composite is about 2.4% above its relative low, and the 20-City Composite is about 1.9%.”

    Multi-family homes are showing more positive signs than single family homes.  Otherwise there just isn't much positive coming through in these Case-Shiller reports of late.  Read the full release here.

  • World Giving Index: Most Nations More Charitable in 2011

    People around the world were more charitable in 2011, according to the UK-based Charities Aid Foundation.  CAF's World Giving Index measures giving in three areas: donating money, volunteering time to an organisation, and helping a stranger or "someone you didn't know who needed help."  While charitable giving of money dipped slightly from 2010 to 2011, more people volunteered and/or helped strangers this past year.  The United States topped the list with a World Giving Index score of 60.  Ireland is a close second with a score of 59, while last year's top countries, Australia and New Zealand, remain near the top with scores of 58 and 57, respectively. 

    Regionally, Southern Asia stands out for a significant increase in giving from 2010 to 2011.  Here is a look at the regional breakdown:

    Read the full report here.

  • When Giving Money is not Enough

    In this season of giving, Mary Ellen Iskenderian wants us to recognize that giving money in itself "is just not sufficient."  As President and CEO of Women's World Banking, Iskenderian has found that she and her organization need to look closely at how that money is spent, and where it reaches.  For Women's World Banking, this means measuring the impact on women in need globally.  But the lesson is one that works across other target groups.  The key point for Iskenderian is that giving without measuring impact is simply not enough:

  • Business Executives Hopeful, But Levels of Optimism Vary Regionally

    As bleak as things may seem from our vantage point in the US, North American business leaders are trending much more optimistic than their counterparts elsewhere.  December responses to the McKinsey Global Survey of Business Executives reveal some sharp regional deviations in expectations, especially in developing powerhouses China and India:

    From the report:

    Respondents in the eurozone have become slightly less worried. Even larger shifts have taken place in the views of respondents in developed Asia, far more of whom now expect stability rather than improvement in their nations’ economies over the next six months—though they’re more hopeful about the global economy than they were in September. Among respondents in North America, there has been a marked swing from expecting worse to expecting better. Overall, though, respondents are still far gloomier about their countries’ prospects than they were in June, when nearly half expected their economies to improve in the next six months; now, 29 percent expect improved conditions.

    Overall, business executives as a whole are expecting corporate profits to rise in the coming months, so the latest survey results paint a generally positive picture for global business.  Read the full survey results here.

  • Inc.: 'The 5 Hardest Jobs to Fill in 2012'

    Keith Cline, a "start-up headhunter" and founder of VentureFizz, is trumpeting start-ups in the tech sector as key drivers of economic growth in 2012.  He thinks there will be jobs in the sector--maybe even more jobs than workers who are qualified for those particular jobs.  So while the job-seekers to jobs ratio overall remains high and foreboding for most workers, Cline says top candidates in these five areas will have strong bargaining power:

    Software Engineers and Web Developers

    Creative Design and User Experience

    Product Management

    Marketing

    Analytics

    Read Cline's full analysis at Inc., here.

  • Job Seekers to Available Jobs Ratio

    December has brought a small wave of positive news on the unemployment front--though much of it is better described as "less negative news."  Lest we get carried away by dips in the unemployment rate and jobless claims, Economic Policy Institute economist Heidi Shierholz reminds us that the conditions are not ripe for a major shift.  Shierholz points to the ratio of job seekers to available jobs, which remains above 4:1.

    Shierholz:

    To put this figure in context, it’s useful to note that the highest this ratio ever got in the early 2000s downturn was 2.8-to-1, and in December 2000, the month the JOLTS survey began, the ratio was 1.1-to-1. While the job-seekers ratio has been generally slowly improving since its peak of 6.9-to-1 in the summer of 2009, today’s data release marks two years and 10 months—147 weeks—that the ratio has been above 4-to-1. A job-seekers ratio of more than 4-to-1 means that for more than three out of four unemployed workers, there simply are no jobs. In October, there were 10.6 million more unemployed workers than job openings. Furthermore, the lack of job openings relative to unemployed workers is in no way limited to particular industries such as construction—unemployed workers dramatically outnumber job openings across the board, in every major industry.

    Read the full post here.

  • Giving Inventiveness its Due

    There are those who think that GDP is limited as a measure of a nation's progress.  Bhutan, for example, has its GNH: Gross National Happiness.  Could there be a way to measure inventiveness?  If there were, Nathan Myhrvold would surely get on board and push that measure as a way to forecast future economic health.  In a column for Bloomberg, Myhrvold--former chief strategist and chief technology officer at Microsoft, and founder and chief executive officer of Intellectual Ventures--argues that inventiveness and innovation are difficult to measure, and therefore get short shrift by economists.  

    The economy of the world is not based on the simple interplay of capital and labor. Sure, these are involved. But they are secondary characteristics, not fundamental ones. Macroeconomists are often said to have their fingers on the pulse of the economy, and that’s an apt analogy. A pulse is a decent secondary indicator of life because blood flow is one prerequisite for the body’s survival. But the pulse is a weak and incomplete measure of life. A brain-dead patient, after all, may have a pulse even though the person’s life is over. Conversely, a machine can drive a pulse without giving life.

    So while it’s all well and good to measure the flow of capital and the markets for labor, don’t mistake this data for the forces that really drive growth, which are inventions (or, if you prefer, ideas) and the ways that they are made real. In response to these forces, capital is deployed and labor is expended.

    Physics is obsessed with conservation laws; mass and energy can be neither created nor destroyed. Economics, on the other hand, obsesses about growth and recession, in which economic value is explicitly created and destroyed. Invention is, directly or indirectly, a primary source of the value we call growth.

    Yet economists give invention short shrift. That is partly because they are still hazy about the origin of inventions. I find talking to economists about invention’s role in the economy a bit like talking to fourth graders about where children come from. A smart fourth grader can tell you all about how kids progress through elementary school. They can even tell you about infants, and that mommy’s belly gets big before one appears. But how and why the spark of conception occurs may be a mystery.

    Read Invention Is the Mother of Economic Growth here.

  • Marketplace Whiteboard: What Makes a Junk Bond Junky?

    If junk bonds have become so popular--beating out equities for the last five years, for example--are they still "junk"?  Marketplace's Paddy Hirsch says that while the moniker isn't quite accurate, these bonds do have a certain "trash or treasure" way about them:

    What is a junk bond? from Marketplace on Vimeo.

  • Adam Davidson: Shopping-Based Indicators and the State of Saving Among American Consumers

    In his most recent New York Times Magazine column, Adam Davidson writes about how he and his Planet Money colleagues surveyed the shopping indicator scene to see what Americans' shopping patterns might tell us about the state of the economy.  From lipstick (once a strong indicator, now not so much) to Champagne sales ("consistently accurate"), there is no shortage of goods that are extolled as strong indicators.  But in the end, the big takeaway is that consumers seem to remain consumers, and have yet to transition into savers.  Davidson:

    Of all the indicators we looked at, one of the most consistently accurate was Champagne sales. The amount of French Champagne that Americans consume has predicted — with nearly 90 percent accuracy — the average American income one year later. Apparently, when we pop a Champagne cork, we know that good times are ahead (see chart). Champagne sales hurtled upward twice in recent history — at the peak of the Internet bubble in 1999 and during the heyday of the housing bubble in 2007. These were both followed by slowdowns as fewer people found reason to celebrate.

    There are so many indicators to choose from that you could glean just about anything regarding our economic future. In fact, the most telling indicator appears to be the sheer number of indicators themselves. Americans now have so many seductive things they can buy that there are ample consumer options no matter what we feel. Partly as a result, savings — known in economics as deferred consumption — have fallen steadily for more than 30 years, from a high of nearly 12 percent of income. It kissed zero before a tiny uptick in the past couple years.

    The decline of the savings rate is particularly troubling because it is consistent through busts and booms. During the fast growth of the late 1990s and mid-2000s, and the dark times that followed, people have been choosing to spend more and save less than ever before. Paradoxically, this happened just as pensions have been disappearing and life spans have been increasing. It suggests that Americans are so caught up in every short-term enthusiasm or agony that they haven't thought enough about long-term fiscal health.

    Read What Nail Polish Sales Tell Us About the Economy here.

  • Carl Walter on Risk Buildup in China

    Carl Walter, author of Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, is concerned about the prospects for China's economy in the coming years.  Speaking at The Economist'sThe World in 2012 Festival, Walter warned of a "risk buildup" in the banking sector that spells trouble down the road.  Walter shared his concerns in this interview with The Economist's Tom Easton:

    For more on The World in 2012 Festival, click here.

  • Mark Thoma on Prospects for Economic Recovery in 2012

    In his CBS Moneywatch column, Mark Thoma writes that while things may be looking up a bit, it does not seem that real economic recovery is happening anytime soon.  He points to these graphs to remind us where we stand:

    Thoma:

    The problem we face is that the sectors that generally lead us out of a recession are the sectors that were most damaged from the collapse of the housing bubble and the subsequent recession. Housing construction is unlikely to increase anytime soon, and households are still struggling to pay off their debt, debt that was made worse by the unemployment, stock crash, and housing price crash that came with the recession. (The automobile sector is also important in recoveries, but the signs there aren't any better.)

    Recessions have different causes, and some types of recessions are easier to recover from than others. An increase in oil prices or an interest-rate hike by the Federal Reserve can be reversed quickly, and the recovery time is generally relatively fast. But as Carmen Reinhart and Kenneth Rogoff explain in their book This Time is Different, recessions that are caused by financial collapses are among the most difficult to recover from. When this type of a recession hits an economy, lost decades are not at all unusual.

    Unfortunately for us, both housing markets and household balance sheets were severely damaged by the recession, and repairing them will take time. Housing values remain depressed with no sign of a robust recovery in sight, and households continue with the debt deleveraging process. Neither sector seems poised to lift us out of the doldrums in the near future.

    Read Will the economy turn around in 2012? here.

  • Jeffrey Sachs Calls on Nations to Pay Down Debt, AND Strengthen Public Policy Apparatus

    In his latest book, The Price of Civilization: Reawakening American Virtue and Prosperity, Jeffrey Sachs calls on Americans to recognize that we are connected to other countries' problems in direct ways, and that our behavior as consumers and citizens have a significant impact on global development.  And he offers up his prescription for working toward a cure to the global economic crisis.  He discussed the state of the global economy, and specifically the euro-zone debt crisis, in an interview with Parminder Bahra of the Wall Street Journal:

  • Public Debt Data, 1880-2008

    IMF researchers S. M. Ali Abbas, Nazim Belhocine, Asmaa El-Ganainy, and Mark Horton are trying to make the task of studying debt cycles and debt sustainability easier.  They have begun building a database of historical public debt.  At VoxEU, they have posted a series of interesting graphs from the data they have compiled so far.  Including this one, that they say provides an "historical perspective of debt developments in advanced, emerging, and low-income economies. Debt levels in advanced economies (now the G20) averaged 55% of GDP over 1880–2009, with a number of peaks and troughs that correspond with key historical events along the way.":

    Here is what the authors say about the value of this data moving forward:

    The composition of the 11 debt reductions observed during 1880–1914, the first era of financial globalisation, is quite similar to that witnessed in the post-1970 financially liberalised period. In both cases, the debt ratio reductions were mainly caused by large primary surpluses. In fact, the post-1970s debt reductions are accounted for almost entirely by primary surplus improvements. However, insofar as such improvements are boosted by the cycle and easier to implement in the context of strong growth, these results may somewhat understate the true role of growth in debt declines; strong growth was a consistent feature of most debt decline episodes.2 That conventional fiscal adjustment and growth have led the way in periods of global financial integration is intuitive as well as consistent with previous studies (such as IMF 2010).

    Looking ahead, highly indebted advanced economies are confronted by a challenging landscape. The pursuit of unconventional options – such as reverting to financial repression policies akin to those taken during the post-WWII years, reducing the burden of domestic debt through higher inflation, or restructuring – may be a temptingshortcut but it comes with high costs. A gradual but steady adjustment is the right way to go. History shows an orderly adjustment is much easier in the context of sustained medium-term growth. This suggests that there is a premium on both implementing structural measures that improve competitiveness and the business environment, and designing fiscal adjustment in a manner that minimises the drag on growth.

    Read Lessons from a century of large public debt reductions and build-ups here.

  • CPI Unchanged in November

    The Consumer Price Index for All Urban Consumers was flat in November.  The index climbed for most of the year, before decreasing slightly in October.  A decrease in the energy index, driven by lower gasoline costs, countered rises in the other indexes (the food index and the all items less food and energy index). climbing 3.5% (seasonally adjusted) over the last year, the CPI decreased 0.1%.  The key factor was energy costs. From the Bureau of Labor Statistics release:

    The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. As in October, the gasoline index fell sharply and the index for household energy declined as well. The food index rose slightly in November, though the index for food at home declined as four of the six major grocery store food group indexes fell.

    The index for all items less food and energy increased 0.2 percent in November following increases of 0.1 percent in each of the prior two months. The indexes for shelter, medical care, apparel, and personal care all rose. These increases more than offset declines in the indexes for new vehicles and used cars and trucks.

    The all items index has risen 3.4 percent over the last 12 months. This is a slightly smaller increase than last month’s 3.5 percent figure, as the 12-month change in the energy index declined from 14.2 percent to 12.4 percent. The 12-month change in the food index also declined slightly, from 4.7 percent to 4.6 percent. In contrast, the 12-month change in the index for all items less food and energy continued to rise, reaching 2.2 percent in November.

    Here's a look at the CPI for All Urban Consumers over the last year:

    Read the release here.

  • Seth Godin on Market Creation

    Sometimes creating markets for products can be a lot more difficult than creating products. Seth Godin says that "buying something for the first time" is a fairly recent phenomenon.  Before the second half of the Twentieth century, we bought what our parents bought, who bought the products their parents bought.  So the challenge for getting consumers to buy new things, even when those products could really truly make their lives better and healthier, remains quite high in parts of the world where people are still buying what their parents bought.  

    Godin discussed this challenge at the Acumen Fund's 2011 Investor Gathering:

  • Biggest Market Moments of 2011, from The Reformed Broker

    We've reached that point in the year where we have get to read through scores of best of the year lists.  Some are instructive or illuminating.  Others, not so much.  We don't track market news closely at the watch--for that you should be reading Nivine Richie at our KnowNOW Finance blog.  But we found The Ten Biggest Market Moments of 2011 list from Joshua Brown--The Reformed Broker--to provide one succinct summary of the year's big business events.  For example, #5:

    Bank of America in Free Fall - Of all the spectacular crashing and burning of 2011, nothing even comes close to the destruction in shares of Bank of America, a company that lost almost two thirds of its market capitalization over the last 12 months.  Every effort was made by management to please the investor base, from asset sales to mass layoff announcements (40,000!) to open conference calls hosted by mutual fund managers who were in disbelief at how low the stock was sinking with every passing day.  BAC dropped from a January high of 15 to 10 by August - but it was just getting warmed up; from August to November it was cut in half again, trading to as low as 5.08 by Thanksgiving and wrecking the funds of John Paulson as well as the careers of several boldfaced mutual fund managers like Bill Miller and Bruce Berkowitz.

    And #1:

    Steve Jobs Resigns as CEO of Apple - We knew that one day, the cancer in Steve Jobs’s liver would force him out, but we were never truly prepared for theannouncement to come.  After fourteen years at the helm of Apple and one of the most miraculous corporate turnarounds in history, on August 24th Jobs told Apple that he could no longer serve the company in his condition.  The stock sold off that night on the news but quickly recovered, Steve would live to see Apple trade at a new all-time high and eventually become the most valuable company in America.  On October 5th, Steve Jobs passes away and the world both mourns his passing and celebrates the amazing revolution he’s sparked from a garage in Los Altos, California.

    Read the full list here

    (Hat tip Barry Ritholtz)

  • Leadership and Personality

    Just as we need some strong leadership in the policy arena to help right the global economy, businesses need strong leaders of their own to drive success in the workplace.  Does that mean businesses need charismatic leadership?  Not necessarily, says Jim Collins.  Collins has seen highly charismatic leaders succeed, and he has seen abrasive leaders succeed.  Strong leadership is not about personality, says Collins in this Big Think interview, but rather, zealotry:

  • Stiglitz's 'Alternative Theory of the Depression'

    In a thought-provoking piece for the January issue of Vanity Fair, Joseph Stiglitz urges us to consider an important element of the Great Depression that has not received as much attention in the media as monetary policy, a troubled banking system, or political battling.  Stiglitz points us to the shift away from agriculture in the late 1920s through the early 1930s as cause of the Depression.  If we are to look more closely at that piece of history, then we may be able to extract important lessons for today, as we see so many Americans going through revolutionary changes in their work and in their workplaces.  Citing resebarch that he has been doing with Bruce Greenwald, Stiglitz writes:

    The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

    The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.

    Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.

    Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.

    Read The Book of Jobs here.

  • Barry Bosworth on Fighting Stagnation in the US and Japan

    Japan went into a recession two decades ago and has been experiencing economic stagnation ever since.  With low growth in the US, there may be lessons policymakers here can take from monetary and fiscal policy moves in Japan.  Barry Bosworth, senior fellow for Economic Studies at Brookings, says both Japan and the US need to embrace significant, structural changes to their economies in order to spur real growth:

  • NFIB Small Business Index Continued to Inch Upward in November

    There was a rise in optimism among small business owners in November, according to a National Federation of Independent Business survey.  The NFIB's optimism index rose to 92.1, from 90.2 in October, spurred largely by perceptions among small business owners that labor conditions are improving. Here's a look at the long term trend:

    While the uptick is certainly a nice change from the end of the summer, when the index was down at 88.1, NFIB economists William Dunkelberg and Holly Wade do not exude optimism in their report.  After all, they point out, the index is still 2 points lower than it was at the beginning of the year.

    The economy is slowly righting itself, dealing with a huge excess supply of assets created in the 2003-2007 boom and the associated debt incurred to create those assets and take consumption to a record high share of GDP (the “party”). The 2000 stock crash left winners with cash and losers with worthless shares of lostmoney.com. We moved on, winners and losers declared. The housing bubble crash left a different set of assets for us to deal with. Declaring, even finding, winners and losers is a mess, not the least due to government trying to determine the outcomes. Not worthless pieces of paper but millions of houses, apartments, condos and less often discussed, retail stores, strip malls, restaurants and the like and a pile of inventory to get rid of. This process is difficult and protracted. In 2007, 845,000 new firms were formed (displacing 804,000 existing firms). This process went into reverse in 2008. More firms terminated, fewer started, fewer new homes were built, inventory went on sale to raise cash and employment was slashed as the now surplus of firms struggled to survive. Many of these sought loans to “tide them over”, loans that by now would in most instances have gone bad had they been made.

    The adjustment seems to be about over. Historically high percentages of owners report inventories are in balance, reduced to match anemic consumer spending. However few plan to add to stocks as prospects for improved growth have not been optimistic. Firms have stopped firing workers, employment has adjusted to weaker sales, but hiring new workers remains muted, as sales prospects offer little reason to hire more workers. Most equipment is still working requiring little need to buy new stuff. Still a problem is the number of firms competing for reduced levels of consumer spending, experiencing poor financial performance. There is likely more to come here, more terminations. This will increase sales at the remaining firms and with a boost from modestly improving consumer spending, begin to address the unemployment problem a bit more aggressively. The excess supply of structures will continue to be a drag, but less so.

    Read the full report here.

  • Sargent and Sims Nobel Prize Lectures

    As part of the Nobel Prize festivities, award recipients Thomas Sargent and Christopher Sims gave their Nobel Prize lectures last week in Stockholm.  Sargent's lecture was titled United States then, Europe now.  Sims spoke on Statistical Modeling of Monetary Policy and its Effects.  You can watch the lecture here.  Thank you to the Institute for New Economic Thinking for the video (the lectures start 10 minutes in):

  • 'Muddling Through' 2012

    At Project Syndicate, Barry Eichengreen gives his take on what is likely to happen in the global economy in the coming year.  Eichengreen is neither a doomsayer nor a bright-eyed optimist, and so he may not get a lot of airtime to share his projections.  Instead, he tells us to expect the EU, US, and China will all "muddle through," in 2012.

    While the eurozone is unlikely to collapse in 2012, there will be no definitive answer to the question of whether the euro will survive, because there will be no quantum leap in European integration. Treaty revisions take time to draft – and more time to ratify. Efforts to strengthen Europe’s fiscal rules, for example, will take the form of bilateral agreements between governments, rather than changes in the European Union’s Lisbon Treaty.

    It is a sad state of affairs when a recession qualifies as muddling through. But such is the European condition.

    Consider next the United States. While recent data suggest that the economy is doing better – all signs are that GDP will have expanded at a 3% annual rate in the fourth quarter of 2011 – it is important not get carried away. Fiscal support for the expansion will continue to be withdrawn.  And, while the housing market shows some signs of stabilizing, prices will remain weighed down by the large shadow inventory of homes in foreclosure and held by banks.

    These considerations suggest that the acceleration of US growth that began in the third quarter of 2011 is unlikely to be sustained. At the same time, if growth slows significantly, the US Federal Reserve will undoubtedly respond with another round of quantitative easing – QE3 by another name. Thus, while growth next year is likely to fall well short of 3%, the US should be able to avoid a double-dip recession.

    Finally, China should grow by 7.5-8% in 2012. This is muddling through, Chinese style –considerably slower growth than the double-digit rates of the past, but not the hard landing that purveyors of doom and gloom warn is inevitable.

    Read Disaster Can Wait here.