‘featured posts’ Articles

Until Debt Does Them Part

By: Brady Willett & Todd Alway | Fri, Aug 6, 2010

Ben Bernanke’s machinations since the financial crisis began are widely celebrated as having saved the financial markets from complete ruin. Question is, was preventing the ruin of an over-leveraged, non-transparent, and bubble-driven financial system really the best path? For that matter, did the actions of Bernanke and company simply delay the day of reckoning and/or ensure that this day will be even more severe? Efforts to divine an enigmatic yesteryear notwithstanding, the reality is that as policy makers veer down one path we are precluded from knowing what the terrain would have been like down the other, with all of the ‘could have’ and ‘would have’ impediments limiting what can be said with conviction…

What can be said is that it is customary for those who view history with a predetermined bias to evoke the path not travelled to substantiate their point of view. Case in point, while citing the popular Blinder/Zandi report Treasury Secretary Tim Geithner recently noted that, “the combined actions since the fall of 2007 of the Federal Reserve, the White House and Congress helped save 8.5 million jobs and increased gross domestic product by 6.5 percent relative to what would have happened had we done nothing [bolds added].” To begin with, not only is it absurd to theorize “what would have happened” if policy makers did nothing, it is even more absurd to point to today’s dismal economic recovery and contend that things have improved when weighed against _______. To turn this asinine dollop of speculation around: just as the stock market and subsequent housing market bubbles previously disguised tragic policy decisions (or lack thereof) Into a strong economic upturn, the supposedly laudable actions of policy makers during the recent crisis have actually set in motion the destruction of the U.S. financial system and U.S. dollar. Thus, of what utility is saving jobs and enhancing GDP in the short-run if the means by which these feats are achieved causes irreparable long-term harm to the economy and currency?

Suffice to say, the concept of paths taken, and not taken, is worth bearing in mind when discussing tomorrow’s policy choices. In the case of the U.S., policy makers are likely to continue to spend, enslaved as they are to the idea that until U.S. interest rates skyrocket and/or the dollar is destroyed there is always more room to borrow and print. As for the conclusion from Austrians (or Auesterians) that deficit spending/money printing today will only make matters worse tomorrow, U.S. policy makers are unlikely to pay attention to the austerity cries. After all, the market has made it clear that austerity is a strategy undertaken only by the weak.*

This debt/austerity debate, which has gone viral in recent months, has sparked an energetic tête-à-tête among economists. And while it may appear of limited utility for the average investor to wade into this debate, the reality is that most asset classes have, and will likely continue, to feast or famine on the choices of global policy makers. To summon Shakespeare, ‘to deficit spend or enact austerity? – this is the question!’ A question that lends itself to many contradicting answers and can be based not only upon individual country-by-country situations but, perhaps also, perceptions…

“You know what? It doesn’t matter. None of this — this so-called ‘money’ — really matters at all…It’s just an illusion. Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless.” Ben Bernanke. The Onion

The Apostles of Keynes

Paul Krugman is the ring leader when it comes to idolizing Keynes. In his June 27, 2010 article, entitled “The Third Depression“, Krugman noted, “this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.” Other notables latching on to similar themes include De Long, Stiglitz, and John Makin. Mr. Makin, scaring even Krugman, recently noted “By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe…” and “because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise.”

Ironically, even those not usually known for waving their Keynesian pom-poms tend to agree that austerity is not the short-term answer. For example, the level-headed Jeremy Grantham says,“You don’t have to be a passionate follower of Keynes to realize that to rapidly reduce deficits at this point is at least to flirt with a severe economic decline….I recognize that in this I agree with Krugman, but I can live with that once in a while.”

Last, but definitely not least, are U.S. policy makers, which are almost universally pro-Keynes.

The Rebirth of Hayek

In a recent FT article entitled “Today’s Keynesians have learnt nothing“, Niall Ferguson says that “People are nervous of world war-sized deficits when there isn’t a war to justify them”, adding“Those economists, like New York Times columnist Paul Krugman, who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations.” Mr. Ferguson personifies the anti-Krugman point of view; a view that is supported by recent history (i.e. unprecedented fiscal and monetary stimulus actions since 2008 have done little to engender a strong economic recovery).

Along with Ferguson there are numerous European austerity enthusiasts, most notable Britain prime minister David Cameron and president of the European Central Bank, Jean Claude-Trichet. Mr. Cameron, perhaps eying the crown of Mr. Austerity, shocked the markets (in what turned out to be a good way) when his emergency budget laid out the largest cuts in spending since World War II. The basic proposal from Cameron, a template that would give any U.S. policy makers a heart attack, was “about four pounds in spending reductions for every pound in tax increases.” As for Mr. Trichet, in writing “Stimulate no more – it is now time for all to tighten“, he discussed the ‘fiscal buffers’ that were in place before the financial crisis (insinuating that these buffers are no longer in place), and added quite bluntly, “there is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now.” Cameron, Trichet, and even Germany’s Merkel represent a unified European front for austerity, and are the major source of a de-unified outlook for the developed world.

Then there is a growing mob of anti-Keynesian thought coming from some unlikely sources, including the likes of Alan Greenspan. In a recent WSJ Op-Ed Mr. Greenspan contended, “We cannot grow out of these fiscal pressures” adding, “The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.”It goes without saying that if Easy Al’ was still running the Fed he would not be uttering what many policy makers would consider heresy.

Also highlighting the limits of Keynesianism has been FOX’s Glenn Beck, who, after reviewing ‘Road to Serfdom’, helped catapult Hayek’s 1945 text to number one on Amazon. Finally, there is a mob of individuals that FallStreet follows that despise Keynesian thought, including Ron Paul,Peter Schiff, Mish, Gary North, etc.

Can Both Ideologies Be Right?

Strangely enough, followers of both Keynes and Hayek are well aware of their limitations. For example, even the Krugmans acknowledge that deficits are a long-term problem that should be dealt with (but only after greater amounts of deficit spending set the economy down a firmer recovery path). Similarly, it is difficult, Ron Paulites perhaps being the exception, to find an Austrian that is dedicated to the pursuit of jarring policy changes in the name of Hayek (i.e. if the Fed started raising interest rates, a throng of government-run institutions were allowed to fail, and the U.S. budget was immediately balanced the unmitigated chaos that would ensue is unthinkable). In short, what is at issue are not the sound principles of austerity, but the pace of the austerity embrace. Keynes says ‘definitely not now!’, while Hayek remarks ‘if not now, when?’

A Futile Debate?

Despite today’s austerity noise there is no collection of U.S. debt holders that have achieved the clout required to demand austerity from America. For that matter, it is exceptionally difficult to foresee the U.S. being compliant when, and if, foreign austerity demands do arrive. In other words, it appears likely that we will follow the ebb and flow of the current path until the destruction of dollar, intentional or otherwise, comes to pass.

In this regard the deficit spending/austerity debate is somewhat of a red herring in that it is supported by the flimsy assumption that policy makers must indulge theoretical models relating to debt thresholds while at the same time not completely discounting current market forces. The contention is akin to ‘if you ignore rising debt levels for X amount of time you do so at your peril!’ Problem is, no one is all too sure what X is…

“Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.” Alan Greenspan

Conclusions

The U.S. dollar can be seen as being both the lynchpin of the great fiat money experiment and the weakest link of all fiat money. And yet despite all of the jabbering by economists and analysts, neither Keynes nor Hayek-based speculations can lay claim to having accurately mapped the recent path of the markets, let alone the coming path. Many today think that Keynesian thought has reached its limits and contend that USD hegemony has entered its final countdown. But few even attempt to offer a precise depiction of how transference to a new monetary regime will unfold. Can there really be an end to Keynesianism without the beginning of something else completely different? Conversely, the insights of Hayek are indeed a common sense blessing that policy makers would be wise to heed, but they can also act as a burden. After all, remembering that the market has made it clear that austerity is a strategy undertaken only by the weak*, why should the strong indulge in Hayek? Didn’t the 20-years of Hayek inspired IMF mandated shock therapy in the third world cause more harm than good?

Again zeroing in on the U.S., the deficit spending/austerity perspective lends itself to two considerations: in theory the U.S. must soon stop spending/printing or it will wreck its currency and economy, but in reality since all U.S. debt is denominated in USD the U.S., unlike those European nations tied to the Euro, can always print. In other words, it does not take a leap of faith to contend that the U.S. will print, and that tomorrow’s question will not be focused on deficit spending or enacting austerity per se, but of devaluing the dollar or repudiating debt. Until then, was preventing the ruin of an over-leveraged, non-transparent, and bubble-driven financial system really the best path? Really???

“We can always pay our debts in the United States as long as we borrow in dollars. We just keep printing more dollars. The Greeks can’t do that or other members because they are tied to the euro…” Warren Buffett

* “After all, the market has made it clear that austerity is a strategy undertaken only by the weak.” To note: it is possible that the market is mispricing U.S. debt because of the rising threat of the Euro’s collapse and/or the lack of current alternatives to USD. In other words, historically low U.S. interest rates in the face of historically high (and rising) U.S. debt levels may not necessarily be a sign of any fundamental ‘strengths’, but the result of potentially transient forces.

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The biggest lie about U.S. companies – Healthy balance sheets? They owe $7.2 trillion, the most ever

BOSTON — You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they’ve paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.

You could hear this great news pretty much anywhere — maybe from Bloomberg, which this spring hailed the “surprising strength” of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies “have accumulated an astonishing $1.8 trillion of cash,” leaving them in the best shape, by some measures, “in almost half a century.”

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were “hoarding cash” but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.

Investors hear July echoes

This July resembled the previous July in several key respects. What does this suggest for the markets for the rest of 2010?

American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You’d think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have “record amounts of cash” in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don’t look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That’s up by $1.1 trillion since the first quarter of 2007; it’s twice the level seen in the late 1990s.

The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.

Remember that these are the debts for the nonfinancials — the part of the economy that’s supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.

 

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That’s a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data “underline the poor state of the U.S. private sector’s balance sheets,” reports financial analyst Andrew Smithers, who’s also the author of “Wall Street Revalued: Imperfect Markets and Inept Central Bankers,” and chairman of Smithers & Co. in London.

“While this is generally recognized for households,” he said, “it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials’ corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels.”

By Smithers’ analysis, net leverage is nearly 50% of corporate net worth, a modern record.

There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.

That U.S. companies are in worse financial shape than we’re being told is clearly bad news for those thinking of investing in U.S. stocks or bonds, as leverage makes investments riskier. Clearly it’s bad news for jobs and the economy.

But why is this line being spun about healthy balance sheets? For the same reason we’re told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.

Journalists, for example, seek safety in numbers; there’s a herd mentality. Once a line starts to get repeated, others just assume it’s correct and join in.

Wall Street? It’s a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?

You can also blame our partisan age too. Right now, people on the right have a vested interest in claiming businesses are in healthy shape. That makes the saintly private sector look good, and demonizes President Barack Obama and Big Government for scaring away investment. Vote Republican! Meanwhile, people on the left have an interest in making businesses sound really healthy too: If greedy companies are hoarding cash instead of hiring people, they can cry “Shame on them! Vote Democratic!”

As ever, the truth is someone else’s problem and no one’s responsibility.

When it comes to the economy, let’s just hope the public is too hopped up on painkillers and antidepressants to notice. If they knew what was really going on, there’d be trouble. 

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Americans Buy IPads While Broke in New Abnormal Economy

By Devin Leonard - Jul 29, 2010 5:00 PM EDT

An Apple Inc. iPad tablet computer is held by an Apple employee. Photographer: Chris Ratcliffe/Bloomberg

 

Play Video

July 29 (Bloomberg) — Bob Rice, managing partner for Tangent Capital, talks about Amazon.com Inc.’s business strategy and the outlook for the tablet-computer market. Rice speaks with Deirdre Bolton on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

 

Play Video

July 29 (Bloomberg) — David Semmens, economist at Standard Chartered Bank, and Jeanne Branthover, managing director at Boyden Global Executive Search, talk about the outlook for the U.S. and New York labor markets. They talk with Pimm Fox on Bloomberg Television’s “Taking Stock.” (Source: Bloomberg)

Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks during a meeting in Washington. Photographer: Joshua Roberts/Bloomberg

In March, Ralph Ronzio went to a warehouse in a seedy part of Orange County, California, and watched a man auction off his condo for half what he’d paid for it. Ronzio had bought the place for $329,000 in 2005, when he moved to Southern California from Rhode Island to take a job at a data-storage company. It was the first place he’d ever owned.

“It was totally my bachelor pad,” he says. “Not much inside other than the usual leather couch and the big screen TV. My fiancée made me sell the couch.”

That wasn’t the only thing that changed when Ronzio got engaged. His fiancée had two young children, and there wasn’t enough room in the condo for all four of them. So last year, Ronzio bought a house nine miles (14 kilometers) away and they all moved in. He figured he could rent the condo and cover his costs. He figured wrong, Bloomberg Businessweek reports in its Aug. 2 issue.

The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage. When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.

“I bought myself an iPad,” he says.

Latest Apple Gadget

It used to be that someone like Ronzio could be fairly certain of the outcome when spending a few hundred thousand dollars on real estate. Housing prices were headed in only one direction. You could surf the boom and borrow against your home equity to pay for all manner of splurges — a vacation, a flat- screen television, or the latest Apple Inc. gadget. Considering that housing prices almost doubled from 1999 to 2006, there was always an escape hatch: Sell your house and make enough money to pay it all back.

That was the old normal. Last year, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., manager of the world’s biggest bond fund, declared a “new normal,” a global realignment in which the U.S. consumer, no longer a hungry monster, became cautious and subdued.

The current circumstances might be better described as the new abnormal, in which no one knows anything. In June, theConference Board Consumer Confidence Index fell 9 points after an 11 percent drop in the S&P 500 the month before. Newhousing starts were at an eight-month low. Meanwhile, the unemployment rate still hovers near double digits. That’s 14.6 million Americans out of work. Federal Reserve Chairman Ben Bernanke added to the anxiety with a July 21 declaration that the economic outlook is “unusually uncertain.”

‘Liquidity-Constrained’

So who are all those people at the mall? It’s easy to forget that a 9.5 percent unemployment ratemeans that about 9 out of 10 Americans in the workforce are still employed.

“Some consumers are probably liquidity-constrained,” says Kenneth Rogoff, Harvard University professor and former chief economist at the International Monetary Fund. These are “the ones who are probably not the ones buying iPads. But 90 percent of Americans do have a job, and maybe 70 percent are confident about them. And maybe half of those have liquidity.”

On a recent afternoon, Lucy Johnston, 37, an accountant from Tulsa, Oklahoma, could be found at the Fashion Show mall on the Strip in Las Vegas. She’s cutting back on shopping and eating out because of the recession.

“It’s really tough right now,” Johnston says. “I don’t do many full-on spa days anymore.”

Yet there she was, shopping and vacationing in Vegas with her husband.

“We’ve pulled out all the stops. We’re staying at the Bellagio,” she says.

Schizophrenic Consumers

The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies such as Cupertino, California-based Apple, whose net income jumped 94 percent in its last quarter, and Starbucks Corp., which saw a 61 percent increase in operating income over the same time frame, are thriving.

Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers such as Hermes International SCA and Burberry Group Plc are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S.

Bifurcated Market

“Last September, retail started to recover on a very narrow basis,” says Michael Niemira, chief economist for the International Council of Shopping Centers. “Most of the industry was really weak. It wasn’t until the end of the year that you saw any momentum. It was all dollar stores and luxury. You have this bifurcated market. This year, it started to move to the middle a little. Now it’s kind of moved back to the edges.”

Some of this is a reminder that the rich have been largely shielded from the recession’s ravages.

“All of my customers think we are out of the recession,” says Marika Baca, an associate in the women’s department at the Barneys New York store. “This time last year, it was bad. But now the women who were reluctantly picking up one piece are easily buying three.”

Aspirational middle-class consumers say they are also yearning to get their hands on the same high-end merchandise, just as they did in better times.

Family Dollar Stores

In such an environment, optimism about the economic future ebbs and flows constantly, with far-reaching consequences for a nation in which consumer spending accounts for 70 percent of the gross national product. It’s an economy that suggests an EKG- shaped recovery — a sequence of mini booms and busts as consumer fads and pent-up demand drive sales, until the impulses fade. Erratic behavior is everywhere, even at Matthews, North Carolina-based Family Dollar Stores Inc.

“My feeling is that you can see week-to-week differences today that are far more volatile than what we have been seeing,” says R. James Kelly, the company’s president and chief operating officer, reporting a quarter with a 19 percent increase in net income.

Consumer confidence was edging up earlier this year. The stock market had rebounded. It looked like the economy took on aspects of normal behavior — and then it all fell apart. In June, the stock market gave back 4 percent of its value. Like teenagers suffering mood swings, consumers lost their nerve all over again.

‘Dark Cloud’

On July 27, the Conference Board reported that confidence was at a five-month low, which it blamed on job insecurity.

“Concerns about the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves,” Lynn Franco, director of the board’s consumer research center, says in a statement.

Not everybody’s consumer diagnosis is the same, though. Shortly before the Conference Board released its finding, Consumer Reports, the 74-year-old magazine, unveiled the results of its monthly telephone survey about economic issues. It found that consumers had ramped up their retail spending by an average of $40. Though major purchases like cars remained unlikely, Americans were planning to spend more on appliances and electronics.

“We just focus on what’s happening this month,” says Ed Farrell, a director of the Consumer Reports National Research Center. “We don’t ask people what they think the business climate is going to be like in a year. If these people could tell us that, we’d all be very well off.”

Consumer Survey

American Express Co. released the results of its consumer survey on July 13, showing more willingness to spend, damped somewhat by guilt and despair on the part of some of these same respondents. The New York-based credit-card company found that 51 percent of consumers had fallen behind on their annual savings plan, in part because they were either making impulse purchases or simply spending beyond their means. There it is: gloom, muted optimism, and wild abandon.

What if these things aren’t exclusive in the new abnormal? Frank Veneroso, an investment strategy adviser in Portsmouth, New Hampshire, follows the nation’s saving rate. It was his opinion that high debt levels and economic fears would force Americans to rein in their spending and increase their savings.

‘Celebratory Spending Spree’

In the early part of the recession, that’s what happened. Then it stopped happening. Veneroso writes in a report that the nation’s wealthier citizens were so relieved when the stock market rallied last year after the financial crisis that they went on a “celebratory spending spree.” The recent market turmoil will put a stop to it and savings will start to inch back up, Veneroso says.

Except market rallies aren’t the only thing that emboldens consumers. Market dips can also loosen up purse strings, says Dan Ariely, a professor of behavioral economics at Duke University and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions.” When people fret about market gyrations, they see the advantage of shopping over putting money into a mutual fund that might tank, Ariely says.

“If they lose money by spending it on something, at least they have something to show for it,” he says.

For consumers looking for a reason, ups and downs can both provide a justification for spending. Stephanie Redmond, a 25- year-old electronics worker, talked about her financial woes as she shopped at the Dolphin Mall in Miami. She described herself as pessimistic about the economy.

Need New Car

“I don’t see it getting any better,” she said. “I need a new car, but I don’t plan on getting one anytime soon.”

Instead she recently bought a plane ticket to New York and stayed in a Times Square hotel.

“It was my first time, so it was a lot of fun,” she said.

At the Woodfield Shopping Center in Schaumburg, Illinois, Michelle Rodriguez, 39, a part-time cafeteria worker at a local high school, said she cut back considerably after losing her old full-time job two years ago as a receptionist at Kraft Foods Inc.

“I think the economy has a ways to go,” she said. “I don’t make nearly as much as I used to make.”

Yet she said she bought a 46-inch flat-screen Sony TV in the last year. And now she was waiting for help in the Genius Bar line at the Apple Store.

Apple Revenue

One way of understanding Apple’s recent success — the company announced “all-time record”revenue of $15.7 billion for its quarter ending on June 26 — is that the iPad is positioned as a compromise product for people who crave the kick of a new Apple gadget and don’t want to spring for a Mac.

“I was talking to someone recently who said to me, ‘I bought the iPad because I can’t afford a new iMac,’” says Carla Serrano, chief strategist for TBWA/Chiat/Day, Apple’s advertising agency. “O.K., fine. But the iPad does hardly anything that an iMac can do.”

The recession is making people think they need to come up with that she describes as “post-rational” justifications for their extravagant purchases, she says.

The performance of Seattle-based Starbucks suggests that everyday luxuries have also not been wiped out. On July 21, the coffee chain announced a “record” quarter with same-store sales growth of 9 percent, the biggest increase since the second quarter of 2006, the peak of the old normal.

CEO Howard Schultz highlighted Starbucks’ new products, like the “customizable Frappuccino campaign,” as well as Via, the new instant coffee, which is pitched as a budget item, though not exactly priced like one when compared with other instant competitors. A 12-packet box of Via goes for $9.95.

‘Every day!’

Starbucks is the lower-end corollary to Apple, a purveyor of expensive treats. Stephanie Redmond, the Miami electronics worker, may not buy the new car she needs, but give up Starbucks? Never. She says she has to have it “every day!”

Mass marketers have a tougher time seducing consumers with psychological value. Burt Flickinger, a retail consultant based in New York, says Procter & Gamble Co. is struggling to keep people from abandoning its Ivory soap and Crest toothpaste for generic brands. According to Flickinger, better-educated shoppers understand how little difference there is in quality on many household items.

They may also be sneaking into discount retailers for these deals.

Cheap Towels

“The dollar store is the new Target,” says Al Moffatt, CEO of Worldwide Partners, a Denver-based advertising company. “You go in there to buy shampoo for a buck so you can go to Starbucks and justify spending $3 for a coffee.”

Moffatt says that he and his wife recently did their own variation on this recessionary theme. On a trip to Oregon, they bought cheap towels at a discount store before hitting a pricey spa.

Ran Kivetz, a professor of marketing at Columbia Business School, has done research on consumer psychology. He says that consumers’ brains lack a line that separates spending from saving. We practice a certain amount of thrift so that we can justify blowing a large sum frivolously, he says.

Kivetz says the recent recession has made consumer thinking even more conflicted. In the short run, we feel good when we save. In the long run, we tend to regret the denial of a spending outlet.

“We feel guilty” about spending, Kivetz says, which can lead to more irrational purchasing.

Need to Spend

That’s is exactly what’s happening now, according to Kivetz. Consumers were quick to reduce spending when the recession arrived. Then the recession lasted longer than expected, and the new abnormal set in. The economy started to improve. Then it appeared to worsen. There is only so long we can suppress our need to spend, Kivetz says.

“It’s just been a slow walk out of the woods,” he says. “And it’s so complicated. The things going on in Europe are frightening. There are problems with China, with our government debt, and bank debt. At the end of the day, people are saying, ‘There is still risk. I gotta cut back.’ But this is not a typical one-year recession. Life has to have some normalcy. I have to have some luxuries.”

There was little evidence of the recession at a recent lunchtime in the Mall of America in Bloomington, Minnesota. The nation’s largest mall was full of shoppers drinking expensive coffee and toting bags of electronics and expensive shoes. Some of them were there on vacation. Why not? The Mall of America doesn’t just have 520-plus shops, it has an enormous amusement park and a 1.2 million gallon aquarium. Sales are up 9 percent so far this year.

Mellissa Williams, a 30-year-old teacher from Laredo, Missouri, was looking for sneakers with her two children at a sporting goods store.

“We’ll be looking at price tags a little more than we normally would,” she said.

And yet she had come a long way to look for deals. What was her biggest splurge in the last six months?

“Probably this trip,” Williams said.

To contact the reporter on this story: Devin Leonard in New York atdleonard12@bloomberg.net.

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Collapse in Living Standards in America: More Poverty By Any Measure

15 million unemployed, homelessness has increased by 50 percent in some cities

by Christine Vestal

Global Research, July 14, 2010
Stateline – 2010-07-08

More than 15 million Americans are unemployed, homelessness has increased by 50 percent in some cities, and 38 million people are receiving food stamps, more than at any time in the program’s almost 50-year history.

Evidence of rising economic hardship is ample. There’s one commonly used standard for measuring it: the U.S. Census Bureau’s poverty rate. It guides much of federal and state spending aimed at helping those unable to make a decent living.

But a number of states have become convinced that the federal figures actually understate poverty, and have begun using different criteria in operating state-based social programs. At the same time, conservative economists are warning that a change in the formula to a threshold that counts more people as poor could lead to an unacceptable increase in the cost of federal and state social service programs.

When Census publishes new numbers for 2009 in September, experts predict they’ll show a steep rise in the poverty rate. One independent researcher estimates the data will show the biggest year-to-year increase in recorded history.

According to Richard Bavier, a former analyst for the federal Office of Management and Budget, already available data about employment rates, wages, and food stamp enrollment suggest that an additional 5.7 million people were officially poor in 2009. That would bring the total number of people with incomes below the federal poverty threshold to more than 45 million. The poverty rate, Bavier expects, will hit 15 percent — up from 13.2 percent in 2008, when the Great Recession first started to take its toll.

Still, the U.S. Census Bureau’s new numbers will offer only a partial picture of how the nation’s sputtering economy is affecting the poorest Americans — a problem state officials and the Obama administration want to address.

Overestimating food costs

The current formula for setting the federal poverty line — unchanged since 1963 — takes the cost of food for an individual or family and multiplies the number by three, under the assumption that people spend one-third of their incomes putting meals on the table. While the formula may have been a good way to estimate a subsistence cost of living in the early 1960s, experts say food now represents only one-eighth of a typical household budget, with expenses such as housing and child care putting increasing pressure on struggling families.

In addition, the official measure fails to account for regional differences in the cost of housing, it doesn’t include medical expenses or transportation, and at $22,000 for a family of four, the poverty line is considered by many to be simply too low.

Equally worrisome for policy makers is the Census Bureau’s failure to consider in-kind federal and state aid in calculating income. The existing formula counts only pre-tax cash income, leaving out such benefits as food stamps, housing vouchers and child-care subsidies, as well as federal and state tax credits for the working poor.

As a result, the nation’s official poverty count is unaffected by the billions spent on safety-net programs. Yet it remains by far the most frequently used measurement of how well governments are taking care of their most vulnerable citizens.

Conservatives have consistently argued that if safety-net programs were taken into account, the poverty rate would be much lower. At the same time, advocates for the poor have argued that poverty counts would be much higher if the cost of housing, child care and other expenses were factored in.

Nearly two decades ago, Congress asked the National Academies of Science (NAS) to revisit the official poverty measure and come up with recommendations for a new measure that would satisfy critics on both ends of the spectrum.

This past March, the Obama administration said it would use the NAS 1995 guidelines to update the federal government’s poverty calculation and promised to unveil the first new “supplemental poverty measure” in September of 2011.

“The new supplemental poverty measure will provide an alternative lens to understand poverty and measure the effects of anti-poverty policies,” Under Secretary of Commerce Rebecca Blank said. “Moreover, it will be dynamic and will benefit from improvements over time based on new data and new methodologies.”

Under the NAS recommendations, Commerce Department expenditure data for food, clothing, shelter and other household expenses would be used to set a poverty threshold for a reference family of four — two adults and two children. Then a family or individual’s resources would be compared to that line by including income and in-kind benefits, with taxes and other non-discretionary expenses, such as medical expenses and child care, excluded.

Because many expect the new calculation will result in a higher poverty count, the March announcement met with fiery criticism from some conservatives who charged the federal government could ill afford to increase its safety-net spending.

State experiments

But state and local policy makers applauded the move because they said it would give them the tools they need to assess the effectiveness of anti-poverty programs.

In New York City, for example, where an NAS-type poverty measure was adopted three years ago, Mayor Michael Bloomberg said the new data would allow the city to pinpoint who needs assistance most and which of the city’s social services have been most effective at improving its residents’ standard of living.

Using an updated measurement, New York City found that children — the recipients of a broad range of social welfare programs — were less poor than originally thought, while elders, who were struggling with previously unaccounted for medical expenses, were poorer.

As states become increasingly challenged by shrinking revenues and rising numbers of people in need, more than a dozen have set up commissions to help low-income families and many have set poverty reduction goals.

Among them, Minnesota and Connecticut have used NAS-like formulas to assess the effectiveness of current and proposed anti-poverty measures.

With technical assistance from the public policy research group The Urban Institute, both states used the results to support aggressive anti-poverty campaigns. Minnesota has a Legislative Commission to End Poverty in Minnesota by 2020, and Connecticut created a Child Poverty and Prevention Council with the goal of cutting child poverty in half by 2014.

Connecticut found only a slight increase in the number of people living in poverty when using the updated calculation — 21,000 people in 2006, compared to 20,000 using the existing Census measure.

But it got very different results when determining which public assistance programs did the most to reduce poverty. Under previous assumptions, child care subsidies and adult education and job training were seen as the most highly effective at moving people out of poverty over time. But the new formula showed that increasing enrollment in programs such as food stamps, energy assistance and subsidized housing was a more effective way to reduce child poverty in the near term. As a result, the state redoubled its outreach efforts to sign up as many low-income families as possible for these federally-funded programs.

In Minnesota, where the results were similar, a bipartisan legislative committee recommended the state refine its definition of poverty, build public awareness, and carefully monitor the impact of all major legislation on existing anti-poverty programs.

Both states joined 12 others earlier this year in calling on the federal government to adopt an NAS-like formula that would “consider the increased financial burden of housing, child care, and health care on the modern American family while recognizing the benefit of critical work supports such as tax credits, food stamps, and other non-cash subsidies.”

The administration’s supplemental poverty measure remains controversial, and some leaders on both ends of the political spectrum are urging Congress and the administration not to adopt the new formula for purposes of allocating federal funding or determining individual eligibility anytime soon.

If used to parse federal grants among states, it could radically change the amount of money each state receives. It stands to reason, for example, that a family of four trying to make it on $22,000 would have an easier time in rural Alabama than they would in suburban Massachusetts. And should the new measure be used to set individual eligibility for safety net programs, some are fearful that current recipients would be disqualified if all of their federal and state benefits were counted.

For the Obama administration, the Census Bureau’s current measure is problematic because it will fail to show the benefits of at least $100 billion in 2009 stimulus money spent for low-income families. Even so, as those direct subsidies and other job-creating federal funds are phased out, advocates expect the poverty rate will shoot up again next year, when the data is in for 2010.

Contact Christine Vestal at cvestal@stateline.org

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The Third Depression

By PAUL KRUGMAN

Fred R. Conrad/The New York Times

Paul Krugman

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RBS tells clients to prepare for ‘monster’ money-printing by the Federal Reserve

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Gold reclaims its currency status as the global system unravels

By Ambrose Evans-Pritchard
Published: 5:43PM BST 20 Jun 2010

Last week gold surged to an all-time high of $1,258 an ounce Photo: Alamy

A further 323,000 US families were hit with foreclosure notices last month Photo: Bloomberg News

Recent protests in Greece over austerity measures. The country’s public debt will rise from 120pc to 150pc of GDP under the IMF-EU plan Photo: AFP

Jean-ClaudeTrichet, the president of the European Central Bank (EC), talked days later of “the most difficult situation since the Second World War, and perhaps the First”.

The ECB’s latest monthly bulletin gives us some startling details. It reveals that the bank’s “systemic risk indicator” surged suddenly to an all-time high on May 7 as measured by EURIBOR derivatives and stress in the EONIA swaps market, exceeding the strains at the height of the Lehman Brothers crisis in September 2008. “The probability of a simultaneous default of two or more euro-area large and complex banking groups rose sharply,” it said.

This is a unsettling admission. Which two “large and complex banking groups” were on the brink of collapse? We may find out in late July when the stress test results are published, a move described by Deutsche Bank chief Josef Ackermann as “very, very dangerous”.

And are we any safer now that the EU has failed to restore full confidence with its €750bn (£505bn) “shock and awe” shield, that is to say after throwing everything it can credibly muster under the political constraints of monetary union? This is the deep angst that lies behind last week’s surge in gold to an all-time high of $1,258 an ounce.

The World Gold Council said on Friday that the central banks of Russia, the Philippines, Kazakhstan and Venezuela have been buying gold, and Saudi Arabia’s monetary authority has “restated” its reserves upwards from 143m to 323m tonnes. If there is any theme to the bullion rush, it is fear that the global currency system is unravelling. Or, put another way, gold itself is reclaiming its historic role as the ultimate safe haven and benchmark currency.

It is certainly not inflation as such that is worrying big investors, though inflation may be the default response before this is all over. Core CPI in the US has fallen to the lowest level since the mid-1960s. Unlike the blow-off gold spike of the Nixon-Carter era, this rally has echoes of the 1930s. It is a harbinger of deflation stress.

Capital Economics calculates that the M3 money supply in the US has been contracting over the past three months at an annual rate of 7.6pc. The yield on two-year Treasury notes is 0.71pc. This is an economy in the grip of debt destruction.

Albert Edwards from Societe Generale says the Atlantic region is one accident away from outright deflation – that 9th Circle of Hell, “abandon all hope, ye who enter” . Such an accident may be coming. The ECRI leading indicator for the US economy has fallen at the most precipitous rate for half a century, dropping to a 45-week low. The latest reading is -5.70, the level it reached in late-2007 just as Wall Street began to roll over and then crash. Neither the Fed nor the US Treasury were then aware that the US economy was already in recession. The official growth models were wildly wrong.

David Rosenberg from Gluskin Sheff said analysts are once again “asleep at the wheel” as the Baltic Dry Index measuring freight rate for bulk goods breaks down after a classic triple top. The recovery in US railroad car loadings appears to have stalled, with volume still down 10.5pc from June 2008.

The National Association of Home Builders’ index of “future sales” fell in May to the lowest since the depths of slump in early 2009. RealtyTrac said home repossessions have reached a fresh record. A further 323,000 families were hit with foreclosure notices last month. “We’re nowhere near out of the woods,” said the firm.

It is an academic question whether the US slips into a double-dip recession, or merely grinds along for the next 12 months in a “growth slump”. For Europe, nothing short of a sustained global boom can lift the eurozone out of the deflationary quicksand already swallowing up the South.

Spain had to pay a near-record spread of 220 basis points over German Bunds last week to clear away an auction of 10-year bonds, roughly what Greece was paying in March. Leaked transcripts of a closed-door briefing to the Cortes by a central bank official revealed that Spanish companies have been shut out of the capital markets since Easter. Given that the Spanish state, juntas, banks and firms have together built up foreign debts of €1.5 trillion, or 147pc of GDP, and must roll over €600bn of these debts this year, this is a crisis unlikely to cure itself.

By their actions, investors show that they do believe the EU can be relied upon to back its rescue rhetoric with hard money, and for good reason. Germany’s coalition risks breaking up at any moment, fatally damaged by popular fury over the Greek bail-out. Far-Right populist Geert Wilders is suddenly the second force in the Dutch parliament. Flemish separatists have just won the Belgian elections in Flanders. The likelihood that an ever-reduced group of German-bloc creditors facing disorder and budget cuts at home will keep footing the bill for an ever-widening group of Latin-bloc debtors in distress is diminishing by the day.

Fitch Ratings said it will take “hundreds of billions” of bond purchases by the ECB to stop the crisis escalating. Since Bundesbank chief Axel Weber has already deemed the first tranche of purchases to be a “threat to stability”, it is a safe bet that Germany will fight tooth and nail to prevent such a move to full-blown quantitative easing. The blood-letting along the fault-line between Teutonic and Latin Europe will go on, as the crisis festers.

Yet the markets are already moving on, in any case. They doubt whether the EU’s strategy of imposing of wage cuts on half of Europe without offsetting monetary and exchange stimulus can work. Such a policy crushes tax revenues and risks tipping states into a debt-deflation spiral, as if everbody had forgotten the lesson of the 1930s.

Greece’s public debt will rise from 120pc to 150pc of GDP under the IMF-EU plan. There is a futile cruelty to this. As Russia’s finance minister Alexei Kudrin acknowledges, a Greek “mini-default” has become inevitable.

EU president Herman Van Rompuy confessed that EMU lured countries into a fatal trap. “It was like some kind of sleeping pill, some kind of drug. We weren’t aware of the underlying problems,” he said.

What he has yet to admit is that the North-South imbalances built up since the euro was launched – indeed, because the euro was launched – cannot be corrected by further loans from the North or by pushing the South in depression. The political fuse will run out before this reactionary and self-defeating policy is tested to destruction.

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Forget any would-be China crisis, its policies are too shrewd to fail

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