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Wednesday, May 04, 2005

Slight Deficit Improvement

by Calculated Risk on 5/04/2005 11:48:00 PM

Here is the current Year over Year deficit number (May 1, 2004 to May 1, 2005 - closest non-weekend dates used). As of May 2, 2005 our National Debt is:

$7,754,579,738,148.68 (Almost $7.8 Trillion)

As of May 3, 2004, our National Debt was:

$7,105,796,969,042.55

So the General Fund has run a deficit of $648.8 Billion over the last 12 months. SOURCE: US Treasury

Of course the Washington Post exaggerates the improvement "Tax Receipts Exceed Treasury Predictions." First, they report the Enron style budget ... , uh, Unified budget. Second, they are wrong about the size of the improvement in the deficit. They are correct when they report that "... the positive turn is likely to be short-lived".


Click on graph for larger image.

For comparison:

For Fiscal 2004 (End Sept 30, 2004): $596 Billion

For Jan 1, 2004 to Jan 1, 2005: $609.8 Billion

For Feb 1, 2004 to Feb 1, 2005: $618.6 Billion

For Mar 1, 2004 to Mar 1, 2005: $635.9 Billion

For Apr 1, 2004 to Apr 1, 2005: $660.9 Billion

For May 1, 2004 to May 1, 2005: $648.8 Billion

A slight improvement.

NOTE: I use the increase in National Debt as a substitute for the General Fund deficit. For technical reasons this is not exact, but it is close. Besides I think this is a solid measure of our indebtedness; it is how much we owe!

BBC: Britain braced for credit crunch

by Calculated Risk on 5/04/2005 09:51:00 PM

Is this the future for the US? A housing slowdown with declining consumer spending. And now the BBC reports that Britain is bracing for rising foreclosures and bankruptcies:

"Not since the mid-1990s, as the last economic recession claimed its final victims, has so much debt pain been felt by so many people.

Debt charities and credit industry bodies have told BBC News that they have seen a surge in the numbers of people unable to pay their bills.

At the same time, according to official figures nearly 26,000 property repossession orders were granted in the first three months of 2005, the highest number since 1995.

And on Friday, it is widely expected that the Department for Trade and Industry (DTI) will reveal a sharp rise in the number of people going bankrupt.

In short, the UK's trillion pound debt hangover finally seems to be kicking in."

Senatorial Sciolism

by Calculated Risk on 5/04/2005 12:39:00 AM

Ignorance is curable. It just takes experience and education. But what can we do when the Chairman of the Senate Budget Committee ignorantly proclaims that "we are tackling the problem of federal spending"? Laugh? Cry?

Today Senator Judd Gregg (R-NH) made that outrageous and specious claim. In a commentary in the New Hampshire Union Leader, Gregg claimed "For the first time in nearly a decade, the budget forces meaningful savings in mandatory government programs, which are driving out-of-control, long-term deficits."

Nonsense. What is driving out-of-control structural deficits is the significant drop-off in tax revenue from the Bush tax shifts.

UPDATE: Correct Y axis on Graph.


Click on graph for larger image.

The chart depicts Federal Government income and outlays as a % of GDP. "Income" does not include the surpluses for the various trust funds. A steady combination of spending restraint and tax increases brought the budget into balance at the end of the ‘90s. The primary cause of the current budget deficits is the significant decrease in tax revenues, as a % of GDP, due to the Bush tax shifts.

Gregg seems to believe that the fiscal 2006 budget will reduce the deficit. That is also not true. The $106 billion in additional tax cuts for high income earners exceeded the cuts in programs for the poor, meaning the fiscal 2006 budget deficit will set another dubious record.

Mr. Gregg continues: "First, we must tackle the short-term deficit, ..." Although Gregg predictably misunderstands the causes of the deficits, I agree the short term deficit is the top fiscal issue facing America. Not Social Security. But this budget does nothing about the deficit ...

And finally Gregg wrote:

[The budget] maintains job-creating tax policy that has resulted in the fastest-growing economy since 1999 ...

Absolute nonsense. The tax policy was not targeted at job creation. In fact, despite Gregg's implication, this recovery has seen the weakest job creation of any recovery since the Great Depression.

If Gregg was a writer for NRO, I would just chuckle. But he is the Chairman of the Senate Budget Committee. Ignorance and power are a poor combination.

Tuesday, May 03, 2005

More from the UK

by Calculated Risk on 5/03/2005 10:29:00 PM

Independent: ... but in Britain, retailers see worst slide in sales for nearly 13 years

Scotsman: Double hit hints at rates cut

Scotsman: What slowdown means: now's the time to get real

And a harsh review of Greespan's tenure - Jeremy Warner's Outlook: As the world economy falters, Greenspan, the grand illusionist, faces his Waterloo

"Fast forward 20 years and how will historians come to judge Alan Greenspan, chairman of the Federal Reserve? As things stand, Mr Greenspan's report card reads "outstanding performance so far, but jury still out on the final verdict".
...
Just to put this in perspective, even with the Fed funds rate now at 3 per cent it is still "only" 2 per centage points higher than a year ago. By historic standards, rates remain incredibly low. Yet even at this level of interest rates, with inflationary pressures apparently building, US growth continues to look fragile. It's going to be hard to raise rates much further without sending the economy into a tailspin.

Back in Britain, we are seeing something of the same phenomenon. Interest rates remain low by historic standards, but the economy seems extraordinarily sensitive to anything higher. Just six months ago, everyone was talking about the return of inflation. Now the City wonders whether we have not already reached the peak of the interest rate cycle. Retail is suffering some of its worst trading conditions in years and manufacturing seems to be slipping back into recession.

With Mr Greenspan, the question is whether he can ever now hope to wean the US off its addiction to low interest rates ... continued growth has been achieved only at the cost of mountainous current account and budget deficits and an ever growing housing market bubble.

As he tightens once more, Mr Greenspan again finds the economy beginning to suffer. The magic is beginning to wear thin, and, like an illusionist whose sleight of hand is uncovered, scepticism is now palpable: Mr Greenspan may have succeeded only in delaying the pain, not in removing it.
...
Can Mr Greenspan succeed in engineering a soft landing for the US economy, where there is gradual correction of the present imbalances, or has he lost control of the aircraft as it careers towards the runway? The judgement of history awaits."

UK: Economy Shaken

by Calculated Risk on 5/03/2005 05:18:00 PM

More bad news from Europe ... Times: "Economy shaken by worst fall in high street sales for 13 years".

A DOUBLE dose of bleak economic news fuelled fears for Britain’s prospects yesterday, casting a shadow over Labour’s final burst of pre-election campaigning.

High street sales suffered their steepest monthly drop for 13 years while manufacturing activity succumbed to its first decline in two years, according to two surveys. The much worse than expected figures dealt a twin blow to the Government’s hopes of trumpeting a strong economic outlook in the last phase of the election battle.

But there is some good news. Portugal's economy has rebounded from the 2004 recession and posted 1.1% annualized growth for Q1 2005.

Yield Curve Narrows

by Calculated Risk on 5/03/2005 03:47:00 PM


For the first time since 2001, the spread between the Five Year Note and the Fed Funds Rate is less than 100 bps.

Click on graph for larger image.

This might indicate a slowing economy with a whiff of inflation.

Kash's "The Fed's Statement" provides a comparison between this statement and the previous statement from March.

Monday, May 02, 2005

FDIC Update: U.S. Home Prices: Does Bust Always Follow Boom?

by Calculated Risk on 5/02/2005 10:19:00 PM

The FDIC today released an update to their February report that shows the boom is even more widespread.

"... the number of boom markets according to our definitions increased by 72 percent last year, and now includes some 55 metropolitan areas."

They also express concern about excessive leverage and speculation:
"... there have been a number of changes in mortgage markets that could have an influence on home prices, including the emergence of high loan-to-value lending and subprime lending ...

In addition to increased leverage and subprime lending activity, use of adjustable-rate mortgages, or ARMs, remains high. According to the Mortgage Bankers Association, ARMs accounted for almost 46 percent of the value of new mortgages in 2004 and 32 percent of all applications. Both figures were up sharply from their 2003 levels of 29 percent and 19 percent, respectively. It is noteworthy that this development occurred despite the fact that the average annual fixed rate for a 30-year mortgage remained virtually unchanged from 2003.

Furthermore, data from the Federal Housing Finance Board indicate that the ARM share is high and rising in several of our boom markets. Taken together, these trends suggest that highly-leveraged borrowers are increasingly taking on interest-rate risk as they stretch to afford high-cost housing. ...

Another evolving trend that has not been tested in a housing market downturn is the increasing market penetration of innovative mortgage products, such as interest-only (I/O) and option ARMs. These mortgages are specifically designed to minimize initial mortgage payments by eliminating principal repayment; but these also can increase leverage and expose owners to large jumps in monthly payments as interest rates rise. According to Inside MBS and ABS, interest-only mortgages accounted for 23 percent of the value of non-agency mortgage securitizations in 2004. ...

Finally, although this factor is not directly related to credit conditions, heightened investor purchases of homes could also be signaling a higher degree of speculative activity in housing markets during 2004. Data from Loan Performance indicate that 9 percent of U.S. mortgages in 2004 were taken out by investors, up from just under 6 percent in 2000. Furthermore, this share is significantly higher in local markets that are experiencing the strongest home price appreciation. In some of these markets, it is estimated that the investor share of new mortgage originations is as high as 19 percent. Academic studies show that residential property investors are less loss-averse than owner-occupants and thus more likely to sell precipitously in a declining market, thereby aggravating any existing downtrend in home prices."

More Evidence of Global Slowdown

by Calculated Risk on 5/02/2005 03:18:00 PM

Financial Times Reports: Eurozone manufacturing data point to slowing growth.

Manufacturing in the eurozone contracted in April for the first time in 20 months, highlighting the scale of the economic slowdown across the region and adding to fears that some member states might even be facing recession, according to a survey on Monday.
And its not just Germany. "France and Italy experienced a particularly sharp deterioration."
Nevertheless, the sharp fall in the French manufacturing outlook was particularly worrying, economists said, because France's economy had been among the best-performing in the eurozone, buoyed by a strong housing market and government incentives for consumer spending. “France was supporting the eurozone. Now it is significantly less supportive,” he said.


UPDATE: See "David K. Smith Is Bearish On Britain" at Macroblog.

"An unseasonable chill has descended on the economy. Britain’s once-rampant consumers are minding the pennies, proof to me at least that there is a link between the housing market and people’s willingness to spend. The flatter the former, the more subdued the latter."
More at Macroblog ...

Looking Ahead: March Trade Deficit

by Calculated Risk on 5/02/2005 02:45:00 AM

I'm getting a little ahead of the news this week with my post recent on Angry Bear: March Trade Balance Preview. But this story in today's NY Times kept me focused on trade: China Trade Surplus With West Still Rising.

China's global exports soared in the first quarter of this year, allowing the country to rack up huge trade surpluses with the United States and western Europe, according to detailed trade data released late last week by Chinese customs officials.
And more on China's trade with Germany:
Even Germany, which has long run trade surpluses with China because it sells heavy manufacturing equipment to Chinese factories, is now in the red: its $2 billion trade surplus in the first three months of last year evaporated, turning into a $159 million trade deficit in the first months of this year.

For those of us worried by the impact of global imbalances, this trend is disconcerting.

Sunday, May 01, 2005

Buffett on Real Estate Bubble and Trade

by Calculated Risk on 5/01/2005 05:52:00 PM

Here are a few quotes from Warren Buffett and Charles Munger from the Berkshire Hathaway annual meeting:

Buffett: "A lot of the psychological well-being of the American public comes from how well they've done with their houses over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]....

"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than than the underlying costs, sometimes there can be pretty serious consequences."

Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, DC. "
And on the Trade Deficit:
Buffet: "It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these...."

Munger: "The present era has no comparable referent in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences."

Buffett: "I have no idea on timing. It's far easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences. "

Munger: "A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences."

Buffett to Munger: "What do you think the end will be?"

Munger: "Bad."
Read the article for more quotes on other subjects.