the visible hand

it is the theory which decides what can be observed – einstein

Archive for August, 2008

Peter Schiff on decoupling

Posted by ecoshift on August 26, 2008

In general I don’t particularly like Peter Schiff’s world view and I don’t necessarily support his policy recommendations. But his analysis is relatively clear-eyed. He runs an investment firm that is doing well by investing overseas. No doubt the recent runup in the dollar has caused him some pain and he stands to benefit materially from emphasizing a weaker dollar as the tough-love cure for US financial difficulties.

Nevertheless the fact that the global economy is weakening due to the current US recession lends support to the idea that the global economy is dependent on US markets — that the US effectively dominates global markets. The assumption of US economic dominance needs to be carefully evaluated. Peter’s comments below are worth noting:

The Strong Dollar Illusion

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.


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China: stealth support for dollar

Posted by ecoshift on August 26, 2008

Beijing swells dollar reserves through stealth – Telegraph
Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard

China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.

A study by HSBC’s currency team in Asia has concluded that China’s central bank is in effect forcing commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.

Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.

This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

“China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June,” said Daniel Hui, the bank’s Asia strategist.

Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign “hot money”.

Given the sheer scale of China’s foreign reserves – now $1,800bn (£970bn) – any shift in its exchange policy now ripples around the globe. The covert buying may help to explain at least part of the explosive dollar rebound over recent weeks.”

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Putting the port debate in context…

Posted by ecoshift on August 22, 2008

I’m posting this because I appreciate Lew Litzky’s effort to analyze the impact of changing global and regional economic conditions on local policy and development proposals. We need more analysis of local issues that takes accurate measure of the dynamic economic forces that will define which of our efforts will yield satisfactory results. Local policy debates are too often dominated by ideological assumptions free from any empirical or verifiable basis.

It’s true that the Washington consensus is breaking down and unmitigated support for open markets is no longer politically or economically justifiable. More nations are questioning the benefits of focusing on export markets as the only feasible development path. The recent failure of the WTO Doha round is evidence that Free Trade will face additional challenges in the future, both at home and abroad.

And it’s true rising energy costs change the calculus of global shipping.

And it’s true that the current US credit crisis and economic contraction spreading to the global economy as a whole will likely impact the volume of goods shipped in and out of US ports.

But, this crisis, including the spike in energy prices, is also part of a cyclical pattern. Will it be significant? Yes, it has the potential to be the most significant economic downcycle in our lifetimes. It could last several years or longer. Will the US find it difficult to compete with emerging economies for dwindling global (even domestic) market share? I think so. Will it result in an emphasis on alternative energy sources? With even T. Boone Pickens coming out with alternative energy plans I hope and expect that it will. Will it result in a permanent contraction in global trade over a period of decades? That’s a different question.

As recent weeks have shown economic contractions in other major global economies have reduced demand for and the price of crude oil. Concurrent with the emerging global recession and the falling price of oil the value of the dollar has surged. The surging dollar means US markets, even weaker US markets, will remain a target for exporting nations and US exports will continue to face challenging global (and domestic) market conditions… And, container barges will likely remain the pack mules of the global economy because they remain the cheapest method for moving products from place to place — relative to other alternatives.

While I doubt the redevelopment of the railroad through the Eel River canyon will ever be an economic alternative to expanding or increasing throughput at existing major ports in LA, SF, Portland and Seattle it may be worth looking at the relative cost of using container barges to move products in and out of Humboldt to major west coast ports. Not gearing up for full scale port development, but appropriate development scaled to meet local transportation needs and move product in and out of Humboldt at a reasonable price — relative to other alternatives.

PS: don’t skip the EIR.

Reject the marine terminal plan – Times-Standard Online
Lew Litzky/For the Times-Standard
Article Launched: 08/22/2008 01:27:19 AM PDT

This is in regard to the Redwood Marine Terminal Business Plan.

One of the choices for moving the project forward, Option B, calls for upgrading the terminal facilities and rebuilding the railroad to the Bay Area. If the Humboldt Bay Harbor, Recreation and Conservation District selects that option, publicly issued revenue bonds of $20 million to $30 million dollars will be issued to pay for upgrades to the existing terminal and port facilities. After those improvements are completed, investors will decide on the feasibility and profitability of rebuilding the railroad.

Before deciding to invest the hundreds of millions of dollars needed to rebuild the railroad, investors will want to be assured that globalization will continue to expand and that existing port facilities will be over their limit in cargo-handling abilities, necessitating port expansion into other areas like Humboldt Bay.

A recent front-page article in the Aug. 3 edition of the New York Times titled “Shipping Costs Start to Crimp Globalization” suggests a different emerging scenario. “Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.”

”The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.”

”Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers. Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago.”

What is all of this is saying? There is reasonable cause for doubt that globalization can continue expanding at a rate to justify building new port facilities such as the one in Humboldt Bay. Investors are savvy folks and will review changing world conditions before sinking the many hundreds of million dollars needed to rebuild the railroad. If they decide to walk away from the table, guess what? Taxpayers will be left holding the bag, paying off revenue bonds for an underutilized port facility. One more boondoggle!

Before it’s too late, tell the commissioners of the Humboldt Bay Harbor, Recreation and Conservation District to reject the Redwood Marine Terminal Business Plan.

Lew Litzky resides in Arcata.

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Gap Cutting Square Footage By Up to 15%

Posted by ecoshift on August 22, 2008

Gap Cutting Square Footage By Up to 15%
By Debra Hazel

SAN FRANCISCO-With declining comps but soaring earnings due to cost-cutting, and its real estate analysis now complete, Gap has dropped the number of store openings this year and will cut its overall square footage 10% to 15% over the next three to five years, executives said at the company’s second quarter conference call.

In July, the company completed an analysis of its 3,170 stores, seeking to assess the role of each store in its market and the appropriate size for each unit. The results showed that Gap’s chains had too much space, says Glenn Murphy, chairman and CEO of Gap Inc.

“We’ve never had a clear real estate strategy,” Murphy explains. “We now have that information, and it will allow us to make quick decisions. The real estate comes down to the quality of the mall and the quality of the real estate.”

Second quarter net sales were $3.5 billion, compared with $3.69 billion for the second quarter of last year. Overall comparable store sales decreased 10%, with Gap North America, Banana Republic North America and International reporting 6% comp declines, while Old Navy North America posted a 16% comp drop. Online sales however, rose 11%. Net earnings increased 51% from the previous year to $229 million. The company does not expect a major change going forward, while vowing to be aggressive in efforts to drive more shopper traffic.

“There’s nothing new from our perspective for the second half,” Murphy said. “The environment is still challenging. We see no reason for optimism and are managing our business accordingly.”

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Analysis of the 2008 Presidential Candidates’ Tax Plans

Posted by ecoshift on August 19, 2008

A Updated Analysis of the 2008 Presidential Candidates’ Tax Plans: Executive Summary
Author(s): Roberton Williams, Howard Gleckman
Published by The Urban Institute’s Tax Policy Center: August 18, 2008

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

The text below is an excerpt from the complete document. Read the full report in PDF format.

Both John McCain and Barack Obama have proposed tax plans that would substantially increase the national debt over the next ten years, according to a newly updated analysis by the non-partisan Tax Policy Center. Compared to current law, TPC estimates the Obama plan would cut taxes by $2.9 trillion from 2009-2018. McCain would reduce taxes by nearly $4.2 trillion. Obama would give larger tax cuts to low- and moderate-income households and pay some of the cost by raising taxes on high-income taxpayers. In contrast, McCain would cut taxes across the board and give the biggest cuts to the highest-income households.

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Bay Area home prices plunge to 53-month low

Posted by ecoshift on August 19, 2008

Home prices plunge; foreclosures boost sales
Carolyn Said, Chronicle Staff Writer
Tuesday, August 19, 2008

SAN FRANCISCO — Bay Area home prices plunged to a 53-month low in July as a brisk business in foreclosed properties depressed prices and buoyed sales volume, according to a real estate report released Tuesday.

The median price for both new and resale homes and condos stood at $470,000, down 29.3 percent from a year ago, according to MDA DataQuick of San Diego. The last time the median was lower was in March 2005, when it was $469,500. For resale homes, the median was $485,000, a 34.3 percent drop from last July.

A full 33 percent of all resale homes were foreclosed properties, which banks generally sell at a discount – further depressing prices in the vicinity. In July 2007, just 4.2 percent of existing home sales were foreclosed properties.

The highest percentage of foreclosed sales was in Solano County, where two-thirds of all resold homes were foreclosures. The lowest was in San Francisco at 4.6 percent of existing-home sales.

A total of 7,586 new and resale houses and condos changed hands in the nine-county region in July, up 2.2 percent from a year ago. For resale homes, a total of 5,585 sold, up 11.9 percent from a year ago.

DataQuick cautioned that the increase in sales was not a harbinger of market recovery.

“So much of today’s market is driven by distress,” said John Walsh, MDA DataQuick president. “Unless interpreted in that context, the stats give a rather distorted view of the overall market. We know one-third of the Bay Area’s resales in July were homes fresh off foreclosure. Who knows how many more involved a desperate seller and a lender who accepted a short sale?”

The foreclosure flood is good news for home buyers who are able to meet today’s strict qualifications for getting a mortgage. But many buyers are still taking a wait-and-see attitude since prices are continuing to drop. And among sellers, those who are not under duress continue to stay on the sidelines.

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“Yet government demands nothing from them in return”

Posted by ecoshift on August 6, 2008

And one more voice weighs in on the inability of our government to negotiate effectively on our behalf with our major financial institutions.

Bailing Out the Bad Guys: What Congress and Bush Do Best
Washington can act with breathtaking urgency when the right people want something done. In this case, the people are Wall Street’s titans, who are scared witless at the prospect of their historic implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven’t seen “bipartisan cooperation” like this since Washington decided to invade Iraq.

Economic Free Fall
By William Greider
August 18, 2008 edition of The Nation.

In their haste to do anything the financial guys seem to want, Congress and the lame-duck President are, I fear, sowing far more profound troubles for the country. First, while throwing our money at Wall Street, government is neglecting the grave risk of a deeper catastrophe for the real economy of producers and consumers. Second, Washington’s selective generosity for influential financial losers is deforming democracy and opening the path to an awesomely powerful corporate state. Third, the rescue has not succeeded, not yet. Banking faces huge losses ahead, and informed insiders assume a far larger federal bailout will be needed–after the election. No one wants to upset voters by talking about it now. The next President, once in office, can break the bad news. It’s not only about the money–with debate silenced, a dangerous line has been crossed. Hundreds of billions in open-ended relief has been delivered to the largest and most powerful mega-banks and investment firms, while government offers only weak gestures of sympathy for struggling producers, workers and consumers.

The bailouts are rewarding the very people and institutions whose reckless behavior caused this financial mess. Yet government demands nothing from them in return–like new rules for prudent behavior and explicit obligations to serve the national interest. Washington ought to compel the financial players to rein in their appetite for profit in order to help save the country from a far worse fate: a depressed economy that cannot regain its normal energies. Instead, the Federal Reserve, the Treasury, the Democratic Congress and of course the Republicans meekly defer to the wise men of high finance, who no longer seem so all-knowing.

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Obama: On the right track in Lansing

Posted by ecoshift on August 6, 2008

I watched this video all the way through.  About a half hour.  I’ve been pretty agnostic on the current political race.  I mean I was planning on voting democrat in the fall, but found that the debates lacked enough substance to get me particularly excited about any particular candidate.

But, Obama is on the right track here.  You may want to nit pick his proposals.  And, maybe they don’t go far enough.  And, maybe they concede too much to the drillers and spillers.  But, I’ll say it again: this is on the right track.

See for yourself:

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US fails to measure up….

Posted by ecoshift on August 6, 2008

Of course anyone dealing with a health insurance company or sitting on a local school board will already have a good idea how this has come about. It seems that taxes levied to support the health and intellectual capacity of our work force are considered a drag on business performance. But, subsidizing and bailing out major corporations and financial institutions is considered an incentive that will promote economic well-being. Any guesses on how long before we sink to 12th on the economic index?

Development: US fails to measure up on ‘human index’ | World news | The Guardian
· Nation slumps from 2nd to 12th in global table
· Richest fifth take home $168,000, poorest $11,000

* Ashley Seager
* The Guardian,
* Thursday July 17 2008
* Article history

Despite spending $230m (£115m) an hour on healthcare, Americans live shorter lives than citizens of almost every other developed country. And while it has the second-highest income per head in the world, the United States ranks 42nd in terms of life expectancy.

These are some of the startling conclusions from a major new report which attempts to explain why the world’s number-one economy has slipped to 12th place – from 2nd in 1990- in terms of human development.

The American Human Development Report, which applies rankings of health, education and income to the US, paints a surprising picture of a country that spends well over $5bn each day on healthcare – more per person than any other country.

The report, Measure of America, was funded by Oxfam America, the Conrad Hilton Foundation and the Rockefeller Foundation. It shows each of the 11 countries that rank higher than the US in human development has a lower per-capita income.

Those countries score better on the health and knowledge indices that make up the overall human development index (HDI), which is calculated each year by the United Nations Development Programme.

And each has achieved better outcomes in areas such as infant mortality and longevity, with less spending per head.

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hair of the dog

Posted by ecoshift on August 4, 2008

Looks like I’m not the only one who thinks the American taxpayer should appoint a new agent to negotiate for its interests in the upcoming financial industry bailouts….

Housing bill | A hair of the dog |
Jul 31st 2008
From The Economist print edition

Congress has been too lenient on Fannie Mae and Freddie Mac

IT IS hard to deal with an alcoholic. But most experts would agree that the answer is not to leave your credit card behind the bar, persuade the pub landlord to stay open till dawn and leave the inebriate to get on with it. Sadly that is how the American Congress, in its new housing bill, is treating those troubled mortgage groups, Fannie Mae and Freddie Mac.

A rescue of the pair was inevitable. With some $5.2 trillion of debt owned or guaranteed by the duo, their collapse could have ushered in financial catastrophe. Nor could the government close Fannie and Freddie to new business and wind down their old operations. Without them, the mortgage market in America would shut.

But imagine that Fannie and Freddie had turned for financial support to Hank Paulson not as treasury secretary but in his old incarnation as head of Goldman Sachs. Goldman would have insisted that the companies paid a high price: shareholders would probably have been wiped out. Just look at the deal that Lone Star, a private-equity firm, has struck with Merrill Lynch to buy the latter’s dodgy mortgage-related assets: not only is Lone Star paying a mere 22 cents on the dollar, Merrill is lending it most of the purchase money. By comparison, the federal government’s negotiating skills look more like those of Donald Duck than of Donald Trump.

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