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Thursday, March 25, 2010

How The Pot Boils

These are definitely interesting times.

Where to start, where to start. China:
The Ministry of Land and Resources has ordered a temporary ban on the sale of land for housing in a renewed measure to ease soaring real estate prices.
On March 11, the Ministry of Land and Resources issued a directive ordering developers to take a 50 percent down payment on all land put up for auction within one month of signing the contract, or they will lose the land along with their deposit.

Shortly after the directive, the State-owned Assets Supervision and Administration Commission of the State Council ordered 78 central State-owned enterprises to quit the housing market on March 18.
There's way more. Read it - especially the stuff about land hoarding. Note that many types of companies had gotten into the gold rush. There is one slight flaw with this strategy - cutting supply does not cut prices. This reminds me so acutely of the run-up to the Great Depression in the United States. In 1929, companies of all sorts in the US had gotten into the business of lending money out in the NY call market (loans to buy stocks on margin). So had the nation's banks. And one of the reasons that the market eventually collapsed as far as it did was that the inland banks started pulling their money out.

Europe: Today Trichet of the ECB (European Central Bank) announced that their emergency collateral rules would be extended past 2010. Note that the article says that "Greece will benefit". Well, Greece is surely going to default. This is not about Greece. (Greece is Casey Serin; the IMF and Europe can give Greece more loans at a low rate, but in the long run Greece can't dig out of this. The measures to raise taxes and cut benefits will hurt their own economy too much.)

It's about Portugal and the banks which have exposure. Yesterday Fitch downgraded Portugal:
Fitch Ratings has downgraded Portugal's Long-term foreign and local currency IDRs to 'AA-' from 'AA'. The Rating Outlooks on the Long-term IDRs are Negative. Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than EU15 peers, which will put pressure on its public finances over the medium term.
While that is still an investment grade rating, the outlook is negative. This was not good news for Portugal's banks.

By extending the emergency collateral rules (collateral down to BBB-) past the end of this year, the ECB is allowing banks to dump such assets at the ECB. Eventually the dumpers will have to either pony up more or take the bonds back, and this isn't helping the banks any.

There is probably a lot of discreet shifting and poking of all this stuff anywhere banks and investment companies can put it. You can see California's debt ratings at the State Treasurer's page (look down at the right). Fitch still has CA's debt rating at BBB, so there is plenty of interest in the US as well. The credit ratings firms have already been making delicate hints about a reassessment after the UK elections.

And, of course, the credit ratings firms have been making delicate hints about the US. Because any person, municipality, state or country can borrow until it is so insolvent that it collapses.

Because very little is written about Italy, it's worthwhile reminding everyone that Fitch cut Italy's credit rating to AA- back in 2006. Fitch just reiterated that it does not expect to cut Italy's rating further over the next year and a half, but stated that it is watching to see if Italy can lower its budget deficit. So since the Portugal outlook is negative, Portugal is now in a worse position than Italy. For the time being.

You can look at Dubai and just shake your head. Most of the world went on a borrowing spree, and now the world is quietly going to have to settle down to a period of relative austerity. The same forces that will constrain the US economy (high local government obligations) will constrain most of our export partners.

At the current time the US is still plugging along. According to freight, we are still eking out growth, and freight really never lies.

Undoubtedly there will be a period of relief and a slight economic boost over the health care reform plan. Companies need stability most of all; a bad but known situation allows planning, whereas a positive situation with high unknowns can constrain businesses more.

Over the longer term, the US has to confront its PIIGSy nature, and reform. Real reform. HCR was fake reform, and will fail. Real reform is going to hurt, but not as bad as Greece is hurting. Cooking the books kills companies and nations. The benefit to the US in confronting the reality now is that most people will get a much better future deal if we do, even if some dreams will be doomed in the present.

Real reform would include gutting SarbOx (which would hurt nobody except the politicians it would embarass) and repealing the expensing of stock options, which would have only a minimal effect on revenues in the first year and would mean increased revenues in subsequent years.

Real reform would include replacing the business income taxes (and maybe the personal income taxes) with a national sales tax that would apply equally to imports and domestic production. It would also give more efficient firms a stronger edge over less efficient, which would hurt for a few years but soon result in greater output and more jobs.
I read somewhere the statement that the only way to save Greece, Portugal, and Spain is for the rest of the world to massively increase their imports of olive oil and wine. Little chance that will happen. Guess that's what occurs when your only exports are so ubiquitous in the rest of the world.

njcommuter, I'm opposed to a national sales tax and here's why. At the levels proposed (26% or some such) it will kill the market for new anything - houses, autos, boats, and other big ticket items. In addition it will spawwn a black market where transactions are done through barter or cash only. Revenues will actually decrease.
I am in favor of a flatter personal income tax (3 brackets, a large exemptuion of $18,000/person, and phasing out real estate and other deductions over a twelve year period.) Also, since businesses do not pay income tax, their customers do, why not cut business income tax to 10% or less.(Make them pay some token amount to quell the "unfairness" claim.) Such a move would increase compliance, increase economic activity and increase tax revenues overall. The Social Security and Medicare taxes should remain separate because we need to remind people that those programs are not a normal part of government activity and maybe someday people will demand that the monies actually be invested for the use of the beneficiaries. You know, just like insurance companies do. End of rant.
Jimmy - I am more in line with you, because I think you are correct about the economic implications.

If we want to generate jobs, we should cut the corporate tax significantly. People need to think about that. The corporate income tax accounts for way less in revenue than employment and personal income taxes. If we boost jobs significantly (and many countries have done this and saw rapid business expansion) we will more than make up the lost revenue. We will also have a broader business base to tax.

Since we are in such dire straits I'd drop it to 20% and delete a lot of deductions.
" The benefit to the US in confronting the reality now is that ..."
Which American leader has given even a hint of acknowledging that there's something called "reality" that may refuse to cooperate with our government's grandiose plans to FIX EVERYTHING NOW?

We've "fixed" automakers, and now healthcare. We're targeting banks and immigration. Then we'll really spread our wings and save Mother Gaia from that nasty CO2. (It's beginning to look like we're thinking of abandoning Israel; the plan must be that when the Evil Zionists are gone the Middle East will finally be free to blossom into the True Peace Of Islam. Mmmm mmmmm mmm.)

After 2012, the world will be so darn perfect that these guys will have nothing left to do...
A_Nonny_Mouse - I think we will have to find leaders who have balanced the books SOMETIME in their lives.

Yeah, we're still on Fantasy Island.
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