Wednesday, July 13, 2011
June Treasury Data
The data is available on page 7 of the following treasury releases: June 2011; June 2010.
2010:We are losing nominal ground fast - just a few months earlier, we were up 5% YoY on the total. The major impact so far is on the self-employed, which is not surprising right now.
WAGES: 15,374 (+2.9%)
SELF: 1,644 (-12.6%)
TOTAL: 17,018 (+1.2%)
Obviously real wage and self-employment income is down by more than 2% YoY. This probably accounts for why two-thirds of the public believe we are in a double-dip recession.
Just as a reminder, in March wage receipts were up by over 6% YoY. April was the last comparable month on the self-employment income: April 2011. April 2010. Self was almost exactly the same back then (of course that is net over the year). So there has been a sharp degeneration over the last few months for those businesses (some of that may be retirements/shutdowns). YoY wage trends in May were +2.947%, compared to June's +2.898%.
My conclusion, which need not be yours, is that my theory on the service businesses is correct. That is, they are being starved due to declining real incomes for a large number of households, and that they will be a major factor in cutting final demand over the next six months. It takes some real strong impulse to produce these sudden reserves of cash in bank accounts.
Another sign of the times from the June Monthly Treasury Statement is that corporate income tax receipts in June 2011 were 50,594, compared to June 2010's 56,529. Million. Look up at the top of page 6. That is -$5,935,000,000 in corporate income tax receipts YoY.
There was a lot of talk about the June employment report and seasonal adjustments, but I believe if you look at the trend of wage receipts, it appears that the employment trends shown in the Household survey are real.
Needless to say, these numbers have negative implications for state financing. Property taxes are generally the most important local revenue stream, but sales and income tax changes hit the states hard. The mechanism here is declining margins and declining real incomes for most households.
In an attempt to make it all better, Bernanke was trying to explain to Congress this morning that the Fed would do whatever it needed - fight inflation or fight deflation (my interpretation). The market took away the imminent appearance of QE3- a disaster movie coming to a theater near YOU in August, and promptly dropped the dollar and bumped up oil prices to the high 90s and gasoline wholesale to 314.40. So expect inflation to keep giving the above results. The market is trying hard to heal itself right now, but it seems like the good old country doctor he might have the wrong diagnosis, and given what he described as his reason for thinking the problem was temporary, followed by the result of his statement, he definitely hasn't written the right prescription!
In part, the recent weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary. Notably, the run-up in prices of energy, especially gasoline, and food has reduced consumer purchasing power. In addition, the supply chain disruptions that occurred following the earthquake in Japan caused U.S. motor vehicle producers to sharply curtail assemblies and limited the availability of some models. Looking forward, however, the apparent stabilization in the prices of oil and other commodities should ease the pressure on household budgets, and vehicle manufacturers report that they are making significant progress in overcoming the parts shortages and expect to increase production substantially this summer.Ah, Ben. Either the traders think you're an ass and a fool, or the traders don't believe that this is temporary, because the markets reacted like greased lightning to this:
Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation. However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.By dumping the dollar and buying oil, thus negating the "temporary" factors. I am not sure the market was wrong to do so. On the one hand, Dr. Ben testified that he expected prices to drop. Here he appears to be saying that if prices do drop, he's gonna rev up the BlackMoneyHawk and make some more flights over Manhattan.
On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.
On the other hand, the economy could evolve in a way that would warrant a move toward less-accommodative policy. Accordingly, the Committee has been giving careful consideration to the elements of its exit strategy, and, as reported in the minutes of the June FOMC meeting, it has reached a broad consensus about the sequence of steps that it expects to follow when the normalization of policy becomes appropriate. In brief, when economic conditions warrant, the Committee would begin the normalization process by ceasing the reinvestment of principal payments on its securities, thereby allowing the Federal Reserve's balance sheet to begin shrinking. At the same time or sometime thereafter, the Committee would modify the forward guidance in its statement. Subsequent steps would include the initiation of temporary reserve-draining operations and, when conditions warrant, increases in the federal funds rate target. From that point on, changing the level or range of the federal funds rate target would be our primary means of adjusting the stance of monetary policy in response to economic developments.
Due to the fact that I anticipated a possible depressive episode, I had cracked open the emergency dark chocolate candy bar stashed in the freezer and ate two squares with a glass of nonfat milk while reading this testimony. I think it is worth reading, because I found it rather comical thus fortified. Your sense of humor might not be the same.
At the very least this deserves a bad haiku.
see black money bird!
black swan of prosperity?
black money hawk! down!
Ben Bernanke is a complete moron. He seems to think that high commodity prices like oil are "temporary" yet is hinting at firing up QE3 as a response to deflationary forces despite the fact real inflation is probably north of 6%. When asked by Ron Paul earlier in the session whether he thought gold was money, Bernanke said that he thought gold only has value because of "tradition".
There's no question in my mind he's just a front man for the banking cartel, spewing garbage left and right in a furious attempt to maintain the status quo. The problem is, we need a major budgetary and tax code rebalancing in the biggest of ways.
"When asked by Ron Paul earlier in the session whether he thought gold was money, Bernanke said that he thought gold only has value because of "tradition"."
Um, not quite.
His response to "is gold money?" was, after some pause, "No." (Of course the only reason it is not money is because central banks and government won't allow it to be money -- it's too hard to manipulate.)
The "tradition" answer was his response to why central banks hold gold as reserves (rather than something else such as diamonds).
Clip is here.
On the other hand, if you have ever read Galbraith's classic on the GD, the professorial types don't come off too well. He doesn't spend a lot of time on it, but....
Obviously I believe gold is money. I've been told that in prisons cigarettes and drugs are money. I prefer not to conduct research on the matter, but they would serve.
To be honest, a lot of the time Bernanke puzzles me.
CB's don't hold diamonds because diamonds are neither expensive nor rare, unless you just gotta have one by way of de Beers.
I fully expect that eventually gold will go the way of diamonds, but transmutation may take more than a few years to come about.
My mother likes Wendy's bacon cheeseburger on the "dollar menu". I ordered one to go, pulled up to the window with my $1.08 ready to go and the man says it will be $1.40. I said Whaaaattt haaaaapened? The old "dollar menu" is now the $1.29 menu (but the size stayed the same). Ouch!
Total gold mined in 2008 was 2,260 tonnes (2.26 billion grams).
Total annual production of gem quality synthetic diamonds is a few thousand carats (somewhere in the ballpark of 600 grams). Total annual synthetic non-gem-quality diamonds is around 100 million grams.
Total annual production of natural diamonds is about 130,000,000 carats (26 million grams). (Most of those are of course not gem quality.)
So, even today in the age of diamond synthesis, diamonds are still more rare than gold. (Gem quality diamonds are far more rare than gold. And I'm not sure diamond dust is a very practical form of money.)
Most gold mined stays in circulation whereas most of those synthetic diamonds are being consumed by industry.
Gold is less than $1600 per troy ounce, making it less than $52 per gram.
One gram is 5 carats. A 5 carat diamond is going to cost quite a bit more than $52.
"a 5-carat (1.0 g) vivid pink diamond was sold for $10.8 million in Hong Kong on December 1, 2009."
Diamonds may be in danger of becoming cheaper than gold, but I don't think they're there yet.
Historically the biggest problem with "diamonds as money" has nothing to do with them being common/cheap, but with them all being unique (color, size, cut, flaws), so they make for absolutely horrible units of account. Gold (and many other materials), on the other hand, can be melted down and pressed into standardized coins.
"transmutation may take more than a few years to come about"
We do transmutation every day... in nuclear reactors. For the time being it's still much cheaper to dig gold out of the ground.
Transmutation to gold is physically possible, but economically it's not feasible. Yet.
The real reason central banks have never held diamonds as reserves is because diamonds have never had wide use as money. And there is a good reason for that, which I gave, and which I now see wikipedia even explicitly states on their money page:
"To function as a 'unit of account', whatever is being used as money must be: [...] Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money."
You could try to make an argument that central banks *today* don't hold diamonds as reserves because they see that due to continued improvements in synthesis diamonds may get cheaper in the future, but that would be a completely redundant explanation because central banks of the *past* had no idea diamonds could ever be synthesized (or at least no idea it was any more likely than gold synthesis) yet they *still* didn't hold diamonds in reserve (and did hold gold).
*: If you want to dispute that let's see some numbers. Even the no-name teeny-tiny specks of diamonds on ebay are many times more expensive than their weight in gold, and really they are physically too small to be used as money. The larger pieces on ebay are many times more expensive by weight than the teeny-tiny specks. (In fact, I might make the argument that by volume diamonds are simply too *expensive* to be used as money.)
"And gem-quality diamonds can be produced artificially, although the results are again subjective."
First, I already stated that gem-quality diamonds can be produced artificially (and I even gave the current annual production of that class of diamonds). Second, that's not the question, the question is what do such artificially created diamonds *cost*? (Answer: A lot more than their weight in gold -- at least for now.)
The artificially created diamond dust used for industrial purposes is *very* cheap -- less than $1 a gram (which makes it 50+ times cheaper by weight than gold). But it appears the bigger pieces are still quite pricey.
"Much of the value is added in the marketing process."
I don't know how selling no-name diamonds on ebay involves significant marketing. I guess you could make the argument that people across the world have been convinced by advertising to think diamonds in general are worth more than they really are and that has driven up costs via "artificial" demand. But then that argument could be made of lots of things that are advertised, and I don't see how such an argument leads to any objective determination of "true" price. So it seems like a kind of useless thing to argue about.
And weren't diamonds considered quite valuable long *before* the advent of mass advertising? According to this page, a 1 carat cut diamond was 13 to 18 british pounds in the mid 1800s. The british pound was worth 7.322 grams of gold. That means that back in the 1800s 1 carat cut diamonds were worth (13 to 18)*7.322/.2 = 476 to 659 times their own weight in gold.
"Transmutation to gold is physically possible, but economically it's not feasible. Yet."
How is that not *exactly* what I already said?
The Fed has always been a shill for two masters. No decent, honorable person would take a job that reports to two different bosses. I don't blame Bernanke for doing poorly at an impossible task, I blame him for his combination of arrogance, cowardice, and stupidity. But in the sewer of foolishness that is Washington DC, he is only employee number 64,145,134.
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