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Economix: What Americans Really Think About the Debt Ceiling

July 18, 2011 by Leave a Comment

This month, a Gallup poll found that Americans are almost twice as likely to say they want their Congressional representative to vote against rather than for an increase in the debt ceiling (42 percent to 22 percent, with 35 percent saying they had no opinion).CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Gallup also asked those Americans who had expressed opinions to explain why they had answered that question as they had.  Today the polling organization has released all 700 of these open-ended responses, which can provide some useful insights into how ordinary Americans think about this issue.

I just whipped up a couple of word clouds (via wordle.net) to give a sense of the themes behind both sets of responses. Here are the responses from people who think their representative in Congress should vote against raise the debt ceiling:

DESCRIPTIONSource: Gallup. Image created using Wordle.

Here are the responses from people who think their representative in Congress should vote for raising the debt ceiling:

DESCRIPTIONSource: Gallup. Image created using Wordle.

For what it’s worth, I see that the word “economy” was used more frequently by those who wanted to raise the debt ceiling. Notice any other interesting patterns here?

Article source: http://feeds.nytimes.com/click.phdo?i=95c0c1001b0c3ccd7b329becba6b6ce6

Filed Under: Economy News Tagged With: , ,

You’re the Boss: This Week in Small Business: Everyone’s Pointing Fingers

July 18, 2011 by Leave a Comment

Dashboard

A weekly roundup of small-business developments.

What’s affecting me, my clients and other small-business owners this week.

The Nation: A Brave Man

A hero receives the Medal of Honor (and this Marine wins a prize, too).

The Debt Ceiling: Are They Insane?

Wait a second. The budget deficit is shrinking? Stuart Shapiro wonders if our politicians are great negotiators or just insane. Gallup finds Americans prefer spending cuts and are open to tax hikes. Anthony Orlando confronts five myths about the debt-ceiling crisis. (For me, this video sums up the debate so far.)

The Data: Retail Is Up But So Is Misery

Consumer prices record the largest drop in a year. Mark Perry lists the Top 10 manufacturing industries of 2010. Hotel demand increases. Retail sales increase slightly (pdf). The Association of American Railroads reports steady growth in rail traffic. It turns out commerce has a pulse. The United States trade gap widened to near a three-year high in May. The Misery Index is still the highest since 1983 and unemployment claims are still above 400,000. An Esquire writer asks, “How can we not love Obama?”

Jobs 1: The Data Are Ugly

The number of job openings in May was three million, unchanged from April. There are nearly five workers for every available job. GE’s chief executive demands that businesses hire more people. The Chamber of Commerce reports that small businesses are ignoring GE’s chief executive. In fact, more than 75 percent of small-business owners surveyed by Harris Interactive don’t plan to add any employees over the next year. Economists admit they’re clueless about jobs and debate whether we need 90,000 or 187,000 new jobs per month to keep the unemployment rate steady.

Jobs 2: Everyone’s Pointing Fingers

Eric Singer says that the war on small business is what’s keeping job gains low: “Small businesses are starved for capital and inundated with regulations. The starvation is the cumulative result of years of self-inflicted wounds affecting capital sources, and regulations are accelerating, all with enormous negative effects on our economy.” Douglas A. McIntyre says that start-ups are not hiring because of “the effect of government austerity measures at all levels, which have caused a series of layoffs that are likely to continue as states, town and the federal government sort out their deficit problems.” Tyler Durden (angrily) explains why small businesses aren’t hiring and won’t be hiring. One reason: “The vast majority of small businesses are marginal, and they cannot afford to hire employees when the already crushing costs of health care continue rising.”

The Economy: Honey, We’re Wiped Out

As corporate earnings climb and piggy banks fill up, the National Federation of Independent Business reports that small-business optimism dropped in June: “an unsurprising reading, basically unchanged from the previous month and solidly in recession territory.” One reason: late payments. David Schuler laments the decline in personal consumption. A new study says that “America’s middle class has been utterly, completely wiped out.” Mark Thoma asks if we’re stuck in low growth forever: “I believe we will eventually recover to a new growth path that is near, but a bit lower than the old one. The recovery will be slow, but we will get there eventually. How long it takes depends, in part, upon how aggressively we attack the problem with monetary and fiscal policy measures (or how much we make things worse with mistakes in either area such as premature deficit reduction or interest rate hikes).” Women owners of small businesses expect better times. The Fed considers QE3.

Red Tape Update: Congress’s Bright Bulbs

Proposed legislation may harm Department of Defense small-business contractors. The Feds start relaxing health care laws for states. The light-bulb bill goes dark. A fan who caught Jeter’s 3,000th hit may owe big in taxes.

Marketing: Don’t Listen to Kevin Costner

A retail marketer says that merchants should use social media to listen better: “Listening is the new marketing. It stands to reason that, if people are talking to each other and those conversations have influence, merchants should take time to listen to what is being said. Listening is the on-ramp to engagement and I would not pursue a social media plan of action without first taking time to listen.” Jason Hennessey offers four simple ways to increase Web site conversion rates. Janet Aronica shares 25 ideas for livening up your Facebook content, including: “Use the top photo strip of your Facebook page in a creative way. Spell out a word for a particular campaign, make a cartoon by connecting the images or show unique head shots of employees.” A new survey reveals that the vast majority of businesses do not have formal policies regarding social media activity. Jessica Commins explains how to keep Kevin Costner from ruining your blog and business.

Management: Kenny Powers Is the C.E.O.

Rob McGovern is the same driven entrepreneur he was before his horrific car accident — except that now his brain works differently. Harvard Business Review wants us to consider ditching the endless stream of PowerPoint presentations. Netflix teaches us how NOT to raise prices. Kenny Powers explains his strategic plans. We can learn about managing contacts from Bill Clinton. Tim Berry explains the differences between small-business owners and high-growth entrepreneurs.

Success Strategies: Good News for McDains!

Good news for McDain’s Restaurant: children now make up the smallest-ever percentage of the United States population. Small businesses may benefit from the end of the space shuttle. Nick Hughes tells how not to launch your company. Christian Arno explains why we need the foreign language Internet: “many organizations are missing out on this golden opportunity, because even in this digital age they refuse to go multilingual.” The UPS Store introduces a Facebook contest. Pitney Bowes communications makeover contest ends soon. Danielle Gould explains how one company built a data-driven start-up. Dan Shapiro explains why he sold his start-up to Google.

Your People: Do They Know What 26 x 27 Is?

These 10 companies have the toughest interview questions. Example: “What’s 26 times 27?” A new bill targets workplace bullying. A frequent flier hits 10 million miles (but did he know he could fly for free?). Kate Rogers explains why fines for not paying overtime can cost small businesses big bucks. Mitch Betts says you can’t avoid office politics.

Around The States: Food Fight In California

A new program will offer solar systems in the Bay Area. It’s not too late to attend a small-business seminar in the Los Angeles area. New Hampshire small businesses receive $13 million. Many restaurants in Baltimore may be unaware that they need to “paws” for registration. A New Jersey survey says that business owners aren’t planning to hire. Californians brace for a food fight over vending machines. Michigan businesses are seeing signs of improvement. The White House is sending help to selected cities. Las Vegas reports a modest increase in small-business hiring. Philadelphia papers are to be offered with tablets. A new start-up in Brooklyn is everything an energy firm isn’t supposed to be.

Around the World: There’s No Magic In China

Egypt’s young entrepreneurs emerge. Chinese authorities have set an important condition before the latest Harry Potter movie can be released. The Canadian government proves it can waste money too! Hmm, maybe Russia isn’t such a bad place to own a business after all.

Finance: Do Credit Cards Punish Small Businesses?

Credit unions are increasing their commercial lending. Keith Girard explains how business credit cards punish small-businesses: “Given the disparities between business and consumer credit cards, some small-business owners may opt to simply use their personal credit cards for business expenses.” Half of cell phone owners use mobile banking once a week. Mortgage applications decrease.

Technology: Signs of a Bubble?

RIM promises seven new Blackberrys in the coming months. Cynthia Harvey lists 63 open source replacements for popular financial software. Dropbox values itself at more than $5 billion. Microsoft is going into retail.

The Week Ahead: Real Estate Numbers Coming

Building permits and housing starts will be announced Tuesday, with existing home sales to be released Wednesday. Economists will continue to pay close attention to weekly unemployment claims on Thursday, and the Philly Fed will release its manufacturing survey at week’s end.

This Week’s Bests

Reason To Not Please Everyone. Michael Hess says there’s a price for trying to please everyone: “Can you please everyone? Probably not. Should you please everyone? Probably not. But if you are trying to run a good, healthy, well regarded, and ‘happy’ business, should you try to please everyone? Again, the answer is still probably not. So it seems to me that being presidential means knowing when to try, when not to, and how to do either and get the desired results.”

Reason To Be Charitable. Laurel Tielis gives advice for connecting with charities to brand and build businesses: “You don’t even have to have an event to donate to a charity. You can just pick a date, for example, the anniversary of your store’s opening, and give a percentage of purchases that day to a charity of your choice. You, of course, will tell everyone via your Web site, e-mail, newsletter and mainstream as well as social media.”

Reason to Re-Think Our Strategy. Melody Biringer, a self-described start-up junkie, says that “developing a break-out brand isn’t easy. But you will be able to hit a nerve with your brand story no matter how crowded your industry if you approach it from these two very important angles: What can you really do and what space can you really own?”

This Week’s Question: Does your company contribute to charities? I know I could be doing more.

Gene Marks owns the Marks Group, a Bala Cynwyd, Pa., consulting firm that helps clients with customer relationship management. You can follow him on Twitter.

Article source: http://feeds.nytimes.com/click.phdo?i=6581a07dbf4fcb5038d1de4e27d864e7

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Stocks & Bonds: Small Gains on Wall St. Cap a Choppy Week

July 16, 2011 by Leave a Comment

Shares rose on Wall Street on Friday, easing the losses sustained over the week, as gains in energy and technology stocks were enough to overcome concern that an impasse over raising the federal debt limit was putting the nation’s top credit rating in jeopardy.

The Standard Poor’s 500-stock index rose 7.27 points, or 0.56 percent, to 1,316.14. The Dow Jones industrial average was up 42.61 points, or 0.34 percent, to 12,479.73. The Nasdaq composite index rose 27.13 points, or 1 percent, to 2,789.80.

For the week, the S. P. 500 lost 2.1 percent; the Dow Jones industrial average fell 1.4 percent; and the Nasdaq dropped 2.45 percent.

“There’s a lot more company-specific issues driving stocks now, even though there’s still macro uncertainty about the debt negotiations in Washington and the European crisis,” said Jeffrey S. Coons, president of Manning Napier Advisors in Fairport, N.Y.

Stocks fell from their highs of the day after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 63.8 in July from 71.5 in June. The gauge was projected to rise to 72.2, according to the median forecast of 62 economists surveyed by Bloomberg News. Estimates for the confidence measure ranged from 75 to 68.

Stocks briefly extended their advance after the European Banking Authority said eight banks failed the European Union stress tests with a combined shortfall in capital of 2.5 billion euros ($3.5 billion).

“The stress test results are coming in pretty much as expected, at least at the headline level,” said E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia. “Everybody is waiting for more news on the U.S. debt ceiling and more about the E.U. sovereign debt situation, and nobody wants to get too far on one side or the other ahead of the weekend.”

Google stock rose 13 percent, to $597.62, after reporting sales that beat predictions, a sign that it was making progress expanding beyond search advertising. Sales, excluding revenue passed on to partner sites, rose to $6.92 billion. That topped the $6.57 billion average estimate of analysts surveyed by Bloomberg News.

Clorox shares gained 8.9 percent, to $74.55, its highest price since at least 1980. Carl C. Icahn offered to buy the company for about $10.2 billion in a move intended to draw out other potential bidders.

Shares of Petrohawk Energy, an oil and gas company, rallied 62 percent, to $38.17, after BHP Billiton agreed to buy the company for $12.1 billion in cash, betting natural gas demand would rise in the United States.

As a group, energy companies rose 2.3 percent, the most among 10 industries in the S. P. 500. Technology stocks added 1.6 percent.

Shares of Ralcorp Holdings fell 0.7 percent, to $86, dropping for a sixth consecutive day. The company, which makes Raisin Bran cereals and private-label food brands, plans to spin off Post Foods after failing to sell the unit to rival food makers or private-equity firms.

Flir Systems shares fell the most in the S. P. 500, slumping 9.9 percent, to $28.92. Flir, a maker of night-vision cameras used by American combat forces, reported second-quarter profit excluding some items of 35 cents a share, trailing the average analyst estimate by 4 cents, according to Bloomberg data.

Interest rates were lower. The Treasury’s benchmark 10-year note rose 12/32, to 101 27/32, and the yield fell to 2.91 percent from 2.95 percent late Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=33b44372c3cf5c3185a57536659a2fed

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Economix: What if the Debt Ceiling Isn’t Raised?

July 9, 2011 by Leave a Comment

There are few signs of progress in the meetings between President Obama and Republican Congressional leaders about the need to raise the federal debt limit.

On Thursday, the president said the two sides were still “far apart,” although he said recent meetings were “very constructive.” For his part, the House speaker, John Boehner, said on Friday that no agreement was “imminent.”

One thing that most officials seem to agree on, however, is that failing to raise the limit by the Aug. 2 deadline will have undesirable consequences. Here are some recent statements by American officials and others on the subject:

“While some think we can go past August 2nd, I frankly think it puts us in an awful lot of jeopardy, and puts our economy in jeopardy, risking even more jobs.” — House Speaker John A. Boehner, July 8

“Potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything. And so our credit could be downgraded, interest rates could go drastically up, and it could cause a whole new spiral into a second recession, or worse.” — President Obama, July 6.

“The United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic.” — Ben S. Bernanke, the Federal Reserve chairman, July 7.

“We don’t need to tell the rest of the world that anytime people in Congress start throwing a tantrum that we’re not going to pay our bills.” — Warren E. Buffett, July 7.

“The debt-ceiling trigger does offer a needed catalyst for serious negotiations on budget discipline, but avoiding even a technical default is essential. This is a risk our country must not take.” — A letter circulated by business groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers.

“There is no guarantee that investors would continue to re-invest in new Treasury securities. In fact, some market participants have already indicated that they would be disinclined to do so. As one of the major ratings agencies concluded in a recent report, failure to pay non-debt obligations ‘would signal sever financial distress and potentially imminent debt default,’ prompting the U.S. sovereign rating to be place on ‘Rating Watch Negative.’” — A letter from Treasury Secretary Timothy F. Geithner to Republican senators, June 29.

A few prominent voices have suggested that not raising the debt ceiling, while not ideal, would have acceptable consequences. Here are some of them.

“The Treasury takes in more than enough money from taxpayers to cover interest payments on the national debt. According to the Congressional Budget Office, tax revenue is estimated to be $2.23 trillion in Fiscal Year 2011 while net interest payments will only amount to $213 billion. Even if the debt ceiling remains where it is, there will be more than enough money in the Treasury to make the government’s debt payments, thereby avoiding default.” — A letter to Secretary Geithner, signed by Senator Mitch McConnell, the minority leader, and 16 other Republican senators, May 23.

“My guess is that the bond market would rally as long as it believed the ultimate outcome was going to be genuine entitlement reform — that we wouldn’t even have to find out about a meltdown because it wouldn’t happen.” — Stanley F. Druckenmiller, the retired manager of Duquesne Capital, May 14.

Are there other prominent or notable figures who’ve gone on the record about the consequences of not raising the debt ceiling? Submit them in comments.

Article source: http://feeds.nytimes.com/click.phdo?i=60d89419411bc31142854ee9ae2826d8

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Economix: Will the United States Default?

July 7, 2011 by Leave a Comment

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Three views emerge on whether the United States will default on its government debts, as I talk to people on and close to Capitol Hill. The first is, hopefully yes, and this August offers a good opportunity. The second is, possibly yes, but this would be bad, so we need some form of fiscal austerity. The third is, under no circumstances, and any talk of a need for austerity is a hoax.

The first view is mistaken. The second view hides a dangerous contradiction. And the third view borders on complacency. So how can we find our way to fiscal responsibility? We need tax reform.

People in the first camp think that the United States government has become too big and the only way to cut it down to size is to limit its ability to borrow. A constitutional amendment to limit the size of government relative to gross domestic product or to require a balanced budget could work, but experience suggests a future Congress could always find a way to escape any such constraint.

A big part of the underlying problem is that the world has a taste for American assets. Foreign citizens and many of their governments like the ability to buy and sell dollars in liquid markets, and they are particularly fond of American government debt as a place to keep their rainy-day money. Private investors and government wealth managers around the world wring their hands about the trajectory of deficits and debt in the United States – and then buy more of that debt.

So, in one interpretation of this view, the only way to remove the ability of the federal government to borrow is to miss some payments, thus convincing the financial markets that the government is not really a good credit risk.

Such thinking is part of the strategy to threaten not to extend the debt ceiling for the federal government. That would lead to defaulting on some debt. But default, as the Greeks are finding out, is an all-or-nothing enterprise. Doing just a little default is not possible,  because, in the view of the market, your country pays its debt in full and on time, or it does not.

The consequences of a United States default would be severe, not just for world markets but also for the ability of every American business and household to borrow, lend or make just about any financial decision. So threatening to blow up the current government debt system is not a credible threat, unless you sincerely believe that this would be a good thing ultimately for all concerned.

From the hearing I attended in June of the Joint Economic Committee of Congress, my distinct impression is that some leading legislators are leaning this way. In coming votes on raising the debt ceiling, we’ll find out how many members of the House support such views.

The second camp represents the mainstream of American politics today. Genuinely worried about future insolvency, people on both sides of the aisle propose ways to cut future budget deficits. On the Republican side, people prefer spending cuts; the Democrats would rather raise taxes.

Everyone in this camp fully intends to allow the government to pay its debts. Yet increasingly it appears that some people on the left and the right might be attracted to the idea of a government shutdown, at least for a while, assuming that they can effectively blame the other side.

The point is not to change the nature of government or its ability to borrow, but rather to position ideas and personalities for the 2012 presidential election. The government will be able to make its debt payments, but only if it does not pay wages or keep some nonessential parts of government functioning.

The good part of this thinking is that mainstream politicians are increasingly talking about budget constraints and the need to live within our means. The bad news is that these same people extended the so-called Bush tax cuts at the end of 2010, at a stroke not just refusing to deal with the deficit but also significantly contributing to what they now say is our most pressing problem.

The net impact on debt in 2018, relative to what it would have been otherwise, is an increase of $3 trillion. The Congressional Budget Office says in that year nearly a quarter of total outstanding federal debt will exist because these tax cuts were extended last December. (In these pages, James Kwak and I have made the case for opposing the extension.)

For both parties, the gap between rhetoric and policy actions within the mainstream is not closing. And the presidential election is unlikely to help very much. The Bush tax cuts are up for renewal in 2012; are any candidates likely to run on the platform of not extending them?

The third position is that the United States cannot default on its debts. People in this camp offer various explanations, mostly having to do with the fact that long-term interest rates are at their lowest in 50 years. Clearly someone is happy buying United States government debt.

But how long will this continue? Will foreign investors seek to shift out of dollars in the foreseeable future, perhaps because the euro becomes more appealing? And if the Federal Reserve steps in to buy whatever government paper is not wanted by private participants, this surely can become inflationary.

We have put our head into the mouth of the financial markets lion. Ask Greece, Ireland or Italy what happens when the lion’s mood changes.

You will note that none of these three views addresses tax reform, except in passing. Left and right agree that as a country we spend too much relative to our income. It would make sense, therefore, to find ways to tax consumption more and income less.

This could be done in a way that is not regressive, that does not punish people at the lower end of the income scale. Some of the most progressive tax systems in the world are based in large part on consumption taxes.

Such tax reform could support either a smaller government or a larger one. With a stronger tax base, the size of government is a good debate to have, but that issue that can be completely separated from whether our current and future deficits can be sustained.

Article source: http://feeds.nytimes.com/click.phdo?i=6d24579febeaf353d03435c1bc5a61ee

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The Caucus: Debt Ceiling Date Does Not Budge

July 1, 2011 by Leave a Comment

The Aug. 2 debt ceiling deadline is holding firm. The Treasury Department said Friday morning that its latest estimates still show that’s the date the government will exhaust its ability to pay all of its bills, unless Congress agrees to raise the total amount that the United States can borrow.

“Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner,” the department said in a statement issued in the name of Mary Miller, the assistant secretary for financial markets.

Congressional Republicans say they will increase the borrowing limit only if Democrats agree to a plan to reduce the federal deficit. Democrats say any such plan must include revenue increases. The two sides have been locked in a stand-off for several months. The White House now is warning that a deal must be reached by mid-July to leave enough time for the necessary legislation to be written and passed into law.

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Short-Term Increase in Debt Limit Suggested

June 20, 2011 by Leave a Comment

“If we can’t do something really significant about the debt ceiling, then we’ll probably end up with a very short- term proposal over a few months, and we’ll be back having the same discussion in the fall,” Senator Mitch McConnell, the minority leader, said Sunday on the CBS program “Face the Nation.”

Economists and Obama administration officials are warning of a calamity if the government defaults on its obligations. The default deadline is Aug. 2.

Still, a leading Democrat said the two parties were coming closer together on the debt limit and deficit reduction.

“Progress is being made,” Senator Dick Durbin, the second-ranking Democrat, said on “Meet the Press” on NBC. “We shouldn’t wait until high noon” to raise the debt ceiling because “it will mean higher interest rates if we don’t.”

Vice President Joseph R. Biden Jr. is leading bipartisan Congressional talks on the debt limit and cuts in federal spending.

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Fight Over Debt Ceiling Risks Credit Rating, Moody’s Warns

June 2, 2011 by Leave a Comment

Moody’s unexpected report follows by six weeks a decision by another major ratings firm, Standard Poor’s, to lower its outlook for the Aaa rating on United States debt – but not the rating itself — to negative from stable. Moody’s cautionary note was more pointed in tying a potential reduction in the rating to current budget politics, and urging a resolution weeks sooner than the White House and Congressional leaders were aiming for.

Moody’s warning was two-pronged. First, it said, if Congress does not raise the $14.3 trillion debt in coming weeks, the nation’s credit rating could be lowered “due to the very small but rising risk of a short-lived default.” That would likely translate into higher interest rates at a time when the recovery is again slowing.

And second, Moody’s warned with an implicit slap at both parties, whether the United States keeps that triple-A rating “will depend on the outcome of negotiations on deficit reduction.”

“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default,” the company’s statement said. The goal of the bipartisan budget talks that began in April at President Obama’s initiation has been to reach agreement on deep long-term spending cuts by Aug. 2. That is when the Treasury department has said it will run out of accounting maneuvers to meet the nation’s financial obligations without breaching the debt limit, which would provoke a crisis, even default.

House Republicans have said they will not agree to increase the debt limit without parallel action on spending cuts of an even greater amount. The debt limit would have to be raised $2.4 trillion to carry the government through 2012 and that year’s elections.

Moody’s action comes a day after House Republican leaders engineered a vote on Tuesday evening in which the House voted overwhelmingly not to increase the debt limit. They said that was their way of proving to Democrats that it could not pass without spending cuts attached, but the Democrats countered that they were risking an adverse market reaction by staging the vote, knowing it would fail.

“This report makes clear that if we let this opportunity pass without real deficit reduction, America’s financial standing will be at risk,” House Speaker John Boehner said in a statement. “A credible agreement means the spending cuts must exceed the debt limit increase. The White House needs to get serious right now about dealing with our deficit and debt.”

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Strategies: Why Are Investors Still Lining Up for Bonds?

May 29, 2011 by Leave a Comment

“Who the hell knew it was so powerful?” he said. “If it gets nervous, everybody has to calm it down. If I’m ever reincarnated, I want to come back as the bond market,” Mr. Carville continued. “Then everybody will be afraid of me and have to do what I say.”

But where is that fearsome bond market now? It has been docile, to say the least. Consider these events.

In mid-April, Standard Poor’s placed United States debt on negative watch, saying there was a one in three chance that over the next few years it would actually downgrade the Treasury’s pristine triple-A rating. The agency cited concerns about the ability of Congress and the White House to agree on a plan to reduce the budget deficit.

On May 16, the Treasury hit its statutory debt ceiling — the point at which the government cannot borrow more money without Congressional action. But Congress didn’t act. To keep the government operating and bondholders paid, Treasury Secretary Timothy F. Geithner announced a series of maneuvers that bought some time. The clock is ticking, however. If Congress doesn’t enact legislation by Aug. 2, he said, the United States will default on its debt.

Has this melodrama shaken the bond market? Not a bit.

Since April 18, the prices of Treasuries haven’t fallen. To the contrary. They’ve risen while yields, which move in the opposite direction, have plummeted. On Friday, the 10-year Treasury yield dipped as low as 3.05 percent, its trough for the year. Despite a mounting debt burden and a dithering government, Treasuries have rallied.

Factor in the pronouncements of the Federal Reserve, and the situation is even more puzzling. In its program of “quantitative easing,” aimed at stimulating the economy and driving up asset prices — QE2, as it has been called — the Fed has been buying longer-term Treasuries. But it says it will end the program on schedule next month.

Any economics student knows that when you cut demand — in this case, when the Fed ends QE2 — all things being equal, prices ought to decline. And yet, despite the Fed’s announcement, prices have risen and yields have fallen to extraordinarily low levels. Inflation-protected Treasuries, also known as TIPS — those with terms ranging up to six years — actually have negative real yields, meaning their yields are even less than the rate of inflation. Buyers are essentially paying the Treasury for the privilege of owning them.

“There’s something wrong with this picture,” said Scott Minerd, chief investment officer of Guggenheim Partners. He adds, however, that the picture is bigger than this. “Examine the rest of the world for a moment,” he said in a recent interview. “Compare it to everyplace else, and the United States starts to look a lot better and a lot of this starts to make more sense.”

Europe and Japan, the two other large advanced economies, face crises that are, arguably, far more acute. In the aftermath of an earthquake, a tsunami and a still unfolding nuclear disaster, Japan is struggling through a recession.

In Europe, the probabilities have risen that Greece will need another bailout or will need to restructure its debt or default on it. Ireland and Portugal, which have also needed bailouts, are also troubled, and the European Union has so far been unable to come up with a solution. Leaders of the Group of 8 nations meeting in Deauville, France, on Thursday and Friday failed to make significant headway on these issues.

Meanwhile, growth in red-hot emerging market countries like China has begun to slow, as their central bankers raise interest rates to limit inflation.

Given the alternatives, the bond market has found United States debt quite appealing. The market is convinced that in the end, Washington politicians will trim the budget deficit, Mr. Minerd said. If that perception were to change, the market would react with vehemence, he said. “I think everyone expects that Congress will come to its senses before it’s too late,” he said.

With signs that economic growth is slowing — rattling the stock and commodity markets — the Fed is likely to hold interest rates near zero for months, he said, and Treasury yields are likely to dip even lower, meaning more profits for bond traders.

By this summer, industrial growth will be visibly slowing around the world, said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, a private forecasting group. The markets have probably reacted to early indications of that slowdown, he said, bolstering bonds and hurting stocks and commodities. “Until there are signs of another pickup in economic growth,” he said, “I wouldn’t be buying on dips in the stock market.” In this context, he said, Treasuries may seem a safer bet.

William H. Gross, the co-chief investment officer of the Pacific Investment Management Company, or Pimco, the world’s biggest bond manager, ruefully compared investors in Treasuries to complacent frogs sitting in a pot of slowly heating water. “Bond investors are receiving almost nothing for their money, and the situation is getting worse and worse. But they’ve gotten used to it. They don’t realize how bad it is. And before they know it, well, they’ll be cooked.”

Since early this year, Mr. Gross has been making statements like this, predicting the imminent end of the Treasury rally. “I was premature,” he said, adding, however, that his arguments were valid, if not well-timed.

At some point, he said, bond investors will realize that by accepting low — and even negative — real yields, they are being “skunked.” Using a fancier term, he said, they are experiencing “financial repression,” a hidden tax that is of great benefit to the government, which will be able to pay back its debt more cheaply as time goes on.

IN a situation like this, wealth is transferred from investors to a debtor government without investors entirely realizing it, said Carmen M. Reinhart, an economist at the Peterson Institute for International Economics in Washington. Ms. Reinhart, who has written extensively on the subject, says financial repression is still common in the developing world. Until the onset of the financial crisis, though, it had all but vanished from developed countries.

Now, she said, with debts mounting and central banks holding down interest rates, “We are beginning to see financial repression once again in developed countries like the United States.”

Article source: http://www.nytimes.com/2011/05/29/your-money/29stra.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Foes Revise Plan to Curb New Agency

May 6, 2011 by Leave a Comment

The Consumer Financial Protection Bureau has been one of Washington’s drawn-out passion plays, featuring bankers and finance companies that want to undermine the agency and have villainized Elizabeth Warren, the hard-edged Harvard law professor President Obama picked to start it.

Ms. Warren has characterized the fight as one in which opponents are trying to stick “a knife in the ribs of the agency.” In a recent interview, she said, “the fight has now shifted. It didn’t stop, it just moved from being a fight out in the headlines, out in the middle of the street, to a fight in the back alleys.”

But on Thursday, the fight returned to the open as 44 Senate Republicans sent a letter to Mr. Obama saying they “will not support the consideration of any nominee, regardless of party affiliation, “to direct the bureau until the agency is restructured.

With 44 of 47 Republican senators digging in against the bureau, Democrats would be unable to gather the 60 votes necessary to end a filibuster and bring a vote on a nominee for director of the agency. That leaves the president with the option of a recess appointment, a move that would anger legislators whose support the president is likely to need to tackle other issues, like cutting the deficit and raising the debt ceiling.

Already, three bills are pending in the House of Representatives to alter the agency’s charter, making it easier for other regulators to overturn the bureau’s rules and replacing its director with a five-person commission.

“This is about accountability,” said Senator Richard Shelby of Alabama, the ranking Republican member of the Senate Banking Committee. “The bureau, as currently structured, lacks any semblance of the checks and balances inherent in the Constitution. Everyone supports consumer protection, but we should never entrust a single person with this much power and public money.”

The White House defended the agency’s structure, saying it provided “the strongest consumer protections in history.”

“The consumer agency’s sole mission is to protect American families and provide the tools they need to make smart financial decisions,” said Amy Brundage, a White House spokeswoman. “For far too long, American consumers have fallen victim to fraud, misleading claims and powerful special interests, and the president believes that American families who were the hardest hit by this financial crisis deserve an independent watchdog to protect consumers and prevent predatory lending and other abuses in the future. “

While the rhetoric surrounding the fight over the consumer bureau has recently focused on its structure, behind the scenes it has been as much about Ms. Warren, who was widely believed to be unable to pass confirmation in the Senate last year. As an alternative, Mr. Obama appointed Ms. Warren last September as a special adviser to oversee the “standing up” of the agency, and she has hired officials who will carry out the regulation of mortgage loans, credit cards, payday lenders and other sellers of financial products.

But until the bureau has a formal director, it cannot write rules governing consumer finance or begin overseeing previously unregulated agencies like payday lenders.

In some ways, Ms. Warren’s own celebrity might be getting in the way of that effort. She is a dynamic public speaker who has for years championed the right of the middle class to receive plain-English explanations of often-complex financial products. But that effort has drawn criticism from some bankers, who feel she has unfairly accused them of exploiting consumers.

Several candidates for director of the bureau have reportedly turned down the opportunity, with at least one saying that she thought Ms. Warren should get the job. As the delay in selecting a nominee has lengthened, supporters of Ms. Warren have characterized her nomination as inevitable.

“There’s no doubt that the fact she’s there has made it more complicated to recruit a director,” said an Obama administration official who spoke on the condition of anonymity and who was not authorized to discuss the search process. “She’s done a terrific job attracting talent to the agency,” the official said. But recent efforts by supporters to portray her as the putative nominee are proving “mildly counterproductive,” the official said.

Ms. Warren herself has deflected speculation about her taking the job, saying it is for the president to decide.

For much of the last few weeks, Ms. Warren has been speaking publicly about what she calls attacks on the consumer agency. “Every day, somebody’s got a plan to undercut this agency, to knock it down,” she said. “The conversation is effectively: ‘Oh, we’d really like to kill this thing but it might be too popular for that — that might cause too much blowback. So can we find a way to maim it?’ ”

Republicans have complained that the bureau, which is to be housed in the Federal Reserve and whose budget is independent of Congressional oversight, has broad powers but does not have to answer to anyone. Republican opponents say they are simply trying to ensure that the agency does not interfere with other regulators that look after the safety and soundness of banks and financial institutions.

The Senate group urged the establishment of a board of directors to oversee the bureau, and a House bill similarly calls for the establishment of a five-member commission. A board structure would be similar to the Federal Reserve, the Federal Trade Commission and the Federal Deposit Insurance Corporation — agencies whose consumer oversight will be shifted to the new consumer bureau on July 21, a year after President Obama signed the Dodd-Frank bank regulation act into law.

Legislators also have called for the consumer bureau to be subject to the Congressional appropriations process. As established, its budget is set as a percentage of the Federal Reserve’s budget and is not subject to approval by Congress.

Consumer groups responded angrily Thursday to the Republican letter. “It’s sort of breathtaking,” said Lisa Donner, executive director of Americans for Financial Reform, which lobbied for the creation of the consumer bureau. “They’re saying, ‘We’re not O.K. with an effective consumer bureau.’ ”

In spite of the continued resistance, Ms. Warren is moving ahead with efforts to begin the consumer agency’s work. Later this month, it is to begin circulating drafts of new consumer mortgage forms that combine two complicated documents that consumers are required to receive as part of a home purchase into a single form that the agency hopes will be easier for homebuyers to understand.

Article source: http://feeds.nytimes.com/click.phdo?i=89fb6f4b2482906d5f2d85a50f969f81

Filed Under: Your Money Tagged With: , ,
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