In The Great Recession Conspiracy, we make the point that the U.S. has a very healthy automobile industry that makes cars Americans want to buy, pays good wages and benefits, and is not going overseas. It also employs twice as many workers as does the industry in Michigan. However, nobody seems to care about the facts.
Today's Washington Post has a very interesting story about one of those plants. See for yourself where the real auto industry is located and what it is doing.
In its biggest foreign market, BMW gets skilled workers for less
Gallery
A look at BMW's S.C. plant
While U.S. manufacturing employment has been in a decades-long slide, the BMW campus in Greer, S.C., has grown in the 16 years since its opening.
The wage differential between German and U.S. workers is just one advantage BMW finds here. The primary reason for the factory, executives emphasized, is that the United States is the automaker's largest foreign market. Locating here, among other things, helps mute the effects of currency fluctuations between the two countries.
This Story
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In its biggest foreign market, BMW gets skilled workers for less
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A look at BMW's S.C. plant
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Your Take: If more companies are like BMW, how will it affect the U.S.?
"We needed a bigger production capacity [here] to balance production and sales in the U.S.," BMW Group Chairman Norbert Reithofer said at the opening. "And for me that is the most important point."
New hires at the plant are not directly employed by BMW but come through a contractor, although the automaker says some of the new workers might eventually be hired by BMW and work their way up to the higher wage.
BMW declined to say what their factory workers in Germany make, explaining in part that comparisons are difficult to make because of benefits packages and differing job categories. The International Labor Organization has pegged hourly manufacturing wages in Germany at nearly 24 euros, or more than $33.
Moreover, in a comparison of international labor costs, the German Association of the Automotive Industry reports that the cost of an auto company employee including benefits is 46 euros hourly in Germany and 26 euros per hour in the United States.
While the opening of factories in foreign markets has sometimes drawn criticism from American unions, last week's opening of the BMW factory here appears to have been met with little opposition from the German union.
"From a German trade union perspective, we are not overly concerned," said Horst Mund, head of the international department at IG Metall, a large German union to which BMW workers belong. "The success of German carmakers depends on the ability to sell cars abroad. We cannot expect all the cars to be made in Germany."
He said that when Daimler decided to make the Mercedes C Class in Tuscaloosa, Ala., rather than in Germany, the union extracted promises that no workers would be left without a job.
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"The affected plant got other models to work on and other jobs - so no one was losing," Mund said. "You can do that as long as you are growing."
Competitive wages
None of the 15 U.S. workers interviewed for this story complained, either. In South Carolina, which has a lower median household income than all but eight states, many consider $15 an hour a good wage.
In conversations outside the plant's turnstiles and beside the parking lot, the blue-shirted workers uniformly praised BMW and their jobs. They also recounted the sometimes difficult path to getting hired.
"It's been pretty good - it's not really hard work," said Wade Lamay, 40, who used to be a supervisor at a plastics recycling company.
Ibn Saweuyer-Parks, 60, who holds a bachelor's degree in math, had been overseeing construction jobs in four Western states and anticipating a comfortable retirement until the economic downturn ravaged his savings.
"I had to get back to work," he said. But "I work in a wonderful environment."
A 58-year-old co-worker, Cliff, who preferred to use only his first name, said he'd run distribution centers for Target and Michaels before taking a buyout a few years ago. Also a college graduate, he thought it would be easy to find another job, but it wasn't. He ended up looking for work at McDonald's and driving a bus for a while before finding the job at BMW.
"It's tough out there," Cliff said.
Wednesday, October 27, 2010
Jack Welch Speaks
In the October 11, 2010 issue of Business Week, Jack Welch is quoted as saying, "I don't think any Administration comes in trying to kill business. It's a bad idea. They are not going to last long that way. The President hasn't been served very well by his economic advisers. The President has no economic history."
Well said, Jack!!
Well said, Jack!!
Income Inequality
Income inequality has been discussed here before. This piece by Robert Frank lays out the facts, and they are ugly.
Income Inequality: Too Big to Ignore
By ROBERT H. FRANK
Published: October 16, 2010
PEOPLE often remember the past with exaggerated fondness. Sometimes, however, important aspects of life really were better in the old days.
During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.
By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.
Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.
Adam Smith, the father of modern economics, was a professor of moral philosophy at the University of Glasgow. His first book, “A Theory of Moral Sentiments,” was published more than 25 years before his celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.
Some moral philosophers address inequality by invoking principles of justice and fairness. But because they have been unable to forge broad agreement about what these abstract principles mean in practice, they’ve made little progress. The more pragmatic cost-benefit approach favored by Smith has proved more fruitful, for it turns out that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries.
Recent research on psychological well-being has taught us that beyond a certain point, across-the-board spending increases often do little more than raise the bar for what is considered enough. A C.E.O. may think he needs a 30,000-square-foot mansion, for example, just because each of his peers has one. Although they might all be just as happy in more modest dwellings, few would be willing to downsize on their own.
People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.
The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.
In a recent working paper based on census data for the 100 most populous counties in the United States, Adam Seth Levine (a postdoctoral researcher in political science at Vanderbilt University), Oege Dijk (an economics Ph.D. student at the European University Institute) and I found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.
For example, even after controlling for other factors, these counties had the largest increases in bankruptcy filings.
Divorce rates are another reliable indicator of financial distress, as marriage counselors report that a high proportion of couples they see are experiencing significant financial problems. The counties with the biggest increases in inequality also reported the largest increases in divorce rates.
Another footprint of financial distress is long commute times, because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work. The counties where long commute times had grown the most were again those with the largest increases in inequality.
The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.
ECONOMISTS who say we should relegate questions about inequality to philosophers often advocate policies, like tax cuts for the wealthy, that increase inequality substantially. That greater inequality causes real harm is beyond doubt.
But are there offsetting benefits?
There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.
In short, the economist’s cost-benefit approach — itself long an important arrow in the moral philosopher’s quiver — has much to say about the effects of rising inequality. We need not reach agreement on all philosophical principles of fairness to recognize that it has imposed considerable harm across the income scale without generating significant offsetting benefits.
No one dares to argue that rising inequality is required in the name of fairness. So maybe we should just agree that it’s a bad thing — and try to do something about it.
Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.
Income Inequality: Too Big to Ignore
By ROBERT H. FRANK
Published: October 16, 2010
PEOPLE often remember the past with exaggerated fondness. Sometimes, however, important aspects of life really were better in the old days.
During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.
By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.
Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.
Adam Smith, the father of modern economics, was a professor of moral philosophy at the University of Glasgow. His first book, “A Theory of Moral Sentiments,” was published more than 25 years before his celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.
Some moral philosophers address inequality by invoking principles of justice and fairness. But because they have been unable to forge broad agreement about what these abstract principles mean in practice, they’ve made little progress. The more pragmatic cost-benefit approach favored by Smith has proved more fruitful, for it turns out that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries.
Recent research on psychological well-being has taught us that beyond a certain point, across-the-board spending increases often do little more than raise the bar for what is considered enough. A C.E.O. may think he needs a 30,000-square-foot mansion, for example, just because each of his peers has one. Although they might all be just as happy in more modest dwellings, few would be willing to downsize on their own.
People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.
The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.
In a recent working paper based on census data for the 100 most populous counties in the United States, Adam Seth Levine (a postdoctoral researcher in political science at Vanderbilt University), Oege Dijk (an economics Ph.D. student at the European University Institute) and I found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.
For example, even after controlling for other factors, these counties had the largest increases in bankruptcy filings.
Divorce rates are another reliable indicator of financial distress, as marriage counselors report that a high proportion of couples they see are experiencing significant financial problems. The counties with the biggest increases in inequality also reported the largest increases in divorce rates.
Another footprint of financial distress is long commute times, because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work. The counties where long commute times had grown the most were again those with the largest increases in inequality.
The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.
ECONOMISTS who say we should relegate questions about inequality to philosophers often advocate policies, like tax cuts for the wealthy, that increase inequality substantially. That greater inequality causes real harm is beyond doubt.
But are there offsetting benefits?
There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.
In short, the economist’s cost-benefit approach — itself long an important arrow in the moral philosopher’s quiver — has much to say about the effects of rising inequality. We need not reach agreement on all philosophical principles of fairness to recognize that it has imposed considerable harm across the income scale without generating significant offsetting benefits.
No one dares to argue that rising inequality is required in the name of fairness. So maybe we should just agree that it’s a bad thing — and try to do something about it.
Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.
Inside Job
Inside job is a great movie!! If you have read The Great Recession Conspiracy, you pretty much know the outlines of the movie. Here is an interview with the director, who was as much surprised as I was about the venality of the named economists.
24 Frames
Movies: Past, present and future
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'Inside Job' director Charles Ferguson: The 'tea party' is not the answer
October 26, 2010 | 3:15 pm
Inside
Charles Ferguson's anatomy-of-a-financial-crisis film "Inside Job" -- in which he documents in a sober, level-headed tone the 2008 economic crash and buttonholes academics, government officials and Wall Street executives he believes were responsible -- provokes plenty of rage about how we got into such a fiscal mess. (It also has angered some of the people it depicts, such as former Federal Reserve Board governor Frederic Mishkin, who is called to task for a report he authored; in an op-ed in the Financial Times earlier this month, he offered this rebuttal.)
We caught up with Ferguson, who previously directed the anatomy-of-a-military-crisis movie "No End in Sight," to hear his latest views on the economy, the reaction to the film and whether he thinks the "tea party" has the answers.
One of the most scathing aspects of the film is how you implicate Barack Obama and his administration for perpetuating the crisis with its lax oversight of Wall Street. Do you foresee a new direction for the administration now, especially with the resignation of Larry Summers?
I don't see much change at all. And the small amount of change we do see is driven by political fear as opposed to a real change in sentiment or policy. The underlying rules of the game have not changed very much.
Why do you think most people have been slow to recognize, then, that this has not just been a George W. Bush problem?
I think that many people in America believe by supporting and voting for Barack Obama they would be fixing this problem, and part of the emotional difficulty for Americans is to come to terms with the fact that it's not the case. It's a bipartisan problem. You can't just address it by voting for a different kind of party or candidate. It's going to be longer and harder take a bottom-up change, like the civil rights movement or the environment.
In the eyes of many Americans, the tea party has taken up that mantle. What do you make of their place in prompting reform?
I think in a situation where people are under a great deal of economic stress, it's natural to get movements like this. But traditionally in American history they don't last a very long time. The more significant question is whether there's going to be a serious movement for reform, which I don't take the tea party to be.
Why is that?
What they've said has been very conventional in nature. It has a political tenor to it, and they're on a particular place on the political spectrum. But there doesn't seem to be complete consistency in that community or movement. If there is any intellectual consistency, it's in the claim that the government shouldn't bail out financial institutions. But I don't think it represents a movement for fundamental change. Even if they were successful, I don't think it would change much.
One of the things that's most striking about the movie is how you actually get people on camera to squirm. Was that difficult to pull off?
There were a lot of people who didn't want to talk me. But it was very important to me to do it that way. It's one thing to lay out a set of facts; it's another to watch someone be able to defend themselves when confronted with them. It makes the argument a lot more secure.
Even though you keep the tone even-keeled, you clearly relish the moments of catching executives and government officials in their own contradictions. Did you ever worry that it would look like you were playing the gotcha game?
Actually, it's quite the opposite.There was an earlier cut of the film with people saying things that were more outrageous and astonishing. I cut them, because I worried if you destroyed them so completely you may engender sympathy for them. I had to dial it back just enough to get the point across but not to completely destroy these people.
One of the people you confront is Frederic Mishkin, who comes out looking complicit in the crisis because of his 2006 report that largely assured the world of the financial stability of Iceland. What did you make of Mishkin's reaction since the film came out, particularly his piece in the FT?
I think it was rather unwise of him to write it. It's extremely clear if you compare what he says to what we show in the film who's right and who's not. If I was in his position I would have just issued a short press release saying I made a mistake with regard to Iceland and that's it.
You expose a lot of conflicts of interest in the movie, like the fact that impartial academics received compensation from corporate power players. Did the level of cravenness ever surprise you?
I did not expect it to be that bad when I started making the film. I knew that conflicts of interest existed in a general way. I didn't realize how pervasive they were. The degree of dishonesty and shamelessness was extreme.
Are you optimistic that reform is possible?
I think we could be facing another bubble and crisis within a decade. Even now, the financial service industry has a disproportionate share of political influence. I don't think we'll have another crisis in the next couple of years. Memories are still fresh and people are still badly burned. But I don't see much change in the underlying drivers of Wall Street behavior.
--Steven Zeitch
24 Frames
Movies: Past, present and future
« Previous | 24 Frames Home | Next »
'Inside Job' director Charles Ferguson: The 'tea party' is not the answer
October 26, 2010 | 3:15 pm
Inside
Charles Ferguson's anatomy-of-a-financial-crisis film "Inside Job" -- in which he documents in a sober, level-headed tone the 2008 economic crash and buttonholes academics, government officials and Wall Street executives he believes were responsible -- provokes plenty of rage about how we got into such a fiscal mess. (It also has angered some of the people it depicts, such as former Federal Reserve Board governor Frederic Mishkin, who is called to task for a report he authored; in an op-ed in the Financial Times earlier this month, he offered this rebuttal.)
We caught up with Ferguson, who previously directed the anatomy-of-a-military-crisis movie "No End in Sight," to hear his latest views on the economy, the reaction to the film and whether he thinks the "tea party" has the answers.
One of the most scathing aspects of the film is how you implicate Barack Obama and his administration for perpetuating the crisis with its lax oversight of Wall Street. Do you foresee a new direction for the administration now, especially with the resignation of Larry Summers?
I don't see much change at all. And the small amount of change we do see is driven by political fear as opposed to a real change in sentiment or policy. The underlying rules of the game have not changed very much.
Why do you think most people have been slow to recognize, then, that this has not just been a George W. Bush problem?
I think that many people in America believe by supporting and voting for Barack Obama they would be fixing this problem, and part of the emotional difficulty for Americans is to come to terms with the fact that it's not the case. It's a bipartisan problem. You can't just address it by voting for a different kind of party or candidate. It's going to be longer and harder take a bottom-up change, like the civil rights movement or the environment.
In the eyes of many Americans, the tea party has taken up that mantle. What do you make of their place in prompting reform?
I think in a situation where people are under a great deal of economic stress, it's natural to get movements like this. But traditionally in American history they don't last a very long time. The more significant question is whether there's going to be a serious movement for reform, which I don't take the tea party to be.
Why is that?
What they've said has been very conventional in nature. It has a political tenor to it, and they're on a particular place on the political spectrum. But there doesn't seem to be complete consistency in that community or movement. If there is any intellectual consistency, it's in the claim that the government shouldn't bail out financial institutions. But I don't think it represents a movement for fundamental change. Even if they were successful, I don't think it would change much.
One of the things that's most striking about the movie is how you actually get people on camera to squirm. Was that difficult to pull off?
There were a lot of people who didn't want to talk me. But it was very important to me to do it that way. It's one thing to lay out a set of facts; it's another to watch someone be able to defend themselves when confronted with them. It makes the argument a lot more secure.
Even though you keep the tone even-keeled, you clearly relish the moments of catching executives and government officials in their own contradictions. Did you ever worry that it would look like you were playing the gotcha game?
Actually, it's quite the opposite.There was an earlier cut of the film with people saying things that were more outrageous and astonishing. I cut them, because I worried if you destroyed them so completely you may engender sympathy for them. I had to dial it back just enough to get the point across but not to completely destroy these people.
One of the people you confront is Frederic Mishkin, who comes out looking complicit in the crisis because of his 2006 report that largely assured the world of the financial stability of Iceland. What did you make of Mishkin's reaction since the film came out, particularly his piece in the FT?
I think it was rather unwise of him to write it. It's extremely clear if you compare what he says to what we show in the film who's right and who's not. If I was in his position I would have just issued a short press release saying I made a mistake with regard to Iceland and that's it.
You expose a lot of conflicts of interest in the movie, like the fact that impartial academics received compensation from corporate power players. Did the level of cravenness ever surprise you?
I did not expect it to be that bad when I started making the film. I knew that conflicts of interest existed in a general way. I didn't realize how pervasive they were. The degree of dishonesty and shamelessness was extreme.
Are you optimistic that reform is possible?
I think we could be facing another bubble and crisis within a decade. Even now, the financial service industry has a disproportionate share of political influence. I don't think we'll have another crisis in the next couple of years. Memories are still fresh and people are still badly burned. But I don't see much change in the underlying drivers of Wall Street behavior.
--Steven Zeitch
Tuesday, October 26, 2010
Life imitates art
In The Great Recession Conspiracy, we predicted that inflation would be the most likely future course of events since the Government had to do something about the huge deficits and debt.
Now a large number of bond buyers are echoing the same opinion and doing it with their own money.
October 25, 2010
In Bond Frenzy, Investors Bet on Inflation
By CHRISTINE HAUSER
At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.
Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.
The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.
The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.
The unusual auction on Monday “reflects a condition in the Treasury market that has been in place for months, chiefly that yields on shorter maturities have moved below the inflation rate,” Anthony Crescenzi, a senior vice president at the bond giant Pimco, wrote in a research note.
Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said there were about $28 billion worth of bids for the notes. About 40 percent were foreign buyers, 57 percent dealers and the rest were possibly retail investors, he said. The prediction is for a 1.58 percent rate of inflation, as measured by the Consumer Price Index.
“It was good demand considering the negative yields,” he said. “They are counting on the Fed to be successful in generating inflation.”
As strange as all this may seem, these investors were actually going along with conventional market wisdom. Many economists are concerned that if the economy continues to stagnate, there is a danger of deflation, or a decline in prices, that would be difficult to reverse.
Most analysts expect that the Federal Reserve, which has already lowered interest rates to near zero and bought Treasury securities in efforts to reinvigorate the economy, is about to pump even more money into the system. Such a move would probably increase the rate of inflation.
Fed officials have hinted at such action in recent appearances. In a speech in Boston on Oct. 15, the Fed chairman, Ben S. Bernanke, said that “there would appear — all else being equal — to be a case for further action.”
The markets interpreted that and other statements as unmistakable signals that the Fed was poised to act at its next meeting, on Nov. 2-3.
Mr. Bernanke couched his argument in terms of the Fed’s mandate to keep prices stable and maximize employment. He said that inflation had been running well below the implicit target of about 2 percent and that unemployment, at 9.6 percent, was too high.
Inflation-protected Treasury securities have already been trading at negative yields on the open market for some time, as professional and institutional investors have sought to hedge their portfolios against the risk of inflation. But Monday was the first time since the government began selling these so-called Treasury Inflation-Protected Securities in the 1990s that new ones were sold at a negative yield.
Buyers “believe we have reached the bottom of the inflation cycle and the next move is higher, not lower,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company.
A growing aversion to risk has produced all manner of investment oddities in the last two years. At the height of the financial crisis, for example, the yield on ordinary short-term Treasury bonds turned negative for a brief time as people flocked to safe investments.
Even now, big investors are buying gold at levels unseen in decades, to protect against fluctuations in the value of currencies. Small investors are fleeing the stock market in droves, favoring bonds and even cash over equities. Companies have managed to sell bonds that do not pay off for 50 or even 100 years.
The remarkable auction occurred as stock indexes on Wall Street edged higher, buoyed by recent strong corporate earnings and a month-to-month rise in housing sales.
Sales of previously owned houses increased 10 percent in September from August, to a seasonally adjusted annual rate of 4.53 million units, above forecasts of 4.30 million, but they were still down 19 percent from September 2009. The National Association of Realtors said about a third of the sales last month were related to foreclosures.
On Monday, the Dow Jones industrial average rose 31.49 points, or 0.28 percent, to 11,164.05. The broader Standard & Poor’s 500-stock index gained 2.54 points, or 0.21 percent, to 1,185.62.
The Nasdaq composite index climbed 11.46 points, or 0.46 percent, to 2,490.85.
Bond prices fell, with the yield on the 10-year Treasury rising to 2.56 percent from 2.55 percent late Friday.
As equities advanced, the dollar declined over the weekend after promises by the world’s 20 biggest economies to avoid a currency war.
It was the latest sign that financial markets are positioning for a rise in inflation. Economists point to the fall in the dollar as a sign of budding inflationary pressures. Another is the recent sharp rise in the price of some assets, including commodities like gold.
Graham Bowley and Sewell Chan contributed reporting.
Now a large number of bond buyers are echoing the same opinion and doing it with their own money.
October 25, 2010
In Bond Frenzy, Investors Bet on Inflation
By CHRISTINE HAUSER
At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.
Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.
The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.
The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.
The unusual auction on Monday “reflects a condition in the Treasury market that has been in place for months, chiefly that yields on shorter maturities have moved below the inflation rate,” Anthony Crescenzi, a senior vice president at the bond giant Pimco, wrote in a research note.
Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said there were about $28 billion worth of bids for the notes. About 40 percent were foreign buyers, 57 percent dealers and the rest were possibly retail investors, he said. The prediction is for a 1.58 percent rate of inflation, as measured by the Consumer Price Index.
“It was good demand considering the negative yields,” he said. “They are counting on the Fed to be successful in generating inflation.”
As strange as all this may seem, these investors were actually going along with conventional market wisdom. Many economists are concerned that if the economy continues to stagnate, there is a danger of deflation, or a decline in prices, that would be difficult to reverse.
Most analysts expect that the Federal Reserve, which has already lowered interest rates to near zero and bought Treasury securities in efforts to reinvigorate the economy, is about to pump even more money into the system. Such a move would probably increase the rate of inflation.
Fed officials have hinted at such action in recent appearances. In a speech in Boston on Oct. 15, the Fed chairman, Ben S. Bernanke, said that “there would appear — all else being equal — to be a case for further action.”
The markets interpreted that and other statements as unmistakable signals that the Fed was poised to act at its next meeting, on Nov. 2-3.
Mr. Bernanke couched his argument in terms of the Fed’s mandate to keep prices stable and maximize employment. He said that inflation had been running well below the implicit target of about 2 percent and that unemployment, at 9.6 percent, was too high.
Inflation-protected Treasury securities have already been trading at negative yields on the open market for some time, as professional and institutional investors have sought to hedge their portfolios against the risk of inflation. But Monday was the first time since the government began selling these so-called Treasury Inflation-Protected Securities in the 1990s that new ones were sold at a negative yield.
Buyers “believe we have reached the bottom of the inflation cycle and the next move is higher, not lower,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company.
A growing aversion to risk has produced all manner of investment oddities in the last two years. At the height of the financial crisis, for example, the yield on ordinary short-term Treasury bonds turned negative for a brief time as people flocked to safe investments.
Even now, big investors are buying gold at levels unseen in decades, to protect against fluctuations in the value of currencies. Small investors are fleeing the stock market in droves, favoring bonds and even cash over equities. Companies have managed to sell bonds that do not pay off for 50 or even 100 years.
The remarkable auction occurred as stock indexes on Wall Street edged higher, buoyed by recent strong corporate earnings and a month-to-month rise in housing sales.
Sales of previously owned houses increased 10 percent in September from August, to a seasonally adjusted annual rate of 4.53 million units, above forecasts of 4.30 million, but they were still down 19 percent from September 2009. The National Association of Realtors said about a third of the sales last month were related to foreclosures.
On Monday, the Dow Jones industrial average rose 31.49 points, or 0.28 percent, to 11,164.05. The broader Standard & Poor’s 500-stock index gained 2.54 points, or 0.21 percent, to 1,185.62.
The Nasdaq composite index climbed 11.46 points, or 0.46 percent, to 2,490.85.
Bond prices fell, with the yield on the 10-year Treasury rising to 2.56 percent from 2.55 percent late Friday.
As equities advanced, the dollar declined over the weekend after promises by the world’s 20 biggest economies to avoid a currency war.
It was the latest sign that financial markets are positioning for a rise in inflation. Economists point to the fall in the dollar as a sign of budding inflationary pressures. Another is the recent sharp rise in the price of some assets, including commodities like gold.
Graham Bowley and Sewell Chan contributed reporting.
Monday, October 25, 2010
An Extraordinary Movie
Larry Lessig (www.fixcongressfirst.org) said you should take a 1000 friends and go see "Inside Job" and for which Matt Damon supplies the voice over.
Yesterday, Frank Rich, in The New York Times suggested the same thing.
Well, I don't have 1000 friends, but I took Joanne and we went to see Inside Job today.
It is an amazing piece of work! If you have read "The Great Recession Conspiracy", you know the outlines of the story, but the movie adds lots of details.
The thing that I found absolutely jaw dropping stunning is the evidence that virtually all of the big name economists are unprincipled whores for money. These guys are multi-millionaires doing the biding of Wall Street Banks.
In one scene, Glenn Hubbard, Dean of the Business School at Columbia, loses his cool when it is announced that he got paid $125,000 to write a paper demonstrating that a lack of regulation is a good thing for everybody, and never disclosed his financial interest.
If you only see one movie this year, see this one. It is your money they are gambling with today. Google to find out where it is playing in your neighborhood.
Yesterday, Frank Rich, in The New York Times suggested the same thing.
Well, I don't have 1000 friends, but I took Joanne and we went to see Inside Job today.
It is an amazing piece of work! If you have read "The Great Recession Conspiracy", you know the outlines of the story, but the movie adds lots of details.
The thing that I found absolutely jaw dropping stunning is the evidence that virtually all of the big name economists are unprincipled whores for money. These guys are multi-millionaires doing the biding of Wall Street Banks.
In one scene, Glenn Hubbard, Dean of the Business School at Columbia, loses his cool when it is announced that he got paid $125,000 to write a paper demonstrating that a lack of regulation is a good thing for everybody, and never disclosed his financial interest.
If you only see one movie this year, see this one. It is your money they are gambling with today. Google to find out where it is playing in your neighborhood.
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