…and back at mortgages and foreclosures…

I’m just an astonishing misery-guts today, aren’t I? While out getting coffee, the missus pointed out the Atlanta story to me:

ATLANTA — Despite a vibrant local economy, Atlanta homeowners are falling behind on mortgage payments and losing their homes at one of the highest rates in the nation, offering a troubling glimpse of what experts fear may be in store for other parts of the country.

The real estate slump here and elsewhere is likely to worsen, given that most of the adjustable rate mortgages written in the last three years will be reset with higher interest rates, said Christopher F. Thornberg, an economist with Beacon Economics in Los Angeles. As a result, borrowers of an estimated $800 billion in loans will be forced in the next 12 months to 18 months to make bigger monthly payments, refinance or sell their homes.

All these economics groups of whom I’ve never heard – where do newspapers get these guys? Anyway, the other story related to this was the adjustable-rate mortgage reset.

NEW YORK – More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.

Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low “teaser” rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.

Well, shit. At the same time, retailers are already feeling the pinch:

Sales at U.S. retailers stalled in June following the biggest gain in more than a year as the housing recession led consumers to tighten their belts, a report this week may show.

Retail sales were probably unchanged last month after a 1.4 percent gain in May, according to the median estimate in a Bloomberg News survey ahead of a July 13 report. Rising fuel prices boosted the cost of imports, caused the trade deficit to swell and hurt consumer confidence, other reports may show.

What effect does this have on the economy? Well, from the earlier post about Australia and inflation, remember that basic macroeconomic equilibrium:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

“Consumption” is about 2/3 of Aggregate Demand, and it depends upon a few factors:

• Current disposable income: increasing oil prices, food and energy bills, dilute disposable income. So does increasing mortgage payments, including the storm that ought to follow the ARM-rate reset
• Household wealth: as we have more money/assets, we are less inclined to save money ‘for a rainy day’. Hence, as we become less assured that we will get to keep our house, we save more money and spend less.
• Expected future income: same principle. If we are not confident that the economy will deliver increasing wealth to us, and/or we are not confident that our houses will do the same, we will need to save money, and spend less.
• The price level: inflation decreases the purchasing power of our current incomes, and the real value of our household wealth – meaning we spend less money than before.
• The interest rate: increasing interest rates mean less borrowing for assets, which encourage greater wealth and consumption. They also mean less borrowing for consumption itself.

So. The signals are anti-consumption (the blog Calculated Risk has a very cool post about this). This is, to some extent, a separate part of the macroeconomy from those employment figures. For me, at any rate – I’m not a macroeconomist.

The signals however are that the economy will need more help than it’s currently getting to expand. Home-owners, do not expect that to be in the form of interest rate decreases. Inflationary pressures, even without serious wage pressure, ought to be enough to hold the Fed’s hand. Same with the need to keep the demand for the US dollar at a reasonable level.

What to do? Well, foreclosures are on, for reals. Wishing for leniency in the banks will only get us so far. With deterioration of home equity across the economy comes a decline in consumption, in Aggregate Demand, in employment, etc. With the Fed holding on to interest rates in case inflation or currency speculation forces their hand, that leaves the other of the two macroeconomic tools at the disposal of the government: expansionary fiscal policy. This means the government spending money and/or cutting taxes – by which I mean intelligent tax cuts, not ones that reward the rich but do nothing for long-run economic growth.

Whatever fiscal policy is undertaken, though, it also needs to be undertaken delicately, so as not to give wind to inflation, which at this juncture really only needs some wage pressure to go. This is the fine line the government gets to walk this year, dealing with conflicting macroeconomic problems. Policy tools are designed to deal with one problem – a weak economy (employment) or a strong economy (inflation) – no policy can deal with both.

What we must hope for is soft, smart policy (see where central bank independence comes to the fore?), and an economy that can work its own way out of the problem. Take away the debt problem (Public Debt, Private Equity, hedge funds, CDOs, CMOs and sub-prime lending all together) and the US economy isn’t too bad* – it doesn’t manufacture enough, but that can be improved.

It’s like an old car that you can get going if you start her up ‘just right’. Cock it up and the US economy could end up like nothing we’ve seen before.

* I felt obliged to mention in a footnote that which Jim Kunstler calls the Happy Motoring Utopia. This is our dependence on exurbs, motorways, single-passenger motoring, big heavy cars, really shitty fuel mileage, etc. All of which requires cheap oil – at a time when oil is increasing in price, even as the US’ ability to refine the oil it has seems to be declining, if anything. Staying so will be disastrous, removing that needle from our arms will be very painful. When I say the economy can work its way out of the problem, I wasn’t suggesting it could do so quickly. The best we can get out of this, I believe, is a soft, but very long, landing, and an equally slow recovery.

Bankruptcies and debt are up

Speaking of increasing interest rates. I spotted, while wandering around the Wall Street Journal for the employment post, the following story from the American Bankruptcy Institute:

U.S. consumer bankruptcy filings increased 37.1 percent nationwide in June from the previous year, according to the American Bankruptcy Institute (ABI). Relying on data from the National Bankruptcy Research Center (NBKRC), overall consumer filings totaled 68,559 in June, nearly a 2 percent decrease from the 69,684 filings in May. Chapter 13 filings constituted 38.3 percent of all consumer cases in June, a slight increase over the previous three months.

“While bankruptcy filings are up more than 30 percent from the same period last year, they are less than half of what they were in 2005,” said Samuel J. Gerdano, ABI Executive Director. “However, the underlying concerns of high debt loads are still a constant, pointing to rising filings in the future.”

That reference to 2005, by the by, was the period immediately prior to the change in personal bankruptcy law, when the horrid Bankruptcy Bill came into effect. So not really a useful comparison (suppose your government says employment figures are way up 1932, for example).

Meanwhile, back at the Wall Street Journal,

U.S. consumers borrowed double the amount Wall Street was expecting for May as credit-card use climbed at the strongest rate in six months. Consumer credit outstanding grew by 6.4%, or $12.9 billion, to $2.441 trillion from $2.428 trillion, according to the Federal Reserve report. Revolving credit, which mainly reflects credit-card financing, rose by $7.2 billion to $894.8 billion from $887.6 billion in April. The 9.8% increase was the biggest since 14.5% in November.

Score! I wonder why we’re borrowing? Oh yeah – gas prices are up, food prices are up, mortgage repayments are up, and wages are not so much. Just remember, if and/or when all the shit hits the fan in the office of your bank manager, it’s all the fault of sub-prime mortgages.

Inflation, interest rates and the US economy, instead

I feel bad, ignoring the US economy – which we are being told all over the joint is humming along beautifully, following the results from the non-farm payrolls survey:

Nonfarm payroll employment increased by 132,000 in June, and the unemployment rate was unchanged at 4.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment rose in several service-providing industries, while manufacturing employment continued to decline. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month.

The Wall Street Journal loved it.

…the U.S. economy seems to be enjoying a Goldilocks moment — not too hot, not too cold — after a few quarters of subpar growth and a few flickers of uncomfortably high inflation that conjured images of the 1970s.

Some skepticism can be found, though (the Economic Policy Institute also had a good write-up). The jobs gain still suffers from two problems, for my liking: first, the ongoing disagreement between the two surveys, the household and the payroll surveys. Second, the numbers we do have keep getting bloody revised. I’m not celebrating results this week that are going to disappear in a fortnight. Sorry.

Coming off the Australian numbers will of course make me snotty about it – 132,000 in June? Does that even cover new entrants to the work force (see, snotty. It’s not 3% growth in employment). Even the Bureau of Labour Statistics is with me:

Both total employment (146.1 million) and the civilian labor force (153.1 million) were little changed in June. The employment-population ratio (63.1 percent) and the labor force participation rate (66.1 percent) also were about the same as in May.

Meanwhile, for all the talk about Full Employment in the US (at 4.5%), real wages are still doing their thing: not moving.

Average hourly earnings of production and nonsupervisory workers on private non-farm payrolls increased by 6 cents, or 0.3 percent, in June to $17.38, seasonally adjusted. This increase followed gains of 4 cents in April and 7 cents in May. Average weekly earnings grew by 0.6 percent over the month to $589.18. Over the year, both average hourly and weekly earnings rose by 3.9 percent.

Certainly, wages aren’t being pressured enough for the Federal Reserve to increase rates yet – and a rate cut is definitely out of the question (American home-owners, your interest rates are, however, also going to go up before they go down – especially if your Fed wants the dollar to stay popular while the rest of us well-performing economies are raising our interest rates). What pressure appeared to be building may even be dissipating:

That graph is actually being hosted by the Big Picture. Don’t get me wrong, these aren’t bad numbers, particularly, just badly-read. The reliability of the numbers themselves make me disinclined to do a great deal with them, and the incongruous elements within the numbers ought to be the topic of debate, not the wonder of the modern American bloody economy. The EPI’s conclusion is as good as any up with which I could come:

Outside of restaurants, the only private sector gains came in health and education, sectors that do not typically respond to underlying weakness in the economy. Wage pressures are subdued, and diminished labor force participation rates, especially for minorities, also suggest cyclical weakness. None of these observations suggest recession, but neither do they suggest that the labor market is safely out of the economic doldrums.

Jim Kunstler is not a fan of Live Earth

Jim Kunstler is discussing Live Earth over at his blog, Clusterfuck Nation (sorry, families-with-children).

I’m not convinced that these big public service rock shows do much harm — other than perhaps inflating our expectations and using too much electricity — but this particular one galled me a little.

For one thing, even though global warming is by definition a global problem, the notion of a global community as a permanent fixture of human history is, I think, a mirage. If there is any salient macro implication to the problems I term the long emergency, it is that the world will soon become a bigger place again; the great nations will soon retreat to their own corners of the world as they powerdown by necessity; and all the trade relations, cultural exchanges, and geopolitical conceits that have lately made the Earth seem like a big international hotel give way to much more local issues of sheer survival.

…

The last thing we need now is the carefully packaged postures of concern from “stars.” Al Gore could do a lot more good militating to get regular hourly passenger train service running between Nashville and Atlanta, or stomping his state, from Memphis to Chattanooga for swapping sales tax on regular merchandise for a higher tax on gasoline. Or, he could just put aside his pretensions for being a kind of global Wizard of Oz and just cut the shit and run for president of the US, where he might actually make a difference.

Nice. I have sympathy for both of those, with caveats. The first, definitely. I don’t imagine this raised awareness of the right kind: young College Republican types are almost zero-likely to attend an event such as this (i.e. it will not convert the non-converted), and people with actual power to affect change also will not have attended (it will not empower any of the converted). Kunstler is, sad to say, more or less right. Al Gore will at some point have to take up the gauntlet and make the White House green.

The caveat there is that other Democrats must get out of the way, which will not happen. What Al Gore probably does not want is another turn through the Stupid Lies Ride of the Fourth Estate – and who can blame him? He did his shift. If we imagine a Hillary Clinton or Barack Obama succeeding (or, he smiles wishfully, a Dennis Kucinich), Al Gore may find he has more power as his own broker of it.

The post is well worth reading in full, though.

HowTo: deal with inflation. Or, petrol prices, fresh-food prices, unemployment and your mortgage

SYDNEY (Thomson Financial) – Job advertisements in newspapers and on the Internet averaged 249,915 per week in June, 0.8 percent fewer than in May but 36.1 percent more than a year earlier, Australia and New Zealand Banking Group Ltd (ANZ) said.

Score. Unemployment in Australia is 4.2%, a 32 or 33 (depending upon where you read it) year record low. Yes, that’s pretty low. More importantly, there’s an argument ‘out there’ that it may find its way below 4% next year. Currently, employment is growing at around 3% per year, while the economy itself grows at about 4%. Wages are growing at around 4.1% per year, only just below the Reserve Bank’s Action Station of 4.5%.

The government is aiming to ease this with attempts to increase labour force participation, currently running at 65% – pretty high. Skilled immigrants, older workers, etc. are being encouraged (I mentioned this in the very formative days of this blog). There isn’t a lot of capacity at all left in the labour supply, and we can depend upon our newspapers for anecdotal evidence about how hard it is to fire hirees.

Macroeconomics 101 with Hubbard and O’Brien

First-year students: what happens when the economy has more-than-full employment? Yes, inflation. Returning to your textbooks:

We should be wary, in this post, about cost-push inflation (I’m probably more Keynesian than not, yes). With wages increasing and input prices (thanks to oil/petrol/gasoline) increasing, prices consumers pay have to increase with the costs-of-production. In turn we demand higher wages, and with a squeezed supply of labour we can get them, sending prices higher still. Hence, inflation.

In the graph nicked from the textbook I use, our example economy has expanded beyond potential real GDP (i.e. Full Employment). In the labour market this means more jobs than people (keeping it simple), driving up wages. In the consumer market it means more demand than supply, driving up prices, which drive up wages – do you see the spiral? In fact our economy will not sustain unemployment below the Non-Accelerating Inflation Rate of Unemployment. Thus we end up back at Full Employment in the graph, inexorably, but along the way we’ve picked up positive inflation.

Now to the point. How does the government (broadly speaking) prevent increasing inflation? Contractionary Monetary policy, i.e. increasing interest rates. There is a fundamental equation for the economy – what is called macroeconomic equilibrium:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

In equilibrium Aggregate Demand = Aggregate Supply (points A and C on the graph). Here we are at point B, where Aggregate Demand > Long-Run Aggregate Supply.

Fortunately Australia’s exchange rate is keeping things a little bit in check (high-valued Australian dollar = declining Net Exports = declining Aggregate Demand, reducing the inequality), but not enough. Governments have two options, (i) change Government Expenditure (increase taxation, reduce spending), but that’s not popular in an election year, and/or (ii) increase interest rates. Higher interest rates means (a) less investment (in houses, in new factories, you name it), and (b) less consumption spending (less access to credit, less household wealth, etc.). Both of these also slow down Aggregate Demand, Employment, and so forth. The problem? Interest rate increases are also unpopular.

Reserve Bank independence

This should not be a problem – central banks are independent in all good economies, and the Reserve Bank of Australia is no different (in that it is independent, but periodically hassled by an unpopular government). According to the SMH, the Reserve may not only increase the borrowing rate above the current 6.25%, but put serious brakes on:

Financial market observers believe there is a good chance the bank will make a pre-emptive strike against inflation next month by raising the cost of borrowing to a decade high of 8.3 per cent.

Cripes. I’d be surprised, but it would no doubt be effective. In both holding inflation down and losing the Liberal party their majority in parliament. Howard used them to win his last election, and has bizarrely made promises that they’ll stay the same for now (like I said, periodically governments interfere with central banks – which alone should cost the bastards their jobs). Given the election has to called by November and held by mid-January, his chances of getting through the election without being burned by interest rates are slim.

Interest rate electioneering

So sensitive are the Liberals to the interest rate issue, in fact, that they’re bully-pulpitting all over the place. The treasurer recently gave one of our networks a talking-to after they discussed the increasing burden, under the Howard government, of household debt. I fail to see how they’re plan of “just don’t think about your debt and the interest you pay on that debt” is going to work. Here is the nature of things:

• Interest rates have steadily increased.
• As has debt. In fact, while interest rates are lower than the Bad Old Days to which Team Howard/Costello like to refer, debt is far higher – meaning the debt households carry, and their susceptibility to interest rate increases, is far greater.
• House prices are far and away greater than they’ve ever been – necessitating higher levels of borrowing. Increase levels of leverage in mortgages has both increased debt and – again – led to further increases in house prices.

With that dynamic we are brought the the final fit, the final bellyache:

• The economy is running at too rapid a pace: employment is too high for stable economic growth.
• Costs of production are increasing due to wage demands, as well as increasing petrol prices.
• Prices of fresh foods in areas hit by drought, flood, you name it (honestly, the weather these days!) are increasing.
• Inflation, and inflationary pressures, are reaching a point past which they cannot go, for fear that the Reserve Bank will lose the ability to manage them effectively.

And in the middle is John Howard, insisting that he can smudge away half of that stuff if we agree to ignore the other half – while we lose our houses. The short answer for mortgaged-home owners is this: good news on the economy is bad news for you. Your interest rates will go up unless something very bad happens to the economy exogenously, and the Prime Minister and the Treasurer are lying when they pretend that they can control almost any of this.

What we are seeing is a government that mostly sat around and softly guided an economic expansion that was set up before they arrived. While in office we’ve seen financial and commodities booms that have taken their economy and run away with it. Ignore them and listen to actual economists, financial analysts and reserve bankers – that’s the word on the street. And just as I said the other day, remember Christopher Walken’s immortal lines from the Suicide Kings:

That phone call I got, it came from outside high walls and fancy gates; it comes from a place you know about maybe from the movies. But I come from out there, and everybody out there knows, everybody lies: cops lie, newspapers lie, parents lie. The one thing you can count on: word on the street … yeah, that’s solid.