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Posts Tagged ‘job losses’

Consumer confidence is important, but what should we believe when one headline tells us that, “The banks have enough cash”, whilst another screams, “Mortgage delinquencies among the most creditworthy homeowners rose by 50% last month”.

After Treasury Secretary Timothy Geithner said, “the vast majority of the nation’s banks have enough capital”, U.S. stocks advanced the most in almost two weeks, and Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset said, “Geithner’s comments that most banks are OK got money coming back into stocks because that pretty much allays yesterday’s fears about stress tests and banks having to raise more capital”.

Even General Motors Corp. rose 2.4 percent to $1.70 after a government auditor said the Treasury will supply the automaker with $5 billion in additional aid.

Meanwhile, David Heupel, who helps manage $60 billion at Thrivent Financial for Lutherans said, “There are still signs of a tough economic environment, but companies that have really cut down their expenses are starting to see a little glimmer of life”.

The “tough economic environment” part of his comment would appear to be something of an understatement however, because the number of so-called prime borrowers who are at least sixty days behind on mortgages owned or guaranteed by Fannie Mae and Freddie Mac rose to 743,686 in January, from 497,131 in December, and that’s almost double the October total.

Fannie Mae and Freddie Mac who are the biggest U.S. mortgage-finance companies, either owning or guaranteeing 56% of all U.S. home loans, just announced that mortgage delinquencies among their “most creditworthy homeowners”, rose by 50% in just one month, and they blamed the fall on both drops in income and too much debt, with 34% of borrowers telling Fannie and Freddie that they were earning less money, and around 20% citing too much debt as their reason for missing their mortgage payments, with a further 8.1% blaming unemployment.

By flooding the financial system with money, Federal Reserve Chairman Ben S. Bernanke is seemingly betting that the country’s highest jobless rate in 25 years, combined with the most idle factory capacity on record, will hold down inflation, and it’s textbook Keynesian economics.

If Bernanke’s gamble pays off, then he and the whole Obama administration will be viewed as saviors, but if instead, Milton Friedman’s theories prove correct, and the country lurches from the present financial crisis into rampant inflation, then they will not be so kindly remembered.

Several statements that have recently been made by experts suggest that Bernanke is batting on a very sticky wicket, and many of them have stated on record, their belief that reflation is still in its early stages, and they have pointed out that there are already signs of growing inflation.

John Brynjolfsson, who is the chief investment officer of the hedge fund Armored Wolf, said in a recent TV interview, “We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation”.

Allan Meltzer who is the Fed historian, and a professor of political economy at Carnegie Mellon University in Pittsburgh says, “If history is any guide, then the effort will end in tears and inflation will get higher than it was in the 1970s”.

Consumer prices rose at a year-over-year rate of 13.3% at the end of the ‘70s, mainly because political pressure from Richard Nixon’s White House prevented Chairman Arthur Burns from removing liquidity as quickly as was then necessary.

Former Fed economist John Ryding, who is the founder of RDQ Economics LLC in New York, concurs with Melzer and says that the central bank will be slow to withdraw all the excess cash it has injected into the financial system. “They pay lip service to inflation being a monetary phenomenon, but they’re too much concerned with the Keynesian explanation of inflation”.

The signs that are said to be pointing strongly to inflation are;

• A swelling Fed balance sheet that has climbed $1.2 trillion in the past year to $2.09 trillion.

• M2, which is a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14% which is up from 6.3% a during the last decade.

• Copper is now at a five-month high and platinum reached a six-month peak on April 9th and there are those that expect oil prices to double from the present price of $52 a barrel now.

Moreover, Ken Mayland, who is the president of ClearView Economics LLC says he sees, “oil prices increasing to “$80, $90, $100 before the end of next year. All that money is going to find a home”.