Dollars and Jens
Tuesday, October 31, 2006
savings bonds
The new I-bond rate comes out tomorrow, and I expect one of us will note it after it has. I've recently come across an explanation of how the rate is determined: the treasury department pulls it out of their

Er, family website. Anyway, there's discretion involved, and varying theories as to what Treasury actually looks at. One theory is that it's based on TIPS yields, in which case it's liable to go up. Another theory is that it's based on nominal yields minus recent inflation, in which case it will go down. In the past, the number seems to thread the middle. We'll know tomorrow.

unit labor costs
Incidentally, recent reports seem to suggest to me that we'll hear about an annual rate of increase of 31/4% in unit labor costs on Thursday. I'd be more worried if it had been accompanied by stronger growth.

Monday, October 30, 2006
exchange-traded credit derivatives
Coming soon on the CME.

Personal Income
The Personal Income report came out; the "savings rate", i.e. the extent to which consumption is less than current income, climbed to -0.2% of disposable income. ("Current income" includes, for example, dividends, but excludes capital gains, so I don't think there's much especially meaningful about the measured savings rate being negative.) Know what? Let's quote from the report:
Personal saving -- DPI less personal outlays -- was a negative $15.0 billion in September,
compared with a negative $49.0 billion in August. Personal saving as a percentage of disposable personal income was a negative 0.2 percent in September, compared with a negative 0.5 percent in August. Negative personal saving reflects personal outlays that exceed disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.
Anyway, doesn't mean wealth is decreasing.

Employee compensation increased a bit faster than 0.5%, but it's been a touch weaker than that lately, and is probably threading nicely between inflationary and stagnant.

The PCE was part of this report, and a couple hours later the Dallas fed released its own trimmed-mean PCE — its version of "core" — which slowed abruptly into the target range that the fed would be using if it were targetting inflation. Which, of course, it isn't. cough. One month of 1.7% annualized trimmed-mean PCE, of course, doesn't mean so much, especially the first time it's been below 2.7% since February.

While I'm babbling, I'll mention last week's GDP advanced estimate, which came in at 1.6%. Frankly, I kind of expected lower, and wouldn't be shocked if it were lowered at the end of November. Of some note is the fact that GDP ex--fixed-residential-investment... What? Don't roll your eyes at me. Seriously, that number came in at +2.7%, which wouldn't be a terribly weak number, and suggests that the housing slowdown hasn't affected the rest of the economy, or that, if it has, it's not so bad. (The number for the previous quarter was 3.3%; for the six months, GDP ex fixed residential investment may have been growing at "potential".)

Tuesday, October 24, 2006
OPEC spare capacity and oil prices
Lynne Kiesling notes an article in the Economist on OPEC and oil prices, and calls particular attention to this passage:
Their output today, of some 27.5m b/d, is much the same as it was in the 1970s. What is more, they are scarred by the memory of the 1980s, when slower-than-expected growth in demand and a glut of non-OPEC supply left them saddled with lots of expensive excess capacity. The high prices of recent years are partly a legacy of that glut, insofar as OPEC, still leery of over-investment, allowed its cushion of spare capacity to dwindle to almost nothing, heightening supply concerns.

Unfortunately for oil consumers, OPEC has little incentive to expand that cushion in the short term. It would, in effect, be spending money to reduce its revenue, since the price of oil would doubtless fall if traders had no fear of future shortages. Dermot Gately, a professor of economics at New York University, has modelled OPEC countries' income at different levels of production. He concluded that any effort on OPEC's part to expand capacity to maintain its market share would only begin to yield higher revenues after 2015, and even then, the increase would be marginal. Given all the uncertainties involved, a rational OPEC planner would probably resolve simply to maintain exports at today's levels rather than add capacity.
I saw a graph of oil production and global capacity as functions of time several months ago, and that chart of OPEC's market share looks a lot like the portion of capacity in use — there was (as the text notes) a glut of spare capacity in the eighties that ran out a few years ago.

Tuesday, October 17, 2006
Producer prices dropped 1.3% last month, but producer prices excluding food and energy rose 0.6%, but producer prices excluding food and energy and cars ... well, this report's a little hard to make out. Makes me all the happier with the trimmed-mean PCE, actually.

Year-over-year, incidentally, the PPI is now up 0.9%; a month ago, that was 3.7%. Part of this was due to the big recent energy price drop, but it came at the same time as the Katrina-related jump 12 months earlier rolled off.

So, how is inflation? Well, the CPI comes out tomorrow. It's worth noting, though, that bonds blipped up (yields down), and while they eased back near to unchanged by the end of the day, TIPS had dropped, bringing the inflation spread to a new cycle low. So expectations for CPI are still contained until at least tomorrow morning.

Sunday, October 15, 2006
credit risk and microcredit
Mark Thoma links to a column written by Hal Varian about five years ago, in which Varian talks about some of the same sort of thing I did two posts ago. It's well-written and I encourage you to read it.

A Hand Up, Not a Handout
Mankiw points to an essay by Yunus in the WSJ on why he prefers loans to hand-outs.

What I like most about the loans is the leverage it enables; if you lend $100, and get back 5/6 of that after administrative expenses (which are around what the Grameen Foundation runs), you can lend the $83 to someone else. Starting with $100, you end up with $600 worth of loans, even ignoring the other moral hazzard benefits that Yunus mentions.

On the Grameen Bank.
Potential borrowers must band together with four other people from their community. The five act as a support group and must approve each other's proposals.

"If someone wants $60 for a goat then the others must approve the idea and believe it will work," said Alex Counts, who worked with the Grameen Bank in Bangladesh and now heads the U.S.-based Grameen Foundation.

While group members are not liable for each other's loans, they can qualify for further loans only if all in the group are current on their first ones.
While it's replicated over and over and coordinated at a higher level, it works because the essential dynamics are at the community level — this is a bottom-up, community-driven system.

Monday, October 09, 2006
Edmund Phelps wins Economics Prize
Those of you who know what the "expectations-augmented Phillips curve" is are likely already to know that the Nobel memorial prize in economics this year is going to the fellow who did the expectations-augmenting. The rest of you are encouraged to find out what it is.

Tuesday, October 03, 2006
Dow Jones Industrial Average

Monday, October 02, 2006
market effects of index trading
Gasoline prices are down notably in the past month or so; the reasons are primarily the obvious prosaic ones (ordinary seasonal demand fluctuations, and that the market had braced for potential supply disruptions — most notably hurricanes — that never materialized), but purely trading effects may have had a role as well:
Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index’s weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings.

“They started unwinding their positions, and those other longs also rushed to the door at the same time,” said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.


Goldman’s announcement on Aug. 9 was not the only downward pressure on prices that week, market participants stress. And while it may have played a part in sending prices down, the market would never have continued its downward trend unless supplies had loosened up, they say.

Also during that week, climatologists revised their hurricane forecasts, easing fears that oil supplies could be disrupted. And BP said it would still produce some oil from its field in Prudhoe Bay, Alaska, where leaks were being repaired. Meanwhile, the peak gasoline season was ending, and new supplies of ethanol were coming online.
This is the sort of thing I would expect to have mostly a transitory effect, but there might be a small sustained impact, and it would certainly have the potential to trigger a move that might not otherwise have happened so soon.

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