Relevant and even prescient commentary on news, politics and the economy.

Health Care thoughts: Big Business Reacts to Reform

by Tom aka Rusty Rustbelt

Health Care: Big Business Reacts to Reform

The National Business Group on Health ** has issued the results of a poll on the reaction of larger employers to PPACA (Obamacare or the Act).

A few highlights:

The group expects employer health care costs to increase by 9% in 2011.

Employers are dropping limits on spending limits in compliance with the Act.

Employers are shifting costs to employees to encourage more careful spending.

Sixty-three percent of employers expect to shift more premium costs to employees next year.

Some of the first deadlines for plan changes arrive in September 2010.

Small business is a whole ‘nother deal. More later.

** The NBGH is an association of larger employers, mostly business, but as diverse as the federal government, the American Cancer Society, the University of California and the United Methodist Church.

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Household saving rates in the US, UK, and Germany: (possibly) light at the end of the tunnel

Menzie Chinn at Econbrowser breaks down US import data by sector to argue the following (see entire article here):

What is clear is that consumer goods do not vary that much; now, part of auto and auto parts is going to satisfy consumer demand as well, and here we do have some evidence in support of the hypothesis of the consumer going back to his/her old ways of sucking in imports.

Consumption hardly seems resurgent, so attributing the increase in imports to consumers means that one is assuming a very high share of imports to incremental consumption — something I’m not sure makes sense. So, I think the book is still open on whether the consumer is going to drive the US back into a rapidly expanding trade deficit.

Another way to look at this is by comparing global household saving rates. Specifically, I look at the household saving rates across the US (the world’s largest economy in 2007, as measured in PPP dollars – download the data at the IMF World Economic Outlook database), UK (6th largest economy), Canada, and Germany (5th largest economy). The household saving ratio is calculated as gross household saving divided by personal disposable income, as reported in country National Accounts.

If the global economy is indeed “rebalancing”, then relative to disposable income the big spenders (US, UK) raise saving, while the big savers (Germany) increase spending. In contrast, if the global economy is returning to the pre-crisis “status quo”, then relative to disposable income household saving rate would:

  • fall in the US and UK
  • rise in Germany

(Using IMF data, here’s a chart that I put together last year of consumption shares across economies to illustrate the big spenders and big savers.)

The German household saving rate is rising, while the UK households saving rate is falling. In the US, we’re seeing the household saving rate stabilizing above pre-crisis levels, even increasing at the margin.

The table below lists average household savings rates for the pre- and post-crisis periods. Notably, the average US saving rate more than doubled to 4.8% since the previous 2005-2007 period, while that in the UK increased a much smaller 36% to 4.6%. Notably, German households increased average saving above an already elevated 10.6% average during the business cycle.

So generally, this simple analysis would suggest that Menzie Chinn’s skepticism of a “status quo” of US consumer imports is worthy. But with the status quo firmly in place in Germany, the household saving data paint a foreboding picture – certainly for the Eurozone, but possibly for the global economy as well.

I’m in no way “blaming” this on the Germans – the banking system there will eventually contend with the crappy Greek and Portuguese assets they hold on balance. But didn’t they learn their lesson? Relying on exports makes the economy highly susceptible to external demand shocks.

More on the UK vs US in my next post.

Rebecca Wilder

Note: Clearly, an analysis of this sort would require a much larger cross-section of household saving data. But differing measurement methodologies and data limitations make the comparison too arduous for a simple blog post. For example, Japan is not part of the analysis because only the expenditure approach to national income is available on a quarterly basis.

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Concept Release on the US Proxy System

Hat tip Moxyvote for this note:


On July 14, the SEC published the linking to the SEC asking for comments on proxy voting Concept Release on the US Proxy System. They occasionally issue these releases, maybe two or three times a year, when they’re considering substantial problems. They want your feedback.

This time around, the SEC describes our current proxy voting system, its consequences on shareholder communication and participation, and the imperfect coupling of voting power and economic interest. From the introduction to this document:

…we are reviewing and seeking public comment as to whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and issuers should rightfully expect. With over 600 billion shares voted every year at more than 13,000 shareholder meetings, shareholders should be served by a well-functioning proxy system that promotes efficient and accurate voting.

If you have something that might help the SEC think this through, drop them some comments before October 20th.

(End quote)

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Many are talking about the bond market being the latest bubble. But it looks more like the press is just seeing bubbles everywhere. To me a bubble happens when everyone starts believing something that probably is not true. For example in the 1990’s investors started thinking that the long term earnings growth of the S&P 500 was shifting up from its long term 7% growth rate. So they believed that the market was worth more than historic valuations implied and the market PE rose to the 25 to 30 level.

In the 2000’s bankers and home owners came to believe that housing prices could never fall so that homeowners could always refinance their mortgages. Consequently, lenders did not have to worry about credit risk.

So for the bond market to be a “bubble” investors would have to start thinking they can make unusually large capital gains in the bond market. But everyone knows that if you buy a 10 year bond that at the end of 10 years all you will get back is your original investment. In the meantime you will get the coupon and what you can earn by reinvesting that coupon. Yes, if rates continue to fall in the short run you will be able to sell the bond for more than you paid, but you total return has to remain limited because in 10 years the possibility of capital gains must converge on zero. As long as this is true the possibility of a bond bubble must remain something reporters and pundits can pontificate on but nothing more than that.

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The market reacted strongly to initial unemployment claims jumping from 488,000 to 500,000. But on a not seasonally adjusted basis claims actually fell from 424,504 to 4o1,856. In recent weeks the seasonally adjusted claims have been somewhat distorted because GM did not have its usual seasonal shutdown of plants this year. This was also reflected in the very strong industrial production report. So it would be better to not react so strongly to the rise in initial claims to 500,000. GM operating its plants through the usual summer shutdown does distort the data, but it is also a sign that the economy may not be as weak as people suspect.

I did not report on this yesterday, partially because I had told my paying clients that the market was extremely vulnerable to disappointing economic news so the negative market reaction was in line with what I expected. But Ken suggested I report on this. For example, this was my chart of the month sent to clients a few weeks ago showing that spot inventory problems were emerging in a few sectors like computers, communication equipment, department and hardware stores. Overall, inventories are not a problem, but selected areas are emerging as problem to watch closely.

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The Myth of the “Credibility of Markets”

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.
crossposted with New deal 2.0

The Myth of the “Credibility of Markets”

It is time to distinguish between the truths and the myths propagated by Wall Street.

A few days ago, I wrote a piece suggesting that President Obama’s attack on the proposed GOP threat to Social Security masked a more fundamental threat posed by members of his own party. Sadly, this analysis appears to be confirmed today in Mike Allen’s politico playbook:

“–ADMINISTRATION MINDMELD: The virtue of action on Social Security is that it demonstrates the ability to begin to affect the long-run deficits. Social Security isn’t the biggest contributor to the problem – that’s still health-care costs. But it could help a little bit, buy time, and strengthens the odds of a political consensus behind other spending cuts or tax increases. Most importantly, it would establish more CREDIBILITY with the MARKETS. The mood of the world at the moment (slightly excessive, from the administration’s point of view) is that if you don’t do anything with spending cuts, it doesn’t get you credibility.” (My emphasis).

This, in a word, encapsulates the Administration’s perverse Wall Street-centric thinking. Credibility with the American people takes a back seat to this amorphous concept called “the markets”, and the corresponding need to maintain “credibility”.

But how are we to divine the true aspirations of the markets? Is this really a legitimate basis for government policy? Private portfolio preference shifts (which are manifested daily in the capital markets) are probably the area least amenable to economic analysis. There are no cookie cutter models here (and economists LOVE models).

Consider the case of a currency: How does one respond to a weaker currency? The conventional response seems to be, “Raise interest rates and eventually you’ll re-attract the capital because you will re-establish ‘credibility’ with the markets”. That was essentially the IMF advice to East Asia in 1997. But, as that experience demonstrated, sometimes raising rates can actually trigger additional capital flight if it is perceived to be a panicked reaction to something. And Japan today clearly demonstrates that low rates per se do not necessarily prefigure a weaker currency. What does a 10 year Japanese government bond yielding less than 1% tell us about “the markets”? Does it reflect approval with a country that has a public debt to GDP ratio about 2.5 times higher than the US?

To paraphrase Milton (the poet, not Friedman), sometimes they also serve who only stand and wait!

Markets are an amorphous concept, which reflect heterogeneity of viewpoints. Some people today are buying gold because they foresee a Weimar style hyperinflation emerging in the face of all of this government spending. Some buy it because they envisage the death of fiat currencies and view the yellow metal as the ultimate insurance policy. Some invest because they consider gold the only real form of money. Some people view it as a barbarous relic and ignore it altogether. How does a government respond to these varying points of view? What’s the right policy response?

The myth that markets, not governments, ultimately determine rates has, of course, been legitimized to some degree by virtue of the fact that our institutional monetary arrangements still reflect archaic gold standard type thinking (whereby a certain amount of gold on hand was required to fund government operations). But we went off the gold standard decades ago. Still we have laws which mandate that all net government spending is matched $-for-$ by borrowing from the private market. So net spending appears to be “fully funded” (in the erroneous neo-liberal terminology) by the market. But in fact, all that is actually happening is that the Government is coincidentally draining the same amount from reserves as it adds to the banks each day and swapping cash in reserves for government paper.The resultant bond market drain is there to ensure that the central bank maintains control of its reserve rate. It has nothing to do with “funding” government operations itself.

If you think that sounds radical then consider the following question posed by my friend, Professor Bill Mitchell: If a government bond auction “fails” (i.e. the government doesn’t find enough buyers for the paper it issues during that particular sale), does this mean that your Social Security cheque is going to bounce? Will national infrastructure projects be suddenly halted because the net spending is not “funded”? Do we have to stop fighting a war in Afghanistan? The answer to all of these questions is the same: Of course not! The net spending will go wherever the Government intends it to go – after all the Government needs no funds to spend because it first creates the currency which is ultimately required to be spent in the real economy. The private sector does not produce dollars (if it did, it would represent a jailable offence called counterfeiting).

More fundamentally, how, pray tell, does one presume that the private sector can net save (in this case, dollars) something it cannot net produce?

Isn’t it true that the government is in a unique position because only it has the capacity to create new net financial assets? Now, granted, this simple observation does not readily apply to the euro zone because the individual countries concerned have effectively ceded that authority, thereby circumscribing an adequate fiscal response to their crisis (a point I have made before). But when the operations of government are examined in this light, it establishes that the Obama Administration’s ongoing fixation with “long term deficit reduction” and “establishing credibility with the markets” is as foolhardy as conducting human sacrifices to placate a deity.

Yet government policy responses today on issues like Social Security or Medicare reflect a misguided belief system and a genuine failure to understand the basis of modern money. Scaling back Social Security will certainly drive unemployment up higher than it is already going becomes it robs people of the very income required to sustain growth. Not a very sensible strategy if you truly care about implementing “change that people can believe in”.

Unfortunately, until these Wall Street-centric beliefs are fully exposed for the myths that they are, we can expect to see more dispiriting headlines of the sort reflected in Mike Allen’s latest politico playbook.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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The Gift that Keeps on Giving

During the discussions about the Fannie Mae project I still regret having turned down, one of the topics was which security would be better for a portfolio (assuming their risk-adjusted prices provided the same value): a four-year-old MBS or a seven-year-old MBS?

I noted that the four-year-old MBS provided more potential upside but came gradually to agree that the seven-year-old security was preferable: an MBS that is that “seasoned” is effectively a generic amortizing bond. There shouldn’t be any surprises—in either direction—so a portfolio manager would prefer it.

As usual, The Old Firm manges to prove that what should be correct for an MBS isn’t necessarily so for a CMBS:

Standard & Poor’s Ratings Services today lowered its ratings on
three classes of commercial mortgage pass-through certificates from Bear
Stearns Commercial Mortgage Securities Trust 2002-TOP6, a U.S. commercial
mortgage-backed securities (CMBS) transaction….

The downgrade of class M to ‘D’ follows a principal loss sustained by the
class, which was detailed in the August 2010 remittance report….

The principal loss and corresponding credit support erosion resulted from the
liquidation of an asset….The Nortel Networks asset is a 281,758-sq.-ft. office
property in Richardson, Texas. The asset had a total exposure of $28.6
million. The asset was transferred to the special servicer in September 2009
and became real estate owned (REO) in March 2010. The trust incurred a $12.0
million realized loss when the asset was liquidated during the August
reporting period…[T]he loss severity for this asset was 44.2%

As corporations are increasingly using “jingle mail,” the prospect for the future of CMBSes—even those that went through several good years. Or for the concept of an “ongoing concern,” or a strong recovery. (That latter concept seems to fade with each passing day.)

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A Curious Choice for a Sunday New York Times Op-Ed

by Beverly Mann
crossposted with Annarborist

A Curious Choice for a Sunday New York Times Op-Ed

According to Republican pollster Whit Ayres in an op-ed piece, “It’s Still the Year of the Outsider,” published Sunday in the New York Times, it will be extremely difficult for Democrats to use their “failed policies of the George W. Bush administration” strategy against Republican Senate candidates who were nowhere near Washington during the Bush years.

So Mr. Ayres thinks that what matters is that it would be new lawmakers rather than the same old ones who would reinstate failed policies, not that the policies themselves failed.

He also thinks that because his recent poll shows that a majority of independents think that “[h]aving a president and Congress controlled by the Democrats has not worked well for the country because, from the economy to the deficit and the debt, the Democrats have not gotten the job done”—one of two options respondents were asked to choose from—they also think that having a president and Congress controlled by the Republicans worked well for the country because, from the economy to the deficit and the debt, the Republicans brought the country to its current state.

But he has to just guess about this, because his poll didn’t offer it as an option. Maybe next time.

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