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

Argentina Avoids IMF Default…

…at least for now:

Argentina agrees to meet IMF debt deadline Argentina on Tuesday agreed to make a $3.1bn payment to the International Monetary Fund, narrowly avoiding what would have been the biggest single default in the fund’s history…

Details of how the IMF and Argentina broke the impasse were unclear on Tuesday afternoon. But people close to the negotiations told the Financial Times that Argentina had agreed to several IMF demands over the country’s treatment of its private creditors. The most important of these is that Argentina should agree to enter formal negotiations with its private creditors to restructure the country’s defaulted sovereign debt. Until now, Argentine authorities have gone out of their way to avoid using the word “negotiation” and, according to creditors, have done everything possible to delay the process.

It’s a messy, messy situation with no easy way out. The choice for the IMF is to: a) let Argentina default, thereby losing the money that they’ve already lent them, but cutting off the risk of losing more money; or b) keep letting Argentina string things along, hoping that things will get better. The choice for Argentina is to: a) default, thus saving billions of dollars in loan repayments but losing the ability to borrow any further, thus potentially making the recovery much, much harder; or b) keep struggling to send payments to the IMF, thereby preserving the ability to borrow further to help get the economy back on its feet. Unless some Good Samaritan comes along with outright gifts of several billion dollars to Argentina, there are no good choices in this situation.


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The Role of Progressive Blogs

Kos wrote an excellent post yesterday about (arguably) the most important roles that progressive blogs have assumed: fact-checkers for the media, and tactical assets for the Democratic party in the battle to unseat George Bush. If the phenomenon of blogging interests you, take a look at it.


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Exuberance in the Bond Market

Check out what’s happened to the yield on the 10 year treasury note in recent days:

Ever since last Friday’s weaker-than-expected employment report, the bond market has been going like gangbusters. Yields on 10 year government bonds have plunged from over 4.0% to 3.7% in a matter of just a few days – a truly remarkable drop.

The financial press has mainly been explaining this as due to the fact that the employment report reassured investors that the Fed won’t raise rates any time soon. Perhaps. But were bond market participants really expecting the Fed to increase rates that soon? And do moves in the Fed funds rate really affect the 10-year bond yield so dramatically? I’m not convinced.

Here’s another theory to try on for size: maybe Friday’s employment report convinced some important bond market players that the recovery has already passed its prime, and that the economy won’t be zooming ahead for the rest of this year like many people thought a month or two ago. If the economy fails to strengthen later this year, then the demand for borrowed money that the bond market was expecting won’t materialize, so long rates won’t rise later this year as previously expected…


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The Sunshine State

The Sunshine State is looking sunny for one presidential candidate, and it’s not Bush. This despite Florida’s modest (2.8% in 3 years) job growth:

If, as I’ve argued before, job losses hurt Bush (e.g., in Ohio and Pennsylvania) then why won’t job increases help him in Florida? In a nutshell, Florida’s working-age and overall population growth has outstripped job growth by far. It would be astounding for a state to add 1 million people, as Florida did, and not see some increase in jobs. Moreover, income growth is stagnant and seniors are not happy with talk about Social Security cuts and they’re not thrilled by the prescription drug plan either.

For the details and links, read the full Florida post at The American Street.


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Further Declines in Consumer Confidence

From CNN/Money:

NEW YORK (CNN/Money) – Consumer confidence slid further in early March, according to the results of a relatively new private survey released Tuesday.

The monthly consumer confidence measure compiled by Investor’s Business Daily and TechnoMetrica Market Intelligence, a private research firm, slid to 54.5 in March from 56.5 in February. The index had hit a 22-month high of 60.6 in January.

Once again it’s worth reiterating that confidence levels were extremely high in January. Nevertheless, the continued drop in consumer confidence does not bode well for the continued recovery. This goes hand in hand with reports from the IRS that tax refunds are only about $100 more than last year, on average. The Treasury Dept. had forecast that they would be $300 more. With negative income surprises like that, declining consumer confidence seems less of a mystery…


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Fixing His Own Mistakes?

Last Thursday President Bush talked about the economy while visiting Bakersfield, CA. As usual these days, he used the chance to lobby for making the 2001 tax cuts permanent:

[W]e need to make sure the tax cuts are permanent. See, the tax cuts are set to expire. That’s what a lot of people don’t understand. This is an important part of the dialogue in Washington, D.C. now, is how to make sure the economy continues to grow. These job creators need certainty in the tax code. You can’t have taxes go down one year and up the next. They need certainty when it comes to planning. They need to be able to have certainty when it comes to their investment deductibility. That’s what they need. And yet aspects of the tax code are set to expire.

Those dastardly, devious Washington D.C. types! How could they arrange such a terrible tax system where taxes are going down one year and up the next?

In fact, he’s right – uncertainty in the tax code really does tend to inhibit business spending. So who is responsible for these down-one-year, up-the-next tax cuts? Of course, Bush did sign these down-and-up tax cuts into law back in 2001 – but at least he must have really chewed them out for setting up such a crazy tax scheme, right?

George Bush, June 7, 2001: Remarks by the President in Tax Cut Bill Signing Ceremony:

This tax relief plan is principled. Today is a great day for America. It is the first major achievement of a new era, an era of steady cooperation. And more achievements are ahead. I thank the members of Congress in both parties who made today possible. Together, we will lead our country to new progress and new possibilities. It is now my honor to sign the first broad tax relief in a generation.

Remember this, whenever you hear Bush talk about how harmful it is for the economy to have taxes changing erratically from year to year: he didn’t think it was such a bad idea back in 2001. In fact, he thought the 2001 tax cut plan, with its down-and-up taxes, was a great idea. Why? Because, as has become standard operating procedure in the Bush White House, political expediency trumped economic sensibility. And that is exactly why after three years in office, the Bush White House has been unable to do anything to help the economy.


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Consumer Debt

I just took a look at last week’s release of the Fed’s Flow of Funds Report for 2003. It shows debt levels, especially among consumers, that have increased very rapidly in recent years. Much of this is due to the famous increase in mortgage debt that consumers took on last year, but other types of consumer debt also grew at a healthy clip. In all, consumer debt grew by 10.4% in 2003.

The odd thing is that such rates of increase in consumer debt are more typical of a year near the peak of the business cycle than a year near the trough. In fact, as this CBS Marketwatch story pointed out, the last time consumer debt grew this fast was back in the boom year of 1988.

I confess to being a bit puzzled. I have never really heard a satisfactory reason for why consumers have recently been willing to increase their debt at such a rapid rate when their incomes have been stagnant. Typically when the economy is slow we see consumers paying down debt, or at least acquiring it more slowly, because they (sensibly) worry about their ability to repay. But not this time.

In my opinion, low interest rates are not a sufficient explanation for the boom in consumer debt. Interest rates are almost always very low at this point in the business cycle. Real interest rates are not lower than usual right now (e.g. they are about the same as in 1993, which was arguably a similar point in the last business cycle – see this post for data). Perhaps people are being fooled by the low nominal rates, even though real interest rates are not low? Is this phenomenon all driven by money illusion? I’d like to think not, but until I hear another convincing story, that’s what I’m left with…


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Blix Book

Former UN Chief Weapons Inspector Hans Blix has a book coming out, Disarming Iraq: the search for weapons of mass destruction. Based on this Blix interview in the Independent, Blix isn’t pulling any punches:

“… My gut feelings [at the start of renewed inspections], which I kept to myself, suggested to me that Iraq still engaged in prohibited activities and retained prohibited items, and that it had the documents to prove it” …

But Mr Blix’s doubts set in when the inspectors were allowed back into Iraq at the end of that month, exactly four years after they were pulled out, as the US/UK bombing campaign of Operation Desert Fox started. They inspected suspicious sites, acting on tip-offs from the intelligence agencies, but they found no credible evidence of WMD. ” I said, ‘If this is the best, what is the rest?'” In fact, he adds: “Considering how misleading much of the intelligence given us eventually proved to be, perhaps it was a blessing we did not get more.”

He tells of a conversation with Mr Blair, one month before the war, amid a controversy over the alleged presence of mobile biological weapons production facilities after the inspectors had been unable to confirm the intelligence claims.

“I added that it would prove paradoxical and absurd if 250,000 troops were to invade Iraq and find very little. Blair responded that the intelligence was clear Saddam had reconstituted his weapons of mass destruction programme. Blair clearly relied on the intelligence and was convinced, while my faith in intelligence had been shaken.”

[snip] … On the wall of Mr Blix’s study is a framed letter from Bill Clinton, congratulating him after his retirement on his 16 years at the head of the IAEA. “I don’t expect I’ll be getting one from Bush,” Mr Blix says drily.


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That Liberal Media

In the NYT today:

Because that group is patriotic and somewhat fiscally conservative, some experts said Mr. Kerry, a New Englander, would not appeal to them.

The piece is otherwise an informative and interesting analysis of Florida. But seriously, what was the reporter, Abby Goodnough, thinking when she wrote that sentence?

Goodnough does give the latest Florida poll results, and they are encouraging:

In the latest poll here, sponsored by The Miami Herald and The St. Petersburg Times, 49 percent of the 800 registered voters surveyed said they would vote for Mr. Kerry if the election were held now, and 43 percent said they would for Mr. Bush.


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