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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Dollar
May 24, 2010 at 10:00 AM

About that double-dip: Europe’s crisis isn’t the only chilling evidence

The end of May rolls around amid great anxiety. Even the oil spill in the Gulf of Mexico gives a dark back beat, symbolic of our complex challenges, institutional weaknesses, unrealistic appetites and how much we don’t know. The markets are trying to make a wobbly recovery this morning, but even a smidgen of bad news could send the indices south again.

The most ominous news last week didn’t concern the euro. Rather, it was the consumer price index, rising in April at the lowest rate since 1966. Alas, we don’t have a 1960s economy, with robust industry, worldwide economic dominance and a middle class with ever rising income and security. The CPI seemed to indicate that Fed Chairman Ben Bernanke’s sum of all fears remains: deflation. (Oil prices toppled, a real leading indicator of recovery or slowdown).

That, combined with the European situation and the ongoing unemployment crisis at home, would put us the closest to a double-dip that we’ve been since this very weak recovery began. It’s not weak for everyone, to be sure. The bailed-out banks are giving record bonuses, as well as increased perks and benefits.

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Comments | More in Dollar, Eurozone, Federal Reserve, Global economy, Inflation, International economy, Outlook, Stock market

April 5, 2010 at 9:45 AM

A rumble at the Fed and lessons from the Rio Tinto prosecution

The Federal Reserve Board is holding a routine meeting this afternoon. But nothing is routine after a recession that has produced damage and unmasked distortions on a level not seen since the Great Depression — and in many ways never seen. The Wall Street Journal has a story about a debate shaping up between two factions on the board as to the exit strategy from the mammoth amounts of money pumped into the system to prevent deflation.

One argues that the economy is still weak, with high unemployment dampening spending and low house prices, so deflation remains a danger. The other says inflation is being masked by some of these same factors and could break out if the Fed doesn’t move faster to raise rates from essentially zero. Ben Bernanke doesn’t have command of the board as did his predecessor Alan Greenspan, so this lack of consensus is telling.

Not everything is in the Fed’s control. For one thing, demand for Treasuries fell in the most recent auction, a reminder that rates may have to rise to entice investors into U.S. debt. Also, as Greenspan said in the 1991 downturn, “you can’t push a string.” There’s a limit to what interest rates and monetary policy alone can do when the economy remains fundamentally broken.

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Comments | More in Bailout, China economy and business, Deficit, Dollar, Federal Reserve

February 2, 2010 at 10:00 AM

Cheney’s ‘Deficits don’t matter’ becomes Obama’s hot potato

Top of the News: Much of the media yesterday kept repeating that President Obama’s budget includes the largest federal deficit in American history. This is not true. One must ask whether they are careless and ignorant — the same bunch that said in 2006 housing prices would always keep rising — or are they partisan?

The key measure is the deficit as a percentage of GDP. Washington’s deficit in 1943 was more than 30 percent; the current number is around 10 percent. We’ve now been embroiled in two wars lasting longer than World War II. The top tax rate then was 94 percent vs. today’s 33 percent, a product of years of tax cutting and loopholes. In addition, the worst economic downturn since the Great Depression has severely cut tax revenue and required a robust response.

One first is true: President Obama inherited the largest deficit in history.

Deficit projections are extremely fluid, dependent on such factors as how quickly the economy — and thus tax revenue — recovers, whether taxes are raised on the wealthy, etc. In the late 1980s and early 1990s, experts argued that eliminating the deficit was impossible. Yet it was done quickly thanks to the modest Clinton tax increases and the economic boom of that decade.

The real question is: When does a deficit matter?

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Comments | More in Deficit, Dollar, Politics and the economy, Sustainability, Tax policy

October 8, 2009 at 10:10 AM

A look east for signs of a global recovery

Top of the News: The global recession was seeded in America. Recovery will depend heavily on Asia.

Thanks to aggressive stimulus, continued exports and monetary policy, Asia appears on track to grow sharply in 2009 and but less strongly in 2010, according to a forecast from RGE Monitor. The big drag will be Japan, which is expected to contract this year and grow by 1 percent in 2010. China is due to expand at an 8 percent rate, which looks good but is still well below its boom years.

How fast-developing Asian nations handle the reset in the West will be an important marker. The big export-led push of the early- and mid-2000s won’t work now. America, especially, but also Europe, continues to deal with huge debt loads and weak consumer demand.

That creates a mixed picture for the Puget Sound region. A weak dollar and stimulus-driven demand for commodities in China may help Washington exports. But the ports will continue to see weaker import traffic. Another critical unknown: Whether the Obama administration can increase China’s appetite for American goods.

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Comments | More in Consumer spending, Dollar, Trade

October 6, 2009 at 9:10 AM

A secret plot to topple the dollar? The markets seem to believe it

Top of the News: Back in the ’80s, Treasury officials would try to “talk down” the value of the dollar in an effort to boost American exports. Now the talk is coming from international journalists and if it’s grounded in reality, it represents the beginning of a monumental shift.

Robert Fisk of the Independent reports that Arab states, along with China and Russia, have begun a “secret” effort to stop trading oil in dollars, instead using a market basket of other currencies. “This sounds like a dangerous prediction of a future economic war between the U.S. and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy,” he writes.

It could mean trouble much sooner. Undermining the dollar as the currency of oil would be a major blow to its status as international reserve currency — and suddenly American deficits and the expansionary policies of the Fed would bring profound consequences. They would swamp any benefit to exports.

Not for nothing did gold hit a record today as the dollar fell. On the other hand, when the crash happened, global capital still rushed to the safety of the dollar and Treasuries. The question is, how long will this lucky trend persist in a rapidly changing world that includes an overstretched and weakened United States?

As the story evolves this morning, central banks are denying the “plot.” And with their big dollar holdings, central banks in China and elsewhere have much to lose. But the underlying stresses on the dollar are significant enough that some in the market don’t buy the denials.

Wednesday update: The Daily Beast reports on an economist’s view that the weaker dollar is part of “Obama’s secret plan” to create new jobs. Do you buy this? If so, it’s risky given the underlying stresses and weaknesses of the economy.

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Comments | More in Dollar

September 8, 2009 at 10:00 AM

Investors set aside their dollars: Good, bad and ugly

Top of the News: There’s “good” falling dollar and “bad” falling dollar, and the question is which one we’re seeing?

As the dollar hit a new low for the year, we’re probably watching both. With the worst of the financial crash averted, investors are moving out of dollars into stocks, commodities and the wonderful new “innovations” our friends on Wall Street are brewing.

That’s good in as much that it showed 1) even with all our troubles, the dollar was still seen as a safe haven; 2) investors are feeling freer to move capital into what one hopes would be productive, job-creating roles in a recovering economy, and 3) a cheaper dollar should help American exporters, which is especially important in Washington state.

So what’s the downside?

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Comments | More in Dollar, Jobs/Unemployment

June 24, 2009 at 10:00 AM

Boeing isn’t alone in business missteps, but that’s little consolation

Top of the News: If it gives Boeing any comfort, it hasn’t yet reached the threshold of history’s biggest business blunders.

Those would include the Edsel, a car perversely named after Henry Ford’s much abused son, which cost Ford $400 million to develop. There was the $2 billion Mukluk dry hole drilled off the coast of Alaska in 1983 by Sohio, Diamond Shamrock and partners, which showed the U.S. was indeed past its peak and no amount of “drill, baby, drill” would change it — price tag: $2 billion. And the disastrous Penn Central merger, where managers of the New York Central and Pennsylvania railroads battled each other while the company burned.

Did I mention New Coke?

Sometimes companies recover from such costly missteps — sometimes not. The Mukluk disaster, for example, led T. Boone Pickens to start the shareholder revolution against big oil, resulting in consolidation of the industry. “They are cannibalizing their capital,” he told me at the time. His big peeve: Imperial managers who faced no accountability for their failures.

Nota bene to Boeing (and that’s not the name of a cheap Italian supplier).

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Comments | More in Aerospace/Boeing, Bailout, Dollar, Outlook

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