Federal Reserve policy makers may start weighing additional steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts.

“At a minimum, the FOMC will have a serious debate about the policy options — what they should do, and what they expect to get from it,” said Roberto Perli, a former associate director in the Fed’s Division of Monetary Affairs, referring to the Federal Open Market Committee. “Growth in the first half was dangerously close to zero,” said Perli, director of policy research at International Strategy & Investment Group.

Read it all.

Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an “expansionary fiscal contraction”, as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

Read it all.

The biggest share of federal spending now goes for Social Security (20.4 percent in 2010) and Medicare (13.1 percent), the two entitlement programs that big majorities of Americans want to protect from any reductions, according to a recent poll. Together these two programs for senior citizens consume more than one-third of spending, far more than national defense, which accounts for just 20.1 percent, despite the increases of recent years….

Who pays all of these taxes? The best information on that comes from the Congressional Budget Office, which has tracked the tax burden for many years. The most recent complete data cover 2007. CBO figured in that year more than half of all federal taxes was paid by the top 10 percent of income earners. They paid 55 percent of all federal taxes in 2007, CBO said.
That’s a comprehensive figure, counting the income tax, payroll taxes, excise taxes and even the corporate income tax (borne by stockholders in the form of reduced dividends and appreciation). And perhaps surprisingly, the top 10 percent of earners pay a greater share of federal taxes now than they did before the Bush tax cuts, which Democrats constantly criticize as a giveaway to “the rich.” The top 10 percent paid 50 percent of all federal taxes in 2001.

Read it all

The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

“It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,” said Anthony Cronin, a Treasury bond trader at Societe General SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Maybe it’s the impetus to say we’ll need more of a concession.”

Read it all.

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.

More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

Read it all.

One disturbing fact from the McKinsey report is this: The number of new businesses, a traditional source of jobs, was down 23 percent in 2010 from 2007; the level was the lowest since 1983, when America had about 75 million fewer people. Large corporations are standoffish. They have about $2 trillion of cash and securities on their balance sheets, which could be used for hiring and investing in new products. Meanwhile, the latest University of Michigan Survey of Consumers reports that “record numbers ”¦ thought that their incomes would lag inflation over the next five years.” Note: They didn’t expect high inflation so much as low income growth.

It’s not that economics achieved nothing. The emergency measures thrown at the crisis in many countries ”” exceptionally low interest rates, “stimulus” programs of extra spending and tax cuts ”” probably averted another Depression. But it’s also true that there’s now no consensus among economists as to how to strengthen the recovery.

Read it all.

Federal Reserve Chairman Ben Bernanke offered a relatively glum view of the U.S. economy, acknowledging that it is growing more slowly than the Fed had expected, but predicted improvement later this year.

“The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets,” Mr. Bernanke said Tuesday, seeking””as he has before””to moderate expectations that the central bank can solve the economy’s lingering problems on its own. “In this context, monetary policy cannot be a panacea.”

Read it all.

The Obama Administration and Chairman Ben Bernanke’s Federal Reserve have bet on a recovery based on reflating asset prices with easy money, federal spending and temporary stimulus programs. Part of that bet was reflating the housing bubble.

The results are what we now see: higher stock prices for Americans lucky enough to own shares, but 2% growth and mediocre job creation, a housing recession stretching well into its fourth year, and soaring commodity prices that reduce real income growth.

Read it all.

From 2001-07, he argues, the dollar underwent a long, steady decline against the euro, tacitly encouraged by U.S. monetary authorities. In response to the dollar’s decline, investors diverted capital into inflation hedges, notably real estate, leading to the subprime bubble. By mid-2007, the real-estate bubble had burst. In response, the Fed reduced short-term interest rates rapidly, which lowered the dollar further. The subprime crisis was severe, but with looser money, the economy appeared to stabilize in the second quarter of 2008.

Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch””exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses””the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.

In March 2009, the Fed woke up and enacted QE1, lowering the dollar against the euro, and signs of recovery soon appeared. But in November 2009, QE1 ended and the dollar soared against the euro once again, pushing the U.S. economy back toward recession.

Read it all.

While better than expected, Friday’s employment numbers showed that the national economy still had a long way to go to fully recover. Though down from its peak of 10.1 percent in late 2009, April’s unemployment rate reflects only those Americans who are still actively looking for work.

As such, economists said the April jobs report was part of a larger picture of the economy that remained mixed. The rise in the unemployment rate reflects the survey of households, which indicated a 190,000 decline in employment in April. And recent data on initial jobless claims and other employment indicators have been weak.

“Millions of people are unemployed and many have left the labor market and given up,” Mr. Shapiro said. “Against that we are maybe creating 244,000 jobs. That is all well and good but it just shows you how much further we have to go to make a dent into what has happened in the labor market.”

“It gets the basic debate out there about the economy,” he added. “Is all we have seen the product of government stimulus, and are all the problems coming back or not?”

Read it all.

It’s obviously been a good week for the Obama administration. But it comes at a dangerous time, for both the administration and the economy. The excitement over tracking down Osama bin Laden could end up making the president and his advisers less panicked over the state of the economy. And they should be a little panicked.

For the second straight year, the recovery seems to be at risk of stalling. The economy grew at an annual rate of only 1.8 percent last quarter ”” eerily similar to the 1.7 percent growth last spring, just when job growth started slowing down. Fully 80 percent of people say the economy is in fairly bad or very bad shape, according to a New York Times/CBS Poll last month. More people say it’s getting worse than getting better, the opposite of a few months ago.

Read it all.

… if we’ve avoided rerunning the 1930s only to end up with a repeat of the 1970s, the public will judge… [Ben Bernanke] to have failed.

To this, the Fed has a stock response. It points to the all-urban consumer price index (CPI-U) and notes that it was up only 2.7 percent in March relative to the same month a year earlier. Strip out the costs of food and energy, and “core CPI”””the Fed’s preferred measure””is just 1.2 percent. When Google unveils its new index of online prices, it’s likely to tell a similar story.

To ordinary Americans, however, it’s not the online price of an iPad that matters; it’s prices of food on the shelf and gasoline at the pump. These, after all, are the costs they encounter most frequently. And with average gas prices hitting $3.88 a gallon last week, filling up is now twice as painful as when President Obama took office.

Read it all.

More than half of Americans (55%) describe the U.S. economy as being in a recession or depression, even as the Federal Open Market Committee (FOMC) reports that “the economic recovery is proceeding at a moderate pace.” Another 16% of Americans say the economy is “slowing down,” and 27% believe it is growing.

Read it all.

A group of the largest US banks and fund managers stepped up the pressure on Congress and the Obama administration to reach a deal to increase the country’s debt limit, saying that even a short default could be devastating for the financial markets and economy.

The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors about the US political system’s ability to forge a consensus on fiscal policy.

The most pressing budgetary issue confronting Congress and the Obama administration is the need to raise the US debt ceiling, which stands at $14,300 billion.

Read it all.

The U.S. dollar’s downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The ICE U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified.

Read it all.

Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That’s a dangerous game, given the need for investment to drive economic development. But it’s also increasingly typical of the world’s reaction to America’s mismanagement of the dollar and its eroding financial leadership.

The dollar is the world’s reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.

The Fed’s relentlessly easy monetary policy combined with Congress’s reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on….

Read it all.

The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion as the metal reaches a record, according to the fund’s board.

The fund, whose $19.9 billion in assets ranked it behind Harvard University’s endowment as of August, according to the National Association of College and University Business Officers, last year added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The holdings reached about $987 million yesterday, as Comex futures closed at $1,486 an ounce….

“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” [Kyle] Bass said today in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

Read it all.

Federal Reserve Bank of Richmond President Jeffrey Lacker Thursday said U.S. firms are increasingly looking for an opportunity to raise prices as more expensive commodities squeeze profit margins, raising the risk of inflation.

“In the absence of further energy-price increases, most forecasters do not foresee a significant acceleration in prices this year. We should not take that outcome for granted,” Lacker said at the University of Baltimore.

Earlier Thursday, the Labor Department said prices U.S. manufacturers and wholesalers pay for goods and materials rose a seasonally adjusted 0.7% in March as gasoline prices jumped and food prices fell.

Read it all.

The U.S. economy continued to improve over the last month on gains in manufacturing, but firms are feeling the effects of higher energy and raw material costs, the Federal Reserve said Wednesday.

“While many districts described the improvements as only moderate, most districts stated that gains were widespread across sectors, and Kansas City described its economic gains as solid,” the U.S. central bank said in its “beige book” summary.

Read it all.

Top Federal Reserve officials sent a clear signal that the Fed is unlikely to follow the European Central Bank in lifting interest rates from rock-bottom levels anytime soon, playing down the idea that soaring commodity prices will lead to broader U.S. inflation.

At the Economic Club of New York on Monday, Janet Yellen, the Fed’s vice chairwoman, said U.S. monetary policy “continues to be appropriate.”

Recent increases in prices of oil, grain and other commodities are “unlikely to have persistent effects on consumer inflation or to derail the economic recovery” and are “not likely to warrant any substantial shift in the stance of monetary policy,” she said. The key, Ms. Yellen added, is that households and businesses don’t expect inflation to take off in the long run.

Read it all.

The greenback…is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

Read it all.

The World Food Bank recently released a report saying food prices world-wide are now at “dangerous levels,” having gone up 29 percent in the past year alone. This clearly could contribute to political instability and push millions of people into poverty.

In actuality, it already has. It is no accident that the revolution now sweeping the Arab world primarily is centered in countries that import much of their food.

Food inflation should come as no surprise to those who shop at supermarkets in the United States, where checkout-counter shock is endemic. Grocers and wholesalers say it is not their fault. Farmers say they should not be blamed, for their costs have skyrocketed, too. Well, then, who or what is responsible?

Read it all.

The problems with the FCIC’s report, released at the end of January, stem from the Commission’s very inception: it was focused on the wrong topic. The FCIC investigated risky investments, lax regulation, excessive leverage. And it downplayed the more mundane, but vastly more important, collapse of the housing bubble.

The FCIC was set up to investigate a sidebar rather than the real story. Given the definition of its mission, the Commission did a reasonably good job. However, its 662-page report is a distraction from the real reasons why 25 million Americans are unemployed, underemployed, or have given up looking for work altogether. The real story doesn’t require 662 pages; it can easily be summed up in a few paragraphs.

Read it all.

Put it together. QE2 is due to run out this summer. Unless you think we’re creating so many jobs in a few months, that it’s obvious that we’re on the right track to full employment, then more QE seems in the cards.

Read it all.

From here:

Major food producers like Sara Lee Corp., Kraft Foods, General Mills and ConAgra Foods are dropping discounts and upping food prices by 6% to 10% at the stores.

Chinese President Hu Jintao, who travels to Washington this week for a state visit after a year marked by disputes and tension with the United States, said the two countries could mutually benefit by finding “common ground” on issues from fighting terrorism and nuclear proliferation to cooperating on clean energy and infrastructure development.

“There is no denying that there are some differences and sensitive issues between us,” Hu said in written answers to questions from The Washington Post and The Wall Street Journal. He said “We both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

To enhance what he called “practical cooperation” on a wide range of issues, Hu urged an increase in dialogues and exchanges and more “mutual trust.” He said, “We should abandon the zero-sum Cold War mentality” and, in what seemed like an implicit rejection of U.S. criticisms of China’s internal affairs, said the two should “respect each other’s choice of development path.”

Read it all.

Left unsaid [by the President], however, was the fact that job growth was not enough to absorb people entering the work force in the United States, much less to shrink the unemployment rolls.

R. Glenn Hubbard, dean of Columbia University’s business school and former chairman of the council of economic advisers for President Bush, remains a guarded optimist. He sees signs of the economy gaining speed.

“We could run as high as 200,000 per month this year, but keep in mind that might only bring the unemployment rate down to 9 percent,” Mr. Hubbard said. “That does very little for the person who is long-term unemployed.”

The so-called real unemployment rate, which includes those workers who are discouraged or have given up looking for work, stands at 16.7 percent.

Read it all.

[Scott] Pelley: How would you rate the likelihood of dipping into recession again?

[Ben] Bernanke: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.

Bernanke: It may not be. It’s very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.

The debate on Capitol Hill this week is over whether to extend the Bush tax cuts, which would likely increase the budget deficit.

Read it all.

The longer people stay out of work, the more trouble they have finding new work.

That is a fact of life that much of Europe, with its underclass of permanently idle workers, knows all too well. But it is a lesson that the United States seems to be just learning.

This country has some of the highest levels of long-term unemployment ”” out of work longer than six months ”” it has ever recorded. Meanwhile, job growth has been, and looks to remain, disappointingly slow, indicating that those out of work for a while are likely to remain so for the foreseeable future. Even if the government report on Friday shows the expected improvement in hiring by business, it will not be enough to make a real dent in those totals.

Read it all.

The global prosperity of much of the 20th century would seem to belie the pessimists, but I don’t think there is much doubt the moral authority of the West has dramatically declined in the face of the financial crisis. It has revealed deep fault lines within Western economies that have spread to the global economy.

The majority of Western governments are running fiscal deficits of 10 percent or more relative to GDP, but it is increasingly clear that there will be no quick fixes, that big government and fiscal deficits will not bring us back to the status quo ante. Indeed, the tidal wave of red ink has meant that the leverage-led or debt-led growth model is dead.

Developed countries will be forced to deal with their debt on every level, from the personal to the corporate to the sovereign. Being able to borrow may have made people feel richer, but having to repay the debt is certainly making them feel poorer, particularly since the unfunded liabilities that many governments face from aging populations will have to be paid for by a shrinking band of workers.

Read it all.