Headline News Archives

Monday 12.26.2016

Janet Yellen can't find the natural interest rate

There’s a lot of talk these days about the so-called “neutral” (or “natural” or “terminal”) interest rate projections of the Federal Reserve. In fact, their projection of this number is a key argument in their ongoing decision to keep rates at historically very low levels for what has been an extended period of time. (Specifically, Federal Reserve officials have argued that the neutral interest rate has sharply declined in recent years, meaning that apparently ultra-low interest rates really do not signify easy monetary policy.)

What is this neutral rate? The neutral rate is simply the federal funds rate at which the economy is in equilibrium or balance. If the federal funds rate were at this mysterious neutral rate level, monetary policy would be neither loose nor tight, and the economy neither too hot nor too cold, but rather just chugging along at its long-run optimal potential.

The underlying theory is that loose monetary policy — where the Fed’s policy rate is set below the neutral rate — can temporarily stimulate the economy, but only by causing price inflation that exceeds the Fed’s desired target (which, by the way, eventually causes overheating and a crash). On the other hand, if the Fed is too tight and sets the policy rate above the neutral rate, then unemployment creeps higher than desired and price inflation comes in below target.

In short, the neutral interest rate is one where the central bank is not itself distorting the economy. Monetary policy would really be nonexistent, as the Fed would not be altering the interest rate resulting from a free market discovery process between borrowers and savers. (This of course raises the question, why do central planners need to fabricate something that would naturally exist in their absence?) This is near where Yellen actually thinks we are these days, hence she sees little urgency in raising rates and thus lessening what, on the face of it, looks like a very loose current monetary policy.

Bundesbank Hauls its Gold back from New York & Paris Faster than Planned

A “trust-building” measure after an enormous hullabaloo. “In 2016, we brought back again substantially more gold to Germany than initially planned; by now, nearly half of the gold reserves are in Germany,” Bundesbank President Jens Weidmann told the German tabloid Bild in what has become an annual Christmas interview about gold – to soothe the nerves of his compatriots.

Because they’d been frazzled, apparently, by this whole saga. The German Bundesbank, which is in charge of managing Germany’s gold hoard of 3,381 tons, the second largest in the world behind the US, got into hot water in 2012 when rumors were circulating that some or much of its 2,000 tons of gold stored in New York, London, and Paris might not be there anymore, that it might have been melted down, leased, or sold.

The ensuing hullabaloo left some folks at the Bundesbank red-faced. Then the Rechnungshof (the federal government’s independent office of financial control) told the Bundesbank to rethink its overseas gold hoard. So the Bundesbank got to work.

And in January 2013, it promised that by 2020 it would bring back all 374 tons of its gold that it kept at the Banque de France in Paris and 300 tons of its gold at the New York Fed.

The Holiday Shopping Season Is Losing Some of Its Power

The holiday shopping season is losing some of its power in the year's sales. November and December now account for less than 21 percent of annual retail sales at physical stores, down from a peak of over 25 percent, and experts believe it'll keep dropping. Those extra percentage points would have translated into an extra $70 billion more in buying for last year, says Michael Niemira, principal at The Retail Economist.

The season had steadily gained in importance and peaked in the early '80s, before the dominance of big discounters like Wal-Mart stalled its growth as shoppers began moving away from department stores. Still, the two-month period held its own through the mid-'90s, when online shopping for deals took hold.

"There was a mindset even before online shopping," said Niemira, whose data goes back to 1967. "But this just accelerated it."

In general, many people are shopping for the holidays all year long now, mirroring the trend for back-to-school items. Heavy discounting has diluted sales, and with big promotions throughout the year, shoppers no longer hold off making their biggest purchases until the holidays.

What To Expect When The Next Financial Crisis Hits

The Shocking Retirement Crisis Coming Your Way

The nation’s largest retirement system is in serious trouble… The $303 billion California Public Employees’ Retirement System (CALPERS) just announced that it’s lowered its annual assumed rate of return to 7% from 7.5%. That means retirees will have to contribute more money to the plan to make up the difference in expected return.

This shortfall is just a small piece of the massive U.S. state and local pension funds deficits that are going to explode in the next decade. And the total amount of the shortfall will astound you…

Bloomberg reports that there is an estimated $1.9 trillion shortfall in U.S. state and local pension funds. These government retirement systems aren’t going to be able to fix this colossal mess without workers and taxpayers footing the bill. That’s going to cause a lot of pain for people like you. And I hope you don’t think you can rely on Social Security to help fund the gap. It has a funding shortfall estimated at $13.4 trillion.

That means your Social Security benefits will be cut big time… and you’ll likely see massive tax increases. Government control over large swaths of our retirement system is about to become an unmitigated disaster that few retirees have been told is coming. This hasn’t come as a surprise to those of us who believe in personal liberty and free markets.

The U.S. Prepares To Sell Of Its Oil Reserves

The U.S. is beginning to wind down one of the core energy security policies of the past half century as the boom in domestic drilling eases concerns about supply.

The U.S. Department of Energy could begin to sell off some of its strategic petroleum reserve (SPR) as soon as January, the beginning of a multi-year process to shrink the nation’s stockpile of oil. Congress has authorized DOE to sell off $375.4 million worth of oil in its recent budget resolution. The DOE said that such a sale could be held in January 2017.

To be sure, part of the motivation to sell crude is to finance upkeep for the SPR itself. The reserves are held in salt caverns in Louisiana and Texas, setup decades ago in the aftermath of the Arab Oil Embargo in 1973. The SPR system can hold more than 700 million barrels of oil, the largest strategic stockpile in the world. The idea is that the SPR holds 90 days’ worth of oil supplies, which could be released in the event of a global outage. A release has only occurred a handful of times, such as the Persian Gulf War, Hurricane Katrina and the Arab Spring.

Some of the storage systems are rusting and corroding after decades of use. In September, the DOE issued a report to Congress, which came to a dire conclusion about the condition of the reserve. “This equipment today is near, at, or beyond the end of its design life,” the report said. The sale "will allow the Department to take necessary steps to increase the integrity and extend the life” of the reserve, a DOE spokesperson said in December after the budget resolution was passed.

A New Crisis Is Brewing in Spain

When the Rajoy administration took the reins of power at the end of 2011, at the height of Spain’s debt crisis, the country’s Social Security fund had a surplus of over €65 billion, the result of a gradual accumulation of funds since the end of the 1990s. That money was supposed to serve as a nationwide nest egg to help cover the growing needs of Spain’s burgeoning ranks of pensioners. Instead, it has been used by the government to fill some of its own massive fiscal gaps, with the result that now, five years later, the total surplus has shrunk by 75%, to €15 billion.

Things have gotten so bad that in October the Spanish government was forced to admit to the European Commission that by the end of next year the surplus will have become a deficit, of around €2.6 billion. In other words, a fund that took 16 years to build up will have been plundered dry in less than half that time, at an average rate of around €11 billion a year.

The outflow reached torrential proportions this year. To date the government has removed over €19 billion from the fund — more than remains in its coffers. The biggest ever one-off withdrawal took place at the beginning of December when Spain’s new coalition government, with Mariano Rajoy still at the helm, plucked €9.5 billion out in one fell swoop. Part of the money will be used to cover the extra pay check Spanish civil servants receive at Christmas.

Removing such large amounts from the fund for fiscal purposes was against the law – until recently. As El Pais reports, the rules established to regulate the management of the fund set an annual withdrawal limit of just 3% of annual spending on public pensions. That would have meant that this year the maximum the government would been able to remove was €3.35 billion. But that 3% limit was suspended in 2012, the same year that the government spent tens of billions of euros bailing out Spain’s bankrupt savings banks and their creditors.

Iran negotiated to pay only half price for its $16.6 billion Boeing plane deal

Iran said on Sunday it had negotiated to pay only about half the announced price for 80 new Boeing airliners in an order that the American planemaker had said was worth $16.6 billion.

Boeing and its European rival Airbus have both signed huge contracts this month to supply airliners to Iran, the first such deals since international sanctions were lifted under a deal to curb Tehran's nuclear program.

Replacing Iran's antiquated civil aviation fleet is one of the biggest economic opportunities of the 2015 accord to lift sanctions, which was negotiated by the outgoing administration of U.S. President Barack Obama. President elect Donald Trump is a vocal critic of the pact.

Despite Iran's great need for new planes to replace those from the sanctions era, it has entered the market at a time when Boeing, Airbus and smaller planemakers have all faced a downturn in orders, and are therefore expected to offer deep discounts.

Millionaires, Drug Dealers And Senators Caught Using Food Stamps Illegally This Year

What do an Iranian millionaire, a state senator, a drug dealer and a polygamist have in common? They all face charges of misusing food stamps this year.

Around 44 million people received benefits from the Supplemental Nutrition Assistance Program (SNAP), also called food stamps, in 2016. The whole program cost about $70 billion.

Only one cent of each dollar is spent fraudulently, according to the most recent available data from the Department of Agriculture (USDA), which manages the program. Still, that’s about $70 million dollars of federal taxpayer money that was likely wasted this past year.

Here are few of the strangest cases of food stamp fraud in 2016. An Arizona Democratic lawmaker was indicted for illegally getting food stamps and falsifying her application to the program in June. (RELATED: Democratic Lawmaker Indicted On Food Stamp Fraud). Cecilia Velasquez eventually pleaded guilty to charges that she gave a false address on a food stamps application, and falsely claimed to have two dependents. She also admitted to letting two other people use her Electronic Benefits Transfer (EBT) card.

Deutsche Bank settles with DOJ for $7 billion

Minimum wage going up in 21 states

Come the new year, millions of the lowest-wage workers across the country will get a raise. Some of those raises will be very minor -- a cost of living adjustment amounting to an extra nickel or dime an hour. But in several places the jump will be between $1 and $2 an hour.

Even that may not sound like a lot, but it can provide a full-time worker with another $40 to $80 a week. That money, in turn, can make it easier to pay for essential expenses, such as groceries, commuting and keeping the lights on.

All told, the minimum wage is set to rise in 21 states, at least 22 cities, four counties and one region. The majority of those increases will take place on Jan. 1, but in Maryland, Oregon and Washington, D.C., they go into effect in July. Meanwhile, the state of New York will be bumping up minimum pay on New Year's Eve of this year.

The biggest minimum wage raises, percentage wise, will be in Arizona (up 24% to $10), Maine (up 20% to $9) and three Silicon Valley cities (up 20% to $12). In the absence of action from Congress in terms of raising the federal minimum wage, which has remained at $7.25 since 2009, states and localities have taken matters into their own hands.

U.S. Households Rack Up $971.1 Billion in Credit Card Debt

The U.S. economy seems to be humming along nicely, but one number suggests that many Americans are struggling financially: credit card debt.

Households added $21.9 billion in credit card debt in the third quarter, according to the latest study from WalletHub. The growth represents the largest increase in credit card debt for that period since 2007, bringing the total amount of debt outstanding to $927.1 billion.

“So it is not a question of whether consumers are weakening financially, but rather how long this trend toward pre-recession habits will last and just how bad it will get,” said Alina Comoreanu wrote in the study press release. “Unfortunately, the immediate forecast does not appear too bright. WalletHub projects that we’ll end 2016 with a net increase of roughly $80 billion in credit card debt, which would bring outstanding balances within striking distance of 2008’s all-time record and push the average amount owed by indebted households to a perilous $8,380.”

A spike in credit card balances could be a sign of financial fragility. Prior to the Great Recession, struggling households substituted credit for income. The fact that the nation’s total credit card debt is nearing levels not seen since 2008 suggests that the U.S. economy could in fact be a lot weaker than widely believed.

Lockheed Martin CEO promises to cut cost of F-35 after Trump meeting

Lockheed Martin CEO Marillyn Hewson promised to lower the cost of its F-35 aircraft after President-elect Donald Trump criticized the price. Hewson said she had a "good conversation" with Trump and personally committed to drive down the price of the F-35 Joint Strike Fighter.

"I had a very good conversation with President-elect Trump this afternoon and assured him that I've heard his message loud and clear about reducing the cost of the F-35. I gave him my personal commitment to drive the cost down aggressively," she said in a statement on Lockheed Martin's Twitter page. I know that President-elect Trump wants the very best capability for our military at the lowest cost for taxpayers, and we're ready to deliver!"

Hewson's statement came after Trump shared a tweet on Thursday criticizing the cost of the F-35 and threatening to commission a cheaper model from Boeing. "Based on the tremendous cost and cost overruns of the Lockheed Martin F-35, I have asked Boeing to price-out a comparable F-18 Super Hornet!" Trump said.

Hewson and Trump met on Wednesday when she said the conversation she had "conveyed our continued commitment to delivering an affordable aircraft to our U.S. and military allies," according to CNN.

How much you need to earn to be in the top .01% of every state

Restaurant-delivery business will ‘pedal’ pharmaceuticals too

Homer Logistics, a Manhattan restaurant-delivery company, will start “pedaling” prescription drugs in January, CEO Adam Price told On the Money.

Only a select group of the company’s 300 bicycle-using curriers, however, will be trained to handle the pharmaceutical deliveries.

Those employees will receive training and pass a “thorough background check” to ensure that they have not had a record of drug abuse, according to Price.

The assignment pays more than the meal deliveries, because the couriers can make more drop-offs and get more time to do so than the 30 minutes they are allotted for meal delivery. Only those workers who have high marks — Homer assigns a reliability score to each of its employees — will be selected.

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