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Argentina takes a giant step towards another big devaluation

Today the Argentine government announced that any Argentine using a credit card to buy stuff outside the country will have to pay an additional 15% when they pay their bill in pesos, although they can apply this amount to what they may owe in income taxes. This is nothing other than a flimsy attempt to disguise what is a 15% devaluation of the peso.

Those familiar with the goings-on in Argentina know that since last October, the government has been trying desperately to restrict the ability of its citizens to exchange pesos for dollars, because dollars have been in short supply. Imports have been strictly limited, and those traveling abroad must do the impossible to justify their right to buy dollars to pay for their expenses. But one big loophole remained: those with credit cards could continue to buy things overseas and pay for those purchases at the official rate. Now that loophole has been partially closed.

We have some good friends from Argentina staying with us right now, and they were dismayed (to put it mildly) to find out tonight that, starting September 1st, their expenses, if paid by credit card, will suddenly cost them 15% more.

At this point it is practically inevitable that Argentina will eventually declare a major devaluation of the peso. It will probably be at least 40% if not more. As of a few days ago, the "parallel" rate for the dollar was about 6.5, whereas the official rate was 4.6. In other words, the market has been expecting a 40% devaluation. After today's announcement, the parallel rate will undoubtedly rise even more.

When the government restricts people's ability to buy something—in this case dollars—that almost guarantees that the price of that prohibited thing will rise. If Argentines are not free to exchange their pesos for dollars, they will pay almost any price to do so. A currency which is not freely convertible soon becomes worthless. Unfortunately, I have seen this play out so many times in Argentina that I'm amazed that there are still 40-some million people in the country who are willing to suffer under their miserable excuse for a government.

If you want a good reason why the dollar is still so much in demand, this is one. The Fed may be acting irresponsibly, and our government may be spending irresponsibly, but things are not as bad here as they are in Argentina.

Quick updates




Unemployment claims haven't budged this year—they've averaged 374K per week, and that's the latest figure as well. So although the economy is not improving meaningfully, neither is it deteriorating. But there are improvements on the margin, as shown in the chart above. The number of people receiving unemployment insurance has dropped 18.5% relative to a year ago, and that represents 1.2 million people who are either now working or who have an increased incentive to find and accept a new job. 


Those who are working are seeing ongoing increases in their real incomes. Even though there are 5 million fewer jobs today than at the peak in early 2008, real incomes have reached a new high. Real incomes have risen at a 3.6% annualized pace over the past six months, and reeal disposable income is up 2% over the past year. None of this is anything to write home about, but it is still progress.

The economy continues to grow at a modest pace.

Paul Ryan knocks it out of the park

This man is a breath of fresh air: sincere, honest, and principled. He wants to fix the mess we're in, and he knows how and why. I'll let him speak for himself—here's my selection of his best lines tonight:

Maybe the greatest waste of all was time. Here we were, faced with a massive job crisis - so deep that if everyone out of work stood in single file, that unemployment line would stretch the length of the entire American continent. You would think that any president, whatever his party, would make job creation, and nothing else, his first order of economic business. But this president didn't do that. Instead, we got a long, divisive, all-or-nothing attempt to put the federal government in charge of health care. 
Obamacare comes to more than two thousand pages of rules, mandates, taxes, fees, and fines that have no place in a free country. 
After four years of government trying to divide up the wealth, we will get America creating wealth again. With tax fairness and regulatory reform, we'll put government back on the side of the men and women who create jobs, and the men and women who need jobs. 
The choice is whether to put hard limits on economic growth, or hard limits on the size of government, and we choose to limit government. 
College graduates should not have to live out their 20s in their childhood bedrooms, staring up at fading Obama posters and wondering when they can move out and get going with life. 
If a man like Paul Ryan can't fix what ails this country, then all hope is lost. Ryan knows where we have to go, and Mitt Romney has a proven record of doing what needs to be done to get there. Together they are, in my opinion, the best hope we have for a better future.

Jackson Hole thoughts

Here are some things that Fed Chairman Bernanke should be considering as he prepares to give his talk later this week in Jackson Hole.


Inflation expectations are rising. This chart shows the Fed's favorite forward-looking indicator of the market's inflation expectations (the 5-yr, 5-yr forward expected inflation rate embedded in TIPS and Treasury prices). In September of last year, this measure of inflation expectations was a relatively mild 2.0%. Today, it has climbed to almost 2.8%. This is by no means a big concern, since 2.8% inflation is only slightly more than the 2.4% annualized increase in the CPI over the last 10 years. But it does show the bond market is becoming a bit uneasy about the prospects for future inflation. More Fed ease at this point would be hard to justify.


The dollar is weak vis a vis other currencies. This chart shows the Fed's calculation of the dollar's inflation-adjusted value relative to a large basket of trade-weighted currencies and a smaller basket of major currencies. No matter how you look at it, the dollar is trading only slightly higher than it's all-time lows. More Fed ease could weaken the dollar further, and a weak currency tends to exacerbate inflationary pressures.



There is no shortage of money. The M2 measure of money is growing above its long-term, 6% annualized growth rate. Most of the extra growth has come from savings deposits, which now total $6.4 trillion, up from $4 trillion four years ago. For now, it's obvious that there is a tremendous demand for safe dollar liquidity, but should this change, a flood of money could be released from savings deposits into the economy in the form of extra spending. And of course, the Fed has already been extraordinarily generous in its provision of reserves to the banking system. For now that appears to have been justified by the world's voracious demand for dollar liquidity and safe dollar assets (bank reserves now function as a close substitute for 3-mo. T-bills). But that could change, and if the Fed fails to withdraw the reserves in timely fashion, it could support a massive amount of new money creation.


The economy is still growing, albeit at a modest pace. Since the recovery began three years ago, nominal growth has averaged about 4% a year. It dipped only slightly from that level in the past year. Real growth has averaged about 2%, and it too dipped only slightly in the past year. Jobs continue to expand, and new claims for unemployment are relatively low and stable. Thus, there are no signs that growth is slowing further.

UPDATE: In view of the above, it is not surprising that, while Bernanke left the door open to further easing measures in his Jackson Hole speech today, he made no promises. If the economy deteriorates then the Fed will do something. But for now, there is no sign of deterioration, just disappointingly slow growth. As Bernanke also said, it's the turn of fiscal policy to make a difference.

Global recovery perspective


Despite all the continuing problems in the Eurozone (the Euro Stoxx index is only up 38% from its recession lows, as compared to the 111% gain of the S&P 500), and the slowdown in China (the Shanghai Composite index is only up 25% from its October '08 lows), the global equity market has posted a 92% gain since early March '09, according to Bloomberg. We are still 20% below the 2007 highs, so it's still far from a complete recovery, but it's not unimpressive: global equity markets have recovered $23.6 trillion of their 2008-9 losses.

Consumer confidence remains very low


The Conference Board's measure of consumer confidence in August was weaker than expected (60.6 vs. 66). As the charts above and below show, although confidence is up from the all-time lows of the last recession, it is very close to the lows associated with every other recession in the past 45 years. This is a reminder that pessimism still rules. The best way to interpret the rally in equities in the past 3+ years is to see it not as a return of optimism, but rather as a grudging acknowledgement that things haven't turned out as bad as expected.


Still more signs of a housing bottom


The evidence continues to mount in support of the theory that we have seen the bottom not only in residential construction (up 44% since Feb. '11) but also in housing prices, as the chart above shows. Both the Case Shiller and the Radar Logic indices of housing prices are up in the year ending last June (+0.5% and +2.8%, respectively). Moreover, the Case Shiller index for this past June was almost identical to its level in June, 2009. The housing market has now suffered through almost seven years of the most wrenching adjustment imaginable, with prices and construction plunging over a four-year period and then consolidating over the past three years. That's plenty of time to work off a considerable amount of excess inventory and to reprice homes to appeal to new buyers.

Mark Perry has some interesting stats on how impressive the recent numbers have been here.

There are still many millions of homeowners who are underwater, and millions of foreclosed properties yet to be sold, but the dynamics of the housing market are changing. In the past year or so, we've passed through an inflection point in which conditions have shifted from a buyer's market to a seller's market. Now, thanks to incredibly low mortgage rates, housing prices are more affordable than ever before. The psychology of the marginal buyer is slowly beginning to shift: can he or she can snag that home for less if they continue to wait, or is it better to offer full price right now? There is already plenty of anecdotal evidence of bidding wars in some areas, and that could spread to more markets over the next year.


UPDATE: The purpose of this last chart is to illustrate how home prices have come back into line with rents, further bolstering the view that market forces have moved the housing market back into a sort of equilibrium.

The myth of the "balanced approach" to fiscal policy

Glenn Hubbard and Tim Kane recently launched a new blog, "Balance: Why Great Powers Lose It and How America Can Regain It," that looks very promising. Here's an excerpt from their opening essay:

... we have two political parties and two approaches to the trillion-dollar budget deficit. The liberal approach is to raise taxes and the conservative approach is to slow the growth of government expenditures.
A smarter concept of fiscal policy balance is one that prioritizes outcomes (more jobs, faster growth, less poverty) over inputs. The goal of good fiscal policy is less about equating revenue with outlays and more about the fiscal mix which optimizes long-term prosperity. The fact that the liberal “War on Poverty” launched half a century ago has failed to make a dent in poverty is a sign of the government’s imbalanced thinking. Balance means putting incentives for job creation first, not good intentions to alleviate suffering.
This growth-oriented approach makes a lot of sense, and we can already see how. As the chart below shows, tax revenues have been rising for more than two years, without any increase in tax rates, and even though this recovery has been the weakest on record; revenues are up because more people are working, incomes are rising, and corporate profits are strong. Revenues always rise in a recovery, and the stronger the recovery, the more they rise. Meanwhile, federal spending has been almost flat since the recession ended, thanks largely to Congressional gridlock. (Though this happy combination is not likely to persist much longer if entitlement programs are not cut back.) For now, the result is a welcome decline in the deficit as a percent of GDP, from a high of 10.5% at the end of 2009, to 8.5% today. We have also seen a welcome decline in spending as a percent of GDP, from a high of 25.2% in Q3/09 to 23.5% today. Much more remains to be done, but it is not impossible at all.