The Federal Reserve released its annual monetary policy report to Congress today.
It’s good reminder of the year-that-was and provides some modest new insights into the Fed’s plan for the coming years. Here are the highlights:
1. The wealth catch. The Fed reiterated in its annual report that “households’ desire to rebuild wealth” will probably be one of the headwinds to the recovery. And wealth rebuilding – at least in the form of a higher savings rate, has yet to start in earnest. While personal savings as a per cent of disposable income are off their lows (see the graph from the BEA) they’re well below their pre-bubble levels (and trillions in wealth have been lost since then). On the upside at the end of the third quarter, the ratio of debt service payments to disposable income had fallen back to their 2001 levels (See graph from Fed’s report). It’s a positive sign, no doubt, but the figures don’t break out how much debt service people aren’t paying because they’ve lost their houses to foreclosure, and how much represents genuinely lower payments.
2. The report said that ABS backed by private student loans was almost entirely dependent on Talf financing. At first blush, this might seem obvious – you can’t repossess someone’s college degree, so the loans have no practical collateral. But it’s extremely difficult to avoid paying your student loan debt in the US – even in bankruptcy, a former student typically can’t be relieved of their loans. But a quick glance of Sallie Mae’s quarterly report shows that – though people may remain saddled with the debt, many still aren’t paying – some 12.2 per cent of loans through private education loan trusts were expected to default from settlement to maturity.
3. It ain’t over til it’s over. Read more
What timing. On the day that the new coalition government starts down the road of rapid deficit reduction, Adam Posen, external member of the Bank of England’s Monetary Policy Committee, throws a well-aimed grenade into the mix. The questions he asks should make everyone pause for thought.
Today, the new government was displaying its new fiscal probity and claiming this was the route to economic happiness. George Osborne, chancellor, said: Read more
The Bank of Japan reiterated this morning that the country’s economy was beginning to “recover moderately, induced by improvement in overseas economic conditions.”
Changes in Japan's real GDP, compared to other recessions. I added in the red line – an approximate update from the GDP figures released last week.
The travails of the euro and the US’s soft-pedalling on the renminbi having emptied Tim Geithner’s trip to China of much potential drama, the revaluation lobby back in Washington have tried a new tack. Charles Schumer, senator for Stronger Renminbi, and some of his colleagues have demanded that Beijing authorise the release of the staff report which forms part of China’s annual “Article 4″ IMF healthcheck for last year and includes the fund staff’s views on the exchange rate. More than 80 pc of IMF member countries publish staff reports, but China, as it is entitled to do, is not among them. It releases instead something at one remove, a rather more opaque summing up of the IMF executive board’s discussion of the report.
The IMF has been embroiled in these rows before, and for a while went so far as to refuse to discuss the Chinese economy in the executive board to avoid disputes. But it has also stated pretty clearly that it thinks the renminbi should be liberalised, and still not much has happened. While it’s good to have US senators pressing the cause of transparency within the IMF, with whatever motive, it’s pretty unlikely that what the fund thinks is going to tip the policy balance in Beijing.
The first £5.75bn of spending cuts has just been announced by George Osborne, Conservative chancellor, and David Laws, his Liberal Democrat chief secretary, in the Treasury garden. It is something of a spectator sport for large numbers of Treasury officials, who seem either keen to get the knives out, or who have too little to work on and are ripe for the chop.
But these cuts represent just the starter, “the first steps” as Mr Laws admitted. The main course is coming later. This near £5.75bn (the announced £6.2 net the £500m which will be recycled back into frontline services) is tiny compared with the £40bn to £50bn that is coming from 2011 onward. So it is worth not getting too excited by today’s cuts. Read more