Fed struggles to halt march of stagflation

Why does it seem that such a disproportionate number of high quality reads seem to come from across the pond? Perhaps that distance gives them a perspective we lack, given our own closeness to matters here in the States.

No matter. This is from the Times of London:

"When sorrows come, they come not single spies, but in battalions,” said Claudius in Shakespeare’s Hamlet. Stagflation hadn’t been invented back in the Bard’s day, but, as with much of the man’s insights, his description of Ophelia’s desperate condition might well serve as a useful piece of modern economic analysis.

The ailing US economy is confronted not by a single threat but by a whole battalion of sorrows on the march that comprises deepening recession and accelerating inflation.

Last week the Government reported that in the year to January consumer prices rose by 4.3 per cent. This is so far above the top end of anybody’s definition of price stability as to be more than slightly alarming. The detail of the data showed just how pervasive inflation has become. It goes well beyond the usual suspects of oil and energy-related products and even food…

This is why people in the United States are worrying openly about stagflation. The rising inflation trend seems, at least so far, to be impervious to the weakening economy. Even as price pressures have picked up, the signs of recession have proliferated."

Go read the whole thing . . .


Fed struggles to halt march of stagflation
Gerard Baker
The Times, February 26, 2008

Category: Economy, Federal Reserve, Inflation, Real Estate

The Sham of Sovereign Wealth Fund Negotiations

While I am running around this morn, we have a guest post from naked capitialism, on all of those well meaning, non-meddling, only interested in return maximization  Sovereign Wealth Funds:   


The Sham of Sovereign Wealth Fund Negotiations

The Wall Street Journal reports today in "U.S. Pushes Sovereign Funds To Open to Outside Scrutiny," that the US Treasury Department talking to two large sovereign wealth funds, Singapore’s Temasek and the Abu Dhabi Investment Authority, as the first steps in a process to ""draft rules to oversee the behavior of such funds, without discouraging them from investing."

Let’s see if I get this straight. The US is running a chronic current account deficit, which means we are dependent on the kindness of foreigners to maintain our lifestyle. In other words, we have to run a capital account surplus, which is tantamount to having other countries buy our real or financial assets. And while the fall in the dollar has reduced our current account deficit somewhat,  it’s still at a high level. Ergo, we need our money fix.

Brad Setser, who monitors the international capital data closely, has been reporting for some time that the private demand overseas for US assets has fallen considerably. The key buyers now are foreign governments. And those governments, who used to be content to buy low-returning Treasury bonds, are now looking to diversify their holdings and earn higher returns. Enter the sovereign wealth funds.

What is comical about this whole idea is the idea that we have any say in this matter. Of course, the US can nix individual deals, as we did to Dubai Port World’s purchase of UK P&O Ports. Dubai Ports had to divest five US port operations; the UK imposed no such requirement. Similarly, the US blocked Chinese oil company CNOOC’s bid for Unocal blocked, which ruffled quite a few feathers.

But we’ve already let foreign banks make substantial investments into our troubled financial sector, which one can argue gives them strategic leverage. Yes, these are minority stakes, the investors don’t hold any board seats. Nevertheless, as eminence grise Felix Rohatyn pointed out, “You don’t need to appoint two directors to a board to have influence when you own 10 percent of the company.”

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UBS on a Trillion Dollar Meltdown

Interesting discussion from the FT (3 parts) with George Magnus, UBS senior economist advisor:

click for video

Thanks, Dominique!


View from the Markets
FT, February 25, 2008

Category: Credit, Derivatives, Video