If the US defaults, short-term Treasuries, the most traded and liquid securities in the world and which often act as collateral for loans to banks and central banks, would lose their cash equivalence. This would immediately boost interest rates demanded by lenders while some lenders would refuse such collateral outright. Worse, as short-term funding is used in so many areas of the economy, the rise in rates would be pervasive.
Tag Archives: economics and eisenberg
Terrific Tax
Among the demands the Republicans have put forward to end the government shutdown is repeal of the 2.5% medical device tax which took effect 1/1/13. It is a spectacular tax because no one will change their behavior because of it. If you need an artificial hip, you will not now cancel your operation because of the small price increase. Most taxes, like the income tax which discourages work, alter behavior.
Bold Bernanke
In a surprising but gutsy move, the Fed will not start tapering this month. There are many reasons. The most compelling; the recent rise in interest rates needed to be checked as they harm the slow recovery, Congressional hijinks over the budget and debt ceiling look increasingly worrisome, an inflation rate that is worryingly low and the opportunity to unequivocally show markets that its primary concern is encouraging growth.
Disability Disincentive
One reason the labor force participation rate is so low is the explosive growth in those receiving Social Security Disability Insurance. Since 1980, the percentage of 20-64 year olds on SSDI grew from 2.3% to 4.7%. Half the rise is due to an aging work force, an increase in the retirement age and women’s increased eligibility for SSDI. The other half is due to easier eligibility criteria and higher benefits.
Taper Tiger
With a drop in the labor force participation rate to 63.2%, its lowest level since 8/78, the creation of only 169,000 net new jobs in August and revisions subtracting 74,000 new jobs in June and July, it’s now a toss-up whether the Fed begins tapering in September. If they do, expect the Fed to reduce its Treasury purchases by just $10 billion with mortgage backed securities purchases remaining unchanged.
Bogus Benevolence
The Friday File: Organizations often promise that 10%, 20%, or even all profits go to charity, while other firms promise that a percentage of revenues go to charity. Of course charitable giving is always good, but as a curmudgeonly economist, I much prefer the latter approach because it gives firms no incentive to boost salaries and bonuses to reduce or eliminate profits while still appearing to be benevolent.
Hot Lots
In a move to streamline operations and cash in on the home building renaissance, Weyerhauser is selling its home-building unit. The prize, 27,000 lots including 18,000 in market-constrained litigation happy California, mostly in L.A. and San Diego. Assuming no goodwill, if the home-building unit sells for $3 billion, that’s just $110,000/lot. At $4 billion it’s $150,000/lot. At those prices, the buyer will be a public builder of move–up homes.
Banking on Leverage
A proposal to increase capital ratios for the biggest financial firms to 6% for bank subsidiaries and 5% for bank holding companies while good, presents a huge loophole. A $150 billion bank would need $7.5 billion in capital. But if it puts $50 billion in a BHC, the subsidiary would have to hold $6 billion in capital, the BHC just $1.5 billion. That’s a leverage ratio of 33 (50/1.5), whoa!
Boys and Girls
The Friday File: In the US there are 105 boys born for every 100 girls. Older mothers give birth to more girls. By age 40, women give birth to 104 boys for every 100 girls and with each successive birth the probability of having a girl increases. By the seventh birth there are 103 boys for every 100 girls. No one knows much about fathers since daddy data are dismal.
Fly With Facts
The Friday File: While flying seems risky compared to automobile travel, seems is the operative word. For the decade ending in 2008 passenger fatalities per 100 million miles were 0.72 for automobiles, 0.05 for buses and trains and 0.01 for airlines. That means flying in a plane is 72 times safer than riding in a car and that the most dangerous part of air travel is getting to the airport.