By Daniel Costello
Reader H_Baskerville asked us the following question after reading our blog post this morning mentioning India's big gold purchases in recent weeks:
Can you talk more about why India would do this? What does it mean? Does this impact Treasury bond sales? Will other nations (BRIC) follow?
In short, big gold purchases from India or any other investor, and the resulting rise in the price of gold, could be the beginning of a long-term vote of "no confidence" in the dollar and the U.S. Federal Reserve. It certainly marks the strongest indication yet that some foreign governments are turning away from the U.S. dollar as the world's reserve currency.
Gold prices jumped to nearly $1100 an ounce this week and prices are now up 22.7% for the year, headed for a ninth straight annual increase.
Like India, central banks and other investors across the globe are increasing their bullion reserves. In the last year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.
Historically, U.S. Treasury bills are considered to be one of the world's safest investments. But growing insecurity about the long term health of the U.S. economy and recent weakness in the dollar benefits gold, which is often used as an alternative asset hedge to a depreciating dollar.
What if investors are moving away from the dollar for good? Foreigners own a little more than half of publicly-held U.S. government securities, according to the Treasury Department. So if these foreigners - both central banks and private investors - decided to give their Treasury portfolio a heave-ho, it could leave to a devaluation of the greenback and rising interest rates, and the cost of borrowing for consumers and businesses could rise. That would be bad for economic growth.
That's not likely to happen soon. But if gold's ascendency is an early sign of the future, it may be time to buckle up.
What was the rationale behind allowing regulator shopping in the first place?
The (sort of) simple answer is that we've added layer after layer to our regulatory system over many years. No one ever sits down and says, "This would be the absolute best system of regulation for us right now." Instead, every couple of decades (preferably in a time of crisis), we add an agency and tweak some rules, ultimately creating an incredibly complicated system.
Lara Sirois heard our story about homeowners struggling to navigate their way through the federal Making Home Affordable program. She adds her name to the list of frustrated homeowners seeking help, and asks this question:
My husband and I found a loophole in this program (not the good kind): he's been laid off since last November. I got laid off in February but have had short-term contract work that's ending this week. We'll both be on unemployment and so are not eligible as Citibank does not consider unemployment benefits to be reliable income. If one of us were working -- and making less than we do on unemployment -- then we'd be eligible. Both of us out of work and needing help more than ever? Not eligible. We're not sure how this is supposed to be helpful. Isn't it better if we try to be proactive and get help BEFORE we're in dire straits?
We got this from Ming Lee, who writes about noticing something strange on an envelope:
I received my monthly mortgage statement from Franklin Bank, and usually I don't look too closely at the address window. But this week when I looked it read: Federal Deposit Insurance Corporation Receiver for Franklin Bank.
Since I don't have any deposits with Franklin Bank, only my mortgage, the FDIC receivership doesn't impact me, does it?
Yes, it does impact you, but not necessarily in a bad or scary way.
Bridget Walsh has been listening to lawmakers say that the new credit card bill moving through Congress might mean higher annual fees and interest rates for consumers, but that people can shop around for better deals -- the market will make sure they have choices.
She writes:
I keep hearing that part of your FICO score depends on how long you keep a credit card along with how well you pay your bills and how many inquiries into your credit you have. So if cards that I have had for a long time (with no balance) now impose annual fees, it seems that either I will have to suck up and pay the fees or risk lowering my FICO score by closing that account and shopping around for better deals. Even though I have 3 cards with no balance and no annual fee, I might be tempted to close one or more accounts to keep from paying fees and thereby lower my score even more by reducing my credit line.
I am a 25-year-old graduate student currently working on getting a PhD in chemistry. As you know, millions of college seniors will be graduating in the coming weeks. Presumably, they have had a difficult time finding jobs, a topic which you have touched on anecdotally in past podcasts. Yet, none of these college graduates will be receiving unemployment benefits, as they did not recently lose a full time job. Will unemployment statistics simply miss these hundreds of thousands of people becoming unemployed within the span of a month? If so the employment picture will be even worse than it looks for an outside observer.
I saw in the New York Times [Tuesday] that IBM is raising its dividend by 10%, and was reminded of something I heard on your podcast recently, something I'm admittedly not sure I have right: when a company raises its stock dividend to (possibly unrealistically) high levels, it may be a sign that the company is in trouble.
Didn't Lehman Bros. do this shortly before its troubles came to light? Should a company really be passing an increased amount of revenue to its shareholders at such an unstable economic time? Is this increase likely to indicate that a company may be trying to inspire confidence while hiding its problems, or is it more likely that IBM is simply doing well and wants its shareholders to know it?
Vinny Catalano answers Sarah's question after the jump.
After our interview with FDIC's John Bovenzi, a listener asks:
When a bank is taken over by the FDIC, what happens to the deposits that exceed the insured amounts? Are they just considered gone, or are they used to cover the debts of the bank being taken over?
Great question. The simple answer is that after $250 thousand, there are no guarantees. It's not bloody likely you'll ever see that money again.
Folks, we have to concentrate for a bit on cutting today's podcast. It's all about the new jobless numbers, plus a look at where we are in history. Your Twitter questions about unemployment were terrific, and it's been great to watch you helping each other -- and us -- understand the economic picture.
I'll leave you for a while with this Twitter post from @bjhaddad:
Please explain what would happen if the government did/does nothing. Seems like everyone just assumes it will be a disaster.
When my wife and I married 7 years ago, the Canadian dollar was about 68 cents. Last year it was $1.02. We take a trip every year, and now it is back to about 80 cents. What factors influence the price of currency, and what impact does this have on the overall crisis. Is the fact that Canadian banks are doing well going to mean that their dollar will strengthen compared to ours?
How is it that while all aspects of the recession are being mirrored across the border in Canada our banks are feeling none of the pain as yours. My vague understanding is that it had something to do with an unpopular (at the time) decision by former PM Chretien.
Former Prime Minister Jean Chretien would probably like us to see brilliant foresight in his 1998 decision to block two banking mega-mergers at the same time that the U.S. Congress decided to allow investment and commercial banks to merge. The American deal paved the way for such now-troubled giants as JP Morgan Chase and Citigroup.
Rep. Paul Kanjorski has been all over the YouTubes this week talking about an electronic bank run during mid-September's near meltdown. Kanjorski says the Federal Reserve alerted lawmakers to it. His star turn prompted several of you to write with varying versions of:
Is this true?
Portfolio blogger (and Planet Money friend) Felix Salmon has an answer. On the short:
This is all, frankly, fiction, and it's not clear where most of it came from, although maybe Kanjorski's "friends" on Wall Street are the same people as Michael Gray's sources at the New York Post. Thinking back to that crazy week it's easy to get details wrong, especially when you're speaking off the cuff on a call-in show. But let's stop treating it as though there's any substance to it. Please.
I am interested to know how many other people are still being inundated with credit card offers and even (!!) increasing credit limits without asking for them. I would love to hear if you and others are still being hit up in this climate. A couple of months ago I heard rumblings of "credit cards are next" -- as in next to crumble. I was getting tons of offers then and now still. Point of reference - I am single, 25, just bought a house (30 year fixed FHA 3 percent down), and have good credit and such.
Bryan in Dallas is looking to make some money. He writes:
My co-worker is offering a $100 bet that in four years, we'll be suffering from "stagflation". Whether I take the bet or not, do you know where we can look today (and also in four years) to find out if stagflation is occurring? Maybe a Government agency or non-profit whose metrics are sound are reputable?
The TED spread is (thankfully) heading below [one], but I observe that both LIBOR and 3-month Treasuries are VERY low -- does this dilute the good TED Spread news?
For those of you just joining us, I'll put some definitions at the very end of the post; if the above question makes sense already, forge ahead.
Jesse Zink of South Africa is paid in U.S. dollars, and the dollar has been rising pretty steeply compared to the South African rand. He wants to know why:
It seems that since the real crisis in the financial markets began last fall, the dollar has only strengthened against the rand and I've had more money to spend. It happened rapidly and was notable, at least 20 percent. I have no complaints about the extra rand in my wallet, but how come the dollar didn't weaken as virtually every other indicator did?
Our Twitter pal IMAJES sent in a question: "In a short selling scenario, what does the person loaning the stock have to gain?"
Briefly, short selling stock is a technique used by investors who try to profit from the falling price of a stock.
For example, consider an investor who wants to sell short 100 shares of company ABC, believing it is overpriced and will fall. The short seller typically borrows the shares from his broker, who typically in turn has borrowed the securities from some other investor who is more upbeat about the stock.
Will the names recipients of the federal contracts be public information? I and a lot of my friends would like to know so that we will have a better idea of who has work and might be hiring.
The video above is from 2007, but you get the idea. Snow, especially in a city like Portland, Ore., can send the whole world sliding. It's maybe not so great for the economy, either.
Mitch writes:
Here in Portland, Oregon, all the shops downtown are closed. Every authority is saying not to drive unless absolutely necessary, and people are obeying. And things in the Northwest aren't nearly as bad as in the Midwest and Northeast. I don't know about other places, but last weekend was pretty bad here, too. Given that we only had four weekends between Thanksgiving and Christmas this year, how bad is it to have any of those weekends ruined by weather like this?
After the jump, an anecdotal answer from another listener in Portland, plus a links kit courtesy of Oregonian reporter Amy Hsuan.
You asked about hedge funds. Columbia University professor Wei Jiang has delivered, with a first round of answers. We'll be posting more questions and answers in the days to come. For now....
In the last few years a number of the new names to Fortune's "Richest people" list were hedge fund managers. All of the people on the list had over $1 billion net worth. Why/how are the hedge fund managers raking in so much money? Are their earnings stable/permanent, or might they evaporate like so much other "wealth" has lately?
For this listener question, I'm going to need your help. Alex writes:
The Washington Post has an article today about the continued drop in the CPI [Consumer Price Index]. 1.7% since the end of October. They cite a lowered cost of fuel for this. They also said that inflation was flat at 0.
. . .
Is this the new sign that we have entered a period of deflation?
Last Thursday, I went to a symposium at Columbia about the causes of, and potential solutions for, the financial crisis. One of the speakers, Prof. Wei Jiang, talked about the future of hedge funds.
A number of you have asked about hedge funds, and Prof. Jiang has volunteered to answer your questions. Please post your questions in the comments section below, and I'll collect them at the end of the day and send them to her. Check back soon for the responses!
We've gotten some listener questions about a relatively obscure indicator, the Baltic Dry Index. Its precipitous fall has eclipsed that of most other indices: nearly 95% in six months. What is this number and why has it plummeted?
Many of you asked about the new $800 billion effort announced by the Federal Reserve last month to help get lending going. Questions like "$800 billion??" and "Where is this money coming from??"
Marshall wonders why falling housing prices are necessarily bad:
The housing boom made houses unaffordable and the prices were artificially inflated anyway. Shouldn't we all be happy that the prices are closer to their real values so that people who aren't rich are more likely actually afford houses again?
As it happens, it's not just Marshall who thinks that falling house prices might be a good thing. Analysts, economists, think tanks and even the occasional Treasury Secretary think so, too. So why are many commentators worried about falling prices?
It is easy to see how the economy can fall into a recession, but -- looking at past recessions -- how does the economy ever get out of them? Why doesn't it stay in a contracted state forever?
This is fundamentally a question of macroeconomics, clearly one that has yet to be answered definitively. The following are a three frameworks that Ben Bernanke, Hank Paulson and Tim Geithner (as well as a horde of academics) are undoubtedly discussing.
If the global "Pool of Money" made foolish investments in American housing, shouldn't *they* be the ones hurting?
If I lend someone with no income $500,000 and never get paid back, shouldn't I be held responsible for my own risk?
If a company lends thousands of incomeless people $500,000 each and never get paid back, isn't that their own fault?
Of course you're right. I would say pretty much everyone would agree that every investors, bank, hedge fund or whatever else that placed a bet on subprime housing should--by all logical and moral rights--be forced to pay the entire consequences of that decision.
Capitalism simply doesn't work when the makers of bad decisions don't pay the costs.
I thought that a recession had to include two consecutive negative growth quarters. The first & second quarters posted positive growth. Has this Committee succumbed to the politically correct crowd's desire to say that we're in one? Please clear up this matter for me. I have a coffee bet riding on the answer.
My hunch is you've got to buy your friend a cup of coffee.
In the US, it is widely accepted that a recession officially exists whenever the National Bureau of Economic Research says there is one. Specifically, it's their Business Cycle Dating Committee.
What's the difference between deflation and a depression? Is this just wordsmithing so everyone doesn't freak more than usual or is there a genuine factual or concrete economic difference?
Dion, you're so in luck. Economist Amir Sufi rings in today with an answer. It's after the jump.
Today, a listener named Jennifer asks whether the auto industry is less important to the nation's economic health than the financial industry. Dan Costello ran down the numbers yesterday. As for the rest, I'll let Jennifer start us off:
Lawmakers seem very reluctant to bail out the auto industry. They were not very hesitant to bail out banks and investment firms, though. I'm wondering, why this difference? . . . Part of me even wondered if it was a classist issue. Millions of jobs would be affected directly or indirectly by an auto industry collapse, but many of them are blue collar jobs. (Certainly white collar jobs would be affected too, of course, but there aren't many blue collar jobs in the banking industry!)
Listener Roger Kerr and many others want to know what is at stake in a potential bailout of the Big Three automakers. Specifically, Kerr wants to know:
How many employees of those companies, of their suppliers, and of all the other
businesses which would be affected downstream, will lose their jobs as a
result?
JD from Witchita, Kansas, wrote in to ask how many people in the U.S. have mortgages and how many of them are adjustable rate mortgages, the kind of loans where the interest rate on the note is periodically adjusted based on a variety of indices.
The other day you had an engineer who asked about his abillity to sell his house after he graduated from school. An economist responded to his question. What caught my attention was the statement the economist asked the caller. "Do you have and Adjustble Rate Mortage?" The economist answered his own question by saying "Of course you do as do I and most everyone else." My question to you is just how many people have ARM's?
This floors me. I don't understand how so many people could be caught up in this unless they didn't know what they were getting into.
Can you explain this statement that the CDO "expert" made to Eisman: "I love guys like you who short my market. Without you, I don't have anything to buy."
Ditto for Russel:
I too cannot figure out how shorting the CDO market was, in effect, propping it up.
Ok, here's my stab at it:
Eisman was trying to find a way to bet that the housing market would crash. One of the ways he did this was by buying insurance on subprime mortgages, through something called a credit default swap.
Listener Graydon Gordian has a question about our good ol' friend, the TED spread:
So instead of looking at the stock market you consistently use the TED spread as an indicator of current economic conditions and the reasons you've given for doing so seem very legitimate.
But I have never heard you discuss what might be limited or problematic about using the TED spread. Are there any common criticisms the indicator receives?
I heard in the podcast and read in Bloomberg that GM stocks fell to a minimum of 59 years... what does this really mean? Does it mean that the company worths the same it was worth 59 years ago, if someone was to buy it today? That all the value they accumulated in the last 59 years went down the drain? How can a company recover from such a drop in a short period time (I mean, without waiting another 59 years)?
It's hard to overstate how badly this American icon has stumbled of late. The automaker's shares have lost nearly half their value in the past week, giving the company a market value of $1.6 billion, below the $2.0 billion that many investors consider to be the ceiling for small-capitalization stocks. Ouch.
The company is worth less than it was nearly since its was founded a century ago. In 1929, its market capitalization was $4 billion. At the start of this decade, its market cap was $66 billion. Whether GM will have any market value by the end of the year remains an open question: the company's executives have reportedly told lawmakers that GM needs federal cash in order to avoid filing bankruptcy as soon as later this year.
Planet Money listener and reader Eric Sipple has a question about how the U.S. jobless rate is calculated. It's a timely one: this morning, we found out the jobless rate spiked to 6.5%, its highest level in 14 years.
How is the U.S. Jobless rate calculated? Is this based entirely on who is collecting unemployment insurance, or is there a more complicated calculation that takes place? When we say 1 in 10 Americans are out of work, are we saying 1 in 10 Americans who previously were working are out, or 1 in 10 total Americans?
In short, the unemployment rate tells you the percent of the labor force that is unemployed. But like many people, Eric wonders if the number is based on the number of people filing for unemployment insurance. Unfortunately, that wouldn't work because some people who have run out of unemployment benefits could still be unemployed, undercutting the actual unemployment number.
Dwayne Callender from Laurelton, N.Y. has a question that we continue to get quite a bit.
Why is the money used in the bailout not going directly to people when they keep hearing stories about declines in consumer spending and the slumping housing market. To summarize, why can't the government give money directly to citizens to combat the impending deflationary cycle? This would also assume that the money or rebate given to households would be in the form of a debit card to encourage spending and avoid saving it in a bank account. This would prevent some of the issues raised when stimulus checks were issued and some people such as myself just put the money into a savings account. Also I never quite saw what the final estimate was on the cost of the original stimulus package (around $150-$200 million if I remember correctly) for what was essentially a brief shot in the arm.
Listener Aloke Prasad asks a good question about our project with the New York Times:
I saw Adam and Charles on the NewsHour with Jim Lehrer show.
They kept mentioning that the school district purchased "toxic" asset called CDO. I think they meant CDS (credit default swap) and not CDO (Collateralized debt obligation).
Reader Chris Mills has a question, which he sent to us late yesterday while on his honeymoon in Fiji. We realize Planet Money is fun and these are confusing times worthy of time-intensive consideration. Still, we can't help but want to offer up some advice in addition to answering his question. To wit:
"Chris, try and keep the computer time to a minimum this week. Seems only right."
Here's Chris' question:
"Everyone keeps talking about treasury bonds and how they are the safest investment. We've been seeing rates very low, even negative. How are we so sure these bonds are so safe? How do we know that there won't be a time that these can't be repaid? Doesn't there come a point where the government could just sell too many of these? I know the Fed can always print money, but I wondered if you could explain to me what makes the security of treasury bonds such a fact?"
Laura and I often say that we'd like to see the TED Spread below 1 before we can say we're in a truly healthy economy. so, Michael asks the good question: is that just an arbitrary number?
Michael Carasik asks:
Should the "TED Spread" really be under 1, or is that just where it was before the collapse happened? In other words, is it true that the closer the TED Spread gets to 0, the closer to Utopia we are, or is this a number that is, say, 1.5 or even 2 in a healthy economy?
Laura and I often say that we'd like to see the TED Spread below 1 before we can say we're in a truly healthy economy. so, Michael asks the good question: is that just an arbitrary number?
Julie takes the buy/don't buy debate in a new direction, namely, "Buy what?" She writes:
I'm a generally frugal person. I suppose by that I mean I do not buy what I do not need. I resist the notion that, for the collective good, I should now begin to buy that which I do not need. Indeed, I suspect the world would be in better shape overall if people only bought what they needed. Yet this seems, according to the folks you've had talking, to be a mistaken impression. I need to buy more stuff, we all need to by more stuff, endlessly, in order to ensure (somehow) that there is enough for everyone. I feel like there's something missing in this -- doesn't this just mean we all end up with too much stuff and the world ends up quite depleted.
Now that the U.S. government is buying massive amounts of equity in banks, can and will they ever sell it off?
Geoffrey Sledge asks:
Now that the U.S. government is buying massive amounts of equity in banks, can and will they ever sell it off? I'm less worried about creeping socialism than just hoping that my government bases its finances on something more stable than the value of banks that have proven unreliable. If down the line the government decides to cash out on the equity, wouldn't that unbalance the market and send the price of that stock into a freefall? Bill Gates can't suddenly sell all his Microsoft stock.
In other words, is the U.S. government going to be a stockholder in these banks for permanent?
This is a great question with -- lucky for me -- an easy answer:
I'd like to understand how these people are paid (how well that is), how complicated and mentally taxing their bank matching tasks really are and why their whole operation hasn't been automated yet?
Listener Peter Stock sent an interesting question after hearing us talk a lot over the last few weeks with Will Aston-Reese and his colleagues at Tradition Asiel Securities.
I'd like to understand how these people are paid (how well that is), how complicated and mentally taxing their bank matching tasks really are and why their whole operation hasn't been automated yet?
Does the Bailout Bill make any provision for the exposure of a companies holdings? I would think that a full public accounting of each company's Toxic Debt would spur confidence at least because it would reduce the Unknown Unknowns out there.
Is the amount of Toxic Debt outstanding known?
We have a nice interview with billionaire Mark Cuban on today's podcast. He is proposing pretty much this exact idea and he goes into the details.
I think the reason it's not happening is simple: banks like to keep these things secret. They don't want to let all of their competitors know the details of their investment strategies.
Presumably, if the banks are in better shape than they appear, they might want to let us see their assets. So, I wonder if they're in worse shape and have an added incentive to keep that hidden.
Mark Cuban says, basically: so what. If they're going to take taxpayer money, they have to show us how healthy they are. Now.
I hear about losses and write-downs a lot and I am wondering where does the money go? If someone is losing money does that mean that someone is gaining money? If so then who? If not then where does the money go? Did it ever exist at all?
I was wondering if you could discuss how a person, someone you might call "Joe Sixpack," could follow the credit markets. I do not think the Dow is a good daily, weekly or monthly barometer of this financial crisis. From listening to your podcasts and my reading, the downturn in the credit market is the real danger to the economy, but I don't have an easy way of following it.
"I saw you mentioned student loan availability, but what about existing loans? Since many student loans have their interest rates tied to LIBOR or Prime, what does LIBOR hitting all-time highs this week mean for students? And, perhaps more ominously, graduates who are in repayment? How long can this go on before they start to see some effect on their loans?"
Even if Congress passes the bailout, many students across the nation will begin to see higher costs for loans in the coming months or could be turned away by banks altogether as the credit crisis intensifies.
"As a current medical student taking many thousands of dollars out a year in student Chase loans, are my loans at risk of being cut off? I don't know how far these economic problems will reach and am becoming increasing worried about the economic future of our country."
For this one, I turned to Anya Kamenetz, author of Generation Debt, a crucial book about student borrowing (and so much more).
Shaun Parker and several other readers have asked about the intimidating world of interest rates, credit markets, commercial paper and what it all means for them and the economy. Parker writes:
"I was wondering why we are judging the impending doom of the financial world (at least via the media) only by the stock market. It seems that the real worry is the paper that isn't being issued and the soaring interest rate being charged between the banks lending to each other? If those are the true indicators of doom, why isn't the media following those more closely (or at all)?"
"When they say the market lost trillions of dollars Monday, is that money people withdrew from their accounts?"
No, it doesn't necessarily mean people withdrew that much money from their accounts. Believe it or not, that would be an even scarier thing than what's happening on Wall Street now.
What has fallen is the "market capitalization" of companies on the stock market, which is just a fancy word for a company's value. Technically, that's defined as a stock's share price multiplied by the number of shares a company has sold to the public. On news that Congress was voting down the proposed $700 billion Wall Street bailout, the total market capitalization dropped by about $1.2 trillion.
In other words, what's fallen is how much investors believe many companies are worth right now -- and it fell because so many people believe the economy is in rough shape. As of today, many investors put that some of that money right back into the market.
READER COMMENT:
A reader, Michael Beuselinck, makes a good comment that investors did take their money out of the market, though many very likely kept the cash right in their brokerage accounts. In fact, many put money right back into the market today. Thanks, Mike.
With an eye on the proposed $700 billion Wall Street bailout, Alisha writes:
What are the odds that the U.S. taxpayer will actually make money on the deal? Will we break even?
The International Monetary Fund just released a review of 124 banking crises (what timing). I'm hoping to cover this for the podcast later today. On the quick...
A listener named Preston checks in after our Friday podcast, The Week America's Economy Almost Died. In that episode, we look at the day a terrifying hypothetical became real, namely that a money market fund broke the buck. Preston writes:
