Posted: 10 Sep 2010 09:50 PM PDT

One would think that New Jersey teachers might have the ability to learn. However, judging from repeated powder puff softball questions by teachers that governor Chris Christie can hit out of the ballpark, I have to wonder.

Please consider this creampuff question and Christie's answer.

Governor Chris Christie was straight, direct, and correct in his response to a union teacher in New Jersey who complains about teacher layoffs. Clearly the teacher's union is to blame.

Moreover, it is the same in every state. How teachers cannot see this is a wonder to behold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wholesale Inventories Rise More than Expected; OK So Where's the Demand?

Posted: 10 Sep 2010 11:22 AM PDT

Rising inventories to meet rising demand is one thing, rising inventories in the face of weak or falling consumer demand is another. On the inventory side of the equation, Wholesale Inventories in U.S. Rose More Than Forecast

Inventories at U.S. wholesalers rose in July by the most in two years as a rebound in demand prompted companies to add to stockpiles.

The 1.3 percent increase in the value of inventories was three times the median estimate in a Bloomberg News survey and followed a 0.3 percent gain the prior month, Commerce Department figures showed today in Washington. Sales at distributors climbed 0.6 percent, the most since April, after falling 0.5 percent.

Economists forecast inventories would increase 0.4 percent, following a previously reported 0.1 percent gain in June, according to the median of 32 projections in a Bloomberg survey. Estimates ranged from increases of 0.1 percent to 0.8 percent. The July gain was the biggest since July 2008.

Wholesalers make up about 30 percent of all business stockpiles. Factory inventories, which comprise more of the total, advanced 1 percent in July, the Commerce Department said last week. Retail stockpiles, which make up the rest, will be included in the Sept. 14 business inventories report.

Today's report showed wholesalers' stockpiles of durable goods, or those meant to last several years, increased 1 percent in July, led by gains in autos, furniture, machinery and metals.

The Commerce Department's latest figures on gross domestic product showed the economy is getting less of a boost from inventories. Stockpiles added 0.63 percentage point to growth in the second quarter, compared with 2.64 percentage points in the prior three months and 2.83 percentage points in the fourth quarter.

Census Bureau Report

Inquiring minds are investigating the Census Bureau Trade Report for July 2010.

Inventories

Total inventories of merchant wholesalers, except manufacturers' sales branches and offices, after adjustment for seasonal variations but not for price changes, were $405.0 billion at the end of July, up 1.3 percent (+/-0.4%) from the revised June level and were up 2.5 percent (+/-1.2%) from a year ago. The June preliminary estimate was revised upward $0.8 billion or 0.2 percent. End-of-month inventories of durable goods were up 1.0 percent (+/-0.4%) from last month, but were virtually unchanged (+/-1.6%)* from last July.

Inventories of metals and minerals, except petroleum were up 2.7 percent from last month and electrical and electronic goods were up 2.1 percent. End-of-month inventories of nondurable goods were up 1.7 percent (+/-0.7%) from June and were up 6.4 percent (+/-2.1%) compared to last July. Inventories of farm product raw materials were up 11.6 percent from last month and inventories of apparel, piece goods, and notions were up 4.1 percent.

Inventories/Sales Ratio

The July inventories/sales ratio for merchant wholesalers, except manufacturers' sales branches and offices, based on seasonally adjusted da data, was 1.16. The July 2009 ratio was 1.27.

Looking Ahead

In terms of adding to GDP, the increase in inventories has played out, and in fact may have more than played out.

The Bloomberg article states "The amount of goods on hand compared with sales suggests manufacturing gains will be sustained in coming months."

I disagree.

Ignoring the effects of the credit bubble and housing bust in 2008-2009 the inventory to sales ratio is on the trendline from 2004-2010. What it suggests is manufacturers expect consumer sales to pick up in the second half or at least stay steady headed into next year.

Will Expectations Pan Out?

Expectations are one thing, reality will be another.

It is now September 10th, and the Census Report is for July.

In the meantime it's important to note Gallup Poll Shows Consumer Spending Pullback, Consumer Confidence Levels Below Depressed 2009 Levels ; Back-to-School Sales Bust Says WSJ

Not only are consumers are pulling back, a Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever. If small businesses are not hiring, consumer sentiment will remain sour as will consumer spending.

There is no reason to expect consumer sentiment to change, or small business sentiment to change. Indeed, increasingly sour voters are likely to "throw the bums out" as noted in Voters Strongly Favor Non-Incumbent GOP Newcomers in Midterm Elections.

All of this adds up to an inventory build for consumer sales that will not happen. Expect more layoffs if sales do not materialize.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Instant Insanity

Posted: 10 Sep 2010 12:20 AM PDT

Willem Buiter, chief economist for Citigroup arguably provides another example of why shares of Citigroup are sitting in the gutter at $4 a share in spite of trillions of dollars in bailouts to banks.

The fact that Buiter entertains "innovative and unorthodox" measures such as "expiring currency" proves he is off his rocker even though he states "the mere fact that something has not been done before often is sufficient grounds for not doing it now."

Any chief economist, anywhere in the world, should be able to come up with better rationale than that.

Before a major rebuttal, please consider the Wall Street Journal article Is this the Right Time for the Fed to go Negative? by Willem Buiter.

To restore monetary policy effectiveness in a low interest rate environment when confronted with deflationary or contractionary shocks, it is necessary to get rid of the zlb [zero lower bound] completely. This can be done in three ways: abolishing currency, taxing currency and ending the fixed exchange rate between currency and bank reserves with the Fed. All three are unorthodox. The third is unorthodox and innovative. All three are conceptually simple. The first and third are administratively easy to implement.

The first method does away with currency completely. This has the additional benefit of inconveniencing the main users of currency—operators in the grey, black and outright criminal economies. Adequate substitutes for the legitimate uses of currency, on which positive or negative interest could be paid, are available.

The second approach, proposed by Gesell, is to tax currency by making it subject to an expiration date. Currency would have to be "stamped" periodically by the Fed to keep it current. When done so, interest (positive or negative) is received or paid.

The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.

All three methods for eliminating the zlb, although administratively feasible and conceptually simple, are innovative and unorthodox. Central banks are conservative. The mere fact that something has not been done before often is sufficient grounds for not doing it now. The cost of rejecting institutional innovation to remove the zlb could, however, be high: a material risk of continued deficient aggregate demand, persistent deflation and, in the U.S. and the U.K., unnecessary conflict between short-term stabilization and long-term sustainability and rebalancing.

Fundamental Flaw

Willem Buiter starts right off the bat with a false premise that "something needs to be done".

The reality of the matter is that left alone, prices will fall to the point where genuine demand picks up. This is a fatal fundamental flaw at the outset, but one that every Monetarist clown in the world makes.

Sadly, Buiter takes Monetarism to an extreme , yet he cannot see the consequences of what he suggests. To be sure Buiter does say "The mere fact that something has not been done before often is sufficient grounds for not doing it now", but if that is the best he can come up with he should be fired tomorrow.

Conversion Madness

Take for example the idea that "existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod".

For starters, that idea would require the retooling of every vending machine and ATM in the country. Is this simple or practical? I think not. However Buiter calls the approach "administratively feasible and conceptually simple".

The same thing goes for his idea of "doing away with currency completely".

What about Canada, Europe, Australia, the UK, etc? Is every country supposed to go along with this insane proposal? What happens to foreign accounts? What about capital flight at the mere hint the US were to discuss such a thing?

What is the Goal?

Were the Fed to even openly consider such insanity, the risk is to flight into gold, silver, foreign currencies, or tangible assets. No doubt the dollar would sink and prices would rise but is that the goal?

No! Buiter cannot even figure out what the goal is. Rising prices is not the goal, rising credit is. And with the risk of expiring currencies the last thing we would see is willingness to extend credit, fearful of being paid back in expiring dollars.

Extreme Response

I am 100% sure the market would have an extreme reaction to implementation of any of Buiter's proposals, in one direction or another, both outcomes horrible. If the goal was to produce hyperinflation and complete loss of faith in the currency, the suggestions of Buiter just might do it.

On the other hand, depending on how the program was structured and which of Buiter's three alternatives was implemented (and how), I could perceive a mad dash into treasuries, coins, or gold, bringing upon a deflationary collapse.

Either way, there is nothing in Buiter's proposals that will stimulate lending, small business expansion, or the creation of jobs.

That Buiter cannot figure this out, suggests he is incompetent and should be fired immediately.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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