Real Hourly Earnings Dropped

Not so touted as the inflation number, today the Bureau of Labor Statistics (BLS) also released its report on real earnings and wages.

The results were not definitive of anything—but they weren’t encouraging: Real wages (adjusted) dropped 0.1% in January, but for the year, real wages rose 0.2% year-to-year (January 2010 to January 2011). Which means, of course, that this past January represented a significant downturn in real wages.

Was it a blip? Or was it the start of a trend?

Forgotten among the discussions about inflation are wages and salaries: If wages and salaries are downturning, even as price levels are upturning, then inflation is taking a double-bite from the average worker.

So keep an eye on real wages in February and especially March: If this past January’s trend continues, then people are going to be hurting even more than the inflation number would lead one to believe.

CPI Up 0.4%

The Bureau of Labor Statistics (BLS) is reporting this morning that the Consumer Price Index (CPI) rose 0.4% during the month of January. For the year-to-year January 2010 through January 2011, CPI was up 1.6%.

So-called “core inflation” (CPI minus food and fuel) was up 0.2%

Not reported in much of the mainstream media were the following paragraph from the BLS report:

Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009. The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent. The index for all items less food and energy has risen 1.0 percent.

This was the key news—and what will be driving the overall CPI number up over the coming months. Because really, is there any product in the wider economy that is not affected by the price of oil, gasoline, or food?

NOON CARTOON: A Paul Krugman Template

Ripped off wholesale from the Economics of Contempt blog:

A Paul Krugman Post [Template]

I'm troubled by this statement from Obama:

"[Insert extremely broad, generic presidential statement about the economy.]"In effect, what Obama is saying is: [insert Ridiculous Proposition, completely unrelated to above statement by Obama].

Let me explain why this is so ridiculous: [insert brutal, utterly devastating takedown of Ridiculous Proposition].

Of course, this completely vindicates me, because I said a long time ago that [insert warning about Ridiculous Proposition from the 2008 primaries or early 2009].

Go check out the Economics of Contempt blog—highly recommended.

[Sorry, E. of C.: There was simply no way to partically quote your wonderful post.]

IBG, YBG

The New York Times is carrying the first on-the-record interview of Bernie Madoff since being jailed.

Madoff—he of the famed multi-billion dollar Ponzi scheme—said something ved interestink about the banks he had to deal with:

“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

While he acknowledged his guilt in the interview and said nothing could excuse his crimes, he focused his comments laserlike on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. In an e-mail written on Jan. 13, he observed that many long-term clients made more in legitimate profits from him in the years before the fraud than they could have elsewhere. “I would have loved for them to not lose anything, but that was a risk they were well aware of by investing in the market,” he wrote.

Mr. Madoff said he was startled to learn about some of the e-mails and messages raising doubts about his results — now emerging in lawsuits — that bankers were passing around before his scheme collapsed.

“I’m reading more now about how suspicious they were than I ever realized at the time,” he said with a faint smile.

Just a few days ago, the Wall Street Journal carried the following:

UK Inflation Up, UK Unemployment UP—UK Interest Rates Flat

We have worries of the UK: Inflation is up, unemployment is up, and Mervyn King just announced that interest rates will remain steady.

About UK unemployment, Bloomberg is reporting this morning:

U.K. unemployment claims unexpectedly rose in January, underlining the fragility of the labor market a year after the economy emerged from recession and as public-spending cuts start in earnest.

The number of people receiving jobless benefits rose 2,400 to 1.46 million, the Office for National Statistics in London said today. The median of 25 forecasts in a Bloomberg News survey was for a drop of 3,000. Unemployment based on International Labour Organization methods rose by 44,000 in the fourth quarter to 2.49 million.

Meanwhile, about UK inflation and interest rates, the Telegraph is reporting:

NOON CARTOON: Jeffrey Sachs Interview

A really fascinating interview with Jeffrey Sachs, who basically says what everyone knows, but which the mainstream media does not report: That both the Democrats and the Republicans are in the back pockets of the wealthy, who are essentially forcing both parties to cut government until there is nothing left, rather than raise taxes.

The video can’t be embedded, so go here to see it. The picture below is just a picture of Sachs.

Why Are Capital Requirements Hated By Banks?

Because they lower profitability—and therefore bonuses. Substantially.

Even the weak-kneed Basel requirements are having an effect, according to Bloomberg:

By cutting Credit Suisse Group AG’s profitability target last week, Brady Dougan acknowledged what some Wall Street bankers and investors are loathe to concede: Tougher capital rules will mean lower returns.

Dougan, the Zurich-based bank’s chief executive officer, lowered the goal for return on equity, a measure of profitability, to more than 15 percent from more than 18 percent. Barclays Plc said today it will aim for a 13 percent ROE, down from an average of 18 percent over the past 30 years. By contrast,Goldman Sachs Group Inc., the bank that makes the most revenue from trading, insists its target of a 20 percent return on tangible equity doesn’t need to be moved.

Profitability soared in the middle of the last decade as banks increased leverage, using borrowed money to bulk up on assets. The credit crisis exposed the risks of that strategy and resulted in $1.48 trillion of writedowns and losses worldwide. To generate the same returns while holding more capital, Wall Street firms can either discover fresh profit opportunities or reduce costs, including pay, analysts said.

A lot of fellow conservatives think that banking regulation and higher capital requirements are some sort of Commie plot. 

But the fact is, banks will always play roulette with the money that they are entrusted—especially corporate banks.

Private banks—where the partners are personally exposed to their bank’s losses—will never take foolish risks. Their lending standards will always be prudent, their leverage positions always cautious, because their partners know that they could wind up in the poor-house if they make the wrong bets. But the flip side to this sensible caution is, private banks will always be very hesitant to lend out money, and so will not help developing industries with financing. 

But corporate banks—apart from having access to greater capital through their publicly traded equity—will be more forthcoming insofar as loans to developing industries are concerned. Which is great—it spurs the economy. 

However, the flip side to that is, the people running corporate banks do not have a personal stake in the fortunes of the bank. So they won’t be so afraid of driving the bank into the ground—as happened in the period leading up to the 2008 Global Financial Crisis. 

That’s why capital requirements are necessary—and high ones at that. 

The lax capital requirements of the last 20 years have created an incentive to both take huge gambles with OPM (other people’s money), and give incentive to the banks to pay huge salaries to bank employees. 

Dougan is taking the first step in the new reality—let’s see if other bankers follow suit, or if there is enough push-back from the banksters that they get their way: A return to the wild-wild west days of yore. 

Big Silvio in Real Trouble?

The AP story was short and stark, serious like a heart attack:

An Italian judge has ordered Premier Silvio Berlusconi to stand trial on charges he paid for sex with a 17-year-old girl and then tried to cover it up. Judge Cristina Di Censo handed down the indictment Tuesday. The trial is set to begin April 6.

Once again, The Hourly G isn’t interested in tawdry sex stories—but if Berlusconi falls, it could have unanticipated consequences for the euro. 

Why? Because Italy is in the same hole as Spain, Ireland, Portugal and Greece—there is a reason they are collectively known as the PIIGS. 

All of the weak economies in the euro-zone—the PIIGS—are over-indebted: They need further funding from the bond markets, in order to stay operational. If there is a seizure in the euro-bond market—for whatever reason—then all of these countries, no just Italy, could suffer a crash. 

And even if it’s just Italy, that’s still a huge elephant: Italy’s GDP is $2 trillion, compared to $3.3 trillion for Germany. Italy simply cannot be bailed out like Ireland ($204 billion) or Greece ($305 billion). 

Ordinarily, sexual politics wouldn’t influence macro-economic policy—but this is Italy. If the Berlusconi government falls, there will be political chaos in Italy—and therefore no clear direction for the bond markets, which at this point in time rule the European continent. 

So this isn’t a Bill Clinton-style freak-show, put on for our collective amusement, but ultimately inconsequential—this Berlusconi thing matters. 

Inflation Rises in the UK and China—Oh My!

The BBC is reporting this morning the rise in UK inflation:

The UK Consumer Prices Index (CPI) annual inflation rate rose to 4% in January, up from 3.7% in December, as the effects of the VAT rise were felt.

Higher oil prices also meant inflation remained well above the 2% target.

Retail Prices Index (RPI) inflation - which includes mortgage interest payments - rose to 5.1% from 4.8%.

The CPI figure is the highest since November 2008, and will put pressure on the Bank of England to lift interest rates to curb accelerating inflation.

Meanwhile, inflation in China is rising as well. According to Bloomberg:

China’s inflation accelerated in January as prices excluding food rose the most in at least six years, bolstering the case for more interest-rate increases to tame overheating risks in the fastest-growing major economy.

Consumer prices rose 4.9 percent from a year earlier after a 4.6 percent December gain, the statistics bureau said on its websitetoday. A separate central bank report showed banks signed 1.04 trillion yuan ($158 billion) in new loans, less than forecast while still the third-highest January total.

The article further points out that: 

Asian economies, with rising food costs and inflows of capital driving inflation, may need to raiseinterest rates further to limit the risk of overheating and prevent a “hard landing,” International Monetary Fund Managing Director Dominique Strauss-Kahn said Feb. 1. India’s benchmark wholesale- price index rose 8.23 percent in January, Indonesia’s inflation is 7 percent and South Korea’s is 4.1 percent, the latest government data show.

Now, what does this all mean?

It means that food prices are rising—courtesy of the inflation exported by the Federal Reserve, via the various iterations of Quantitative Easing—and now we are all seeing the effects on the world's economies, both developed (like the UK’s) and emerging (like China’s and the rest of Asia’s). And this will likely trigger a rise in interest rates, at a time when the global economy is not exactly feeling at its most confident and carefree. 

Inflation, in and of itself, would be bad, especially in stagnating economies—the dreaded “stagflation”. But what is happening around the world is, rising food prices are setting the stage for social unrest. We have seen that in Egypt, we are seeing it in the rest of the Middle East. We are also seeing it in Asia and to a lesser extent (so far) in Latin America. 

Rising social unrest will have a severe impact on the global economy, by raising the specter of uncertainty—which will only further help drive up prices, especially of commodities, which will basically mean adding fuel to the fire. 

So this isn’t over—far from it. This is merely the first signs of the beginning