Monday, February 18, 2008

Missing Bodies

This morning's Financial Times has a headline story called "US banks borrow $50bn via new Fed facility." Doesn't sound too exciting - it starts out by saying the Feds are now better at getting liquidity into the banking system than they were last summer when the wheels went crunch.

But the FT folks have been good at relentlessly unearthing the deeper story:
The move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

“The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”
Where are all of the bodies and timebombs buried? Nobody knows.

That brings us to this chart, from John Authers's column today, "The Short View."

Authers's subject was a Barclay's report that argued that we've been in a period of anomalously low inflation (see the gold line below the red line) that is now over, thanks to cost pressures coming from the booming "developing world."

But there's a more interesting point here. For most of the last century, equity investments gave the investor no gain on retail price inflation.

This brings me to a simpleminded but fundamental point. Overall economies cannot invest their way to prosperity. They have to work their way there, by inventing stuff and then making and selling it. Capital is a prerequisite but not the main vehicle of development. The latter comes from labor. Societies need to be judged by the growth in earned income - what they can and actually do pay their working populations.

On this measure, we're not doing so well.

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