Another report from the front lines of the global economic crisis, and the news is bleak. Most disturbing is the harsh realization that stagflation isn’t just a possibility anymore but a reality that’s already here.
Inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine. Prices rose at the fastest pace in 16 years.
The Labor Department said Tuesday that wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting.
The worse-than-expected performance was certain to capture attention at the Federal Reserve, which has chosen to combat a threatened recession by aggressively cutting interest rates in the belief that weaker economic growth will keep a lid on prices.
But the combination of rising inflation and weaker growth raises the threat of “stagflation,” the economic malady that plagued the country through the 1970s, when a series of oil shocks left households battered by the twin problems of stagnant growth and rising prices.
The 1 percent jump in wholesale prices followed a 0.3 percent decline in December and was the biggest one-month increase since a 2.6 percent increase in November. That gain had been driven by sharply higher energy costs.
With the January jump, wholesale prices have risen over the past 12 months by 7.5 percent, the fastest increase since the fall of 1981, when the country was in a deep recession.
We’re at 12% yearly inflation right now, and this is before the coming spring and summer gas hikes to $4 a gallon. Even the core rate is approaching 5%. Do you expect a 5% raise this year in your paycheck to keep pace, let alone 12%? What about the jumps in your mortgage rate adding to this inflation rate if you rate changes? What about your credit card debt?
Things are only getting worse on that front. Interest rates have fallen, but mortgage rates are going UP as ARMs, adjustable rate mortgages, reset at higher rates based on 10-year treasuries. Higher prices for everything and a weaker dollar mean that more homeowners are defaulting. The result is that foreclosures have skyrocketed.
Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages.
Repossessions rose 90 percent to 45,327 last month from the same period a year ago, RealtyTrac Inc. said today in a statement. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.
“The most troubling thing is that we are seeing more and more of these properties actually going all the way through the process and going back to the banks,” Rick Sharga, executive vice president of Irvine, California-based RealtyTrac, said in an interview.
Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records. About $460 billion of adjustable mortgages are scheduled to reset this year, raising minimum payments for borrowers, according to New York-based analysts at Citigroup Inc.
More than 233,000 properties were in some stage of default last month. Total filings increased 8 percent in January from December, said RealtyTrac, a seller of foreclosure statistics that has a database of more than 1 million properties.
And as more properties go back on the markets, home prices will continue to plummet, robbing more homeowners of equity, causing higher interest rates, leading to more foreclosures…if it wasn’t so truly frightening it would be breathtaking in its simplicity and beauty. Millions of Americans are going to be caught in this spiral over coming months, a frenetic dance that in the end will lead to a total collapse of housing values.
The only good news this week is actually terrible news: the ratings companies have learned nothing. MBIA and Ambac are so far continuing to keep their coveted AAA ratings despite having to borrow at usurious rates usually reserved for sub-junk bond debt. But there’s no choice: the Monoline Nuke looms over all as the blast that may knock us all into the abyss, and yet Moody’s, Standard & Poor’s, and Fitch all are pretending that nuke isn’t in the room next to them.
Embattled financial guarantors MBIAMBI and Ambac FinancialABK will retain their coveted triple-A rating — at least for now, says Standard & Poor’s.
On Monday, S&P issued a statement saying that Armonk, N.Y.-based MBIA is no longer on review for downgrade. Rival guarantor Ambac Financial’sABK triple-A ratings was reaffirmed by the agency. Both firms are being placed on negative watch, but downgrades at this point no longer appear imminent.
At the heart of the ratings agency’s brightening forecast is the improving financial picture of both companies. MBIA, which raised some $2.5 billion from private equity firm Warburg Pincus and public investors, further enhanced its capital position after S&P’s announcement on Monday by eliminating its quarterly dividend. The move will save some $174 million, the amount it paid in dividends in 2007. Ambac is expected to benefit from a plan that is presently being arranged by a consortium of lenders to provide fresh liquidity.
A rescue for Ambac by a bank group that includes CitigroupC and UBSUBS could provide it between $2 billion to $3 billion in a plan that would see it break itself into two halves, sources tell TheStreet.com. One would house policies for conservative debt, including municipal bonds; and another that backstops losses on structured debt, which are dropping in value due to the slumping mortgage market.
S&P’s rating “reflects our assessment of the scope of Ambac’s capital-raising plans and the company’s ability to implement those plans,” the agency’s report reads. “We left the ratings on credit watch with negative implications to reflect uncertainty surrounding the risk profile and capitalization plans for the reported new corporate structure being contemplated by the holding company.”
After S&P announced its action, MBIA said that it will eliminate its dividend. The company had cut its dividend to 13 cents last month, but has not yet paid out any dividends at that rate.
Does a company eliminating its dividend to save money strike you as one that deserves a triple A rating?
Of course not. These companies are in dire straits. But the ratings agencies can’t downgrade them. They’re trapped. The ratings agencies know that if they downgrade these companies, that the Monoline Nuke goes off and hundreds of billions will vanish from the economy almost overnight. But if they don’t downgrade these companies, the consequences could be far more dire, the ratings agencies themselves could face a crisis in confidence.
The ratings agencies are under tremendous pressure to keep the monolines at triple A, but they are well aware of the reality and don’t want to be left holding the bag on this when the walls come down.
So, the next best thing is being done for them short term: playing for time. By pretending that the bank bailout will work, it’s giving the lobbyists on Capitol Hill enough time to force a massive bailout of the monolines…possible even nationalization of the bond insurers with the full faith and credit of the US behind it.
The sheer number of defaults would then in turn be stopped by government intervention, for the cost to the government of NOT bailing out these defaulting companies would be far more than having to make good on these trillions of bond default insurance.
It’s a good plan if you’re expecting billions in free government cash because you’re Too Big To Fail.
And speaking of Too Big To Fail, states are now asking the feds to bail THEM out of the muni bond mess.
U.S. governors including New Jersey’s Jon Corzine and New York’s Eliot Spitzer may ask Congress to help reverse rising municipal debt costs stemming from the subprime mortgage market’s collapse, Washington Governor Christine Gregoire said.
Gregoire, Corzine and Spitzer joined other governors Feb. 24 in forming a group that will “produce something that gets us out of the problem, but most importantly produce something for Congress” to deter a future borrowing squeeze, Gregoire, a Democrat, said during a National Governors Association meeting in Washington yesterday.
Interest on insured bonds, including debt with rates set at periodic auctions, rose to as high as 20 percent because investors shunned the securities or demanded higher yields on waning confidence in the companies guaranteeing repayment. The jump in borrowing costs is another consequence of a credit pinch tied to the subprime collapse that led to $163 billion in Wall Street writedowns.
“A lot of governors really hadn’t anticipated that,” Gregoire told reporters in Washington. The group, which plans to meet soon, hasn’t discussed specific solutions, she said.
Seattle, Washington’s biggest city, faces $80 million in additional costs on existing debt due to the recent turmoil in the credit markets, Gregoire said.
Everyone is now expecting handouts, bailouts, and get out of jail free cards.
As rapidly rising bond debt threatens to sink local and county governments across America, the states are looking to DC to dig them out too.
The results of course will be the government printing its way out of one mess…and into a hyper-inflationary bubble that will lead to a massive deflationary collapse. Everyone will want a bailout then.
And when they don’t get it…that’s when the real problems are going to start.