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Will rising oil prices derail the recovery?

James Hamilton, Econbrowser
Last April I described new research on the role of oil prices in the recent recession. Here’s an update on what’s happened since then.

In a paper presented at the Brookings Institution last spring, I examined the post-sample forecasting performance of an equation originally published in 2003, which relates real GDP to past values of GDP and oil prices. I noted in April that if you had known in October 2007 the values of GDP through 2007:Q3 and what was about to happen to oil prices through 2008:Q2, you could have used that historical relation to predict the value of U.S. real GDP for 2008:Q3 with an accuracy better than 99.5%.

In the figure above I extend the earlier-reported forecast an additional four quarters and compare the projection with what actually happened to GDP through 2009:Q3. The dotted green line is a forecast formed in October 2007 of what would happen to U.S. GDP if you used nothing more than the values of GDP observed through 2007:Q3. Basically that forecast simply extrapolates the recent prior trend. The dashed red line is the forecast that uses GDP values only through 2007:Q3 but also uses knowledge of what was going to happen to oil prices between 2007:Q4 and 2009:Q3. If you treated oil prices as the only thing that matters for the economy, you would have predicted the bottom would be reached in 2009:Q1, flat growth between 2009:Q1 and 2009:Q2, and normal growth resuming in 2009:Q3. That’s exactly the trajectory that GDP has taken so far, although the bottom in 2009:Q2 was 2-1/2 percent lower than would be predicted on the basis of oil prices alone…
(10 Nov 2009)
related: Hamilton’s paper “Causes and Consequences of the Oil Shock of 2007-2008”, available here

Banks Hasten to Adopt New Loan Rules

Lingling Wei and Peter Grant, Wall Street Journal
Banks are moving quickly to restructure commercial mortgages under new U.S. guidelines that are more forgiving of battered property values and can help banks avoid bigger losses.

Citigroup Inc., regional bank Whitney Holding Corp. and other lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced Oct. 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.

“It’s a positive all the way around,” said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. The flexibility extended by regulators will apply to $110 billion to $130 billion of these loans, he said.

…In an interview, Joe Exnicios, chief risk officer of Whitney’s Whitney National Bank unit, of New Orleans, cited a hypothetical example in which a developer borrows money to develop a small retail center and gets a drugstore chain to sign a lease for one store. If the developer can’t sell the other sites, he would be unable to repay the loan. Under the new guidelines, the bank could create a healthy, performing loan supported by the drugstore lease and a nonperforming loan from the rest of the loan. “It may make a difference on whether you need to have additional capital and take additional reserves,” he said.

Critics agree that regulatory flexibility might help some banks avoid failure. But the troubled loans remaining on their books will discourage them from lending, reminiscent of Japan’s “lost decade” in the 1990s…
(X Sept 2009)

Finite Resources: One Possible Explanation for the Financial Crisis
Gail Tverberg, The Oil Drum: Europe
This is a slide video of the presentation given by Gail Tverberg at the Oil Drum/ASPO Conference at Alcatraz, Italy in June 2009. (Presentation PDF 1.3 MB).

Finite Resources: One Possible Explanation for the Financial Crisis from Rembrandt Koppelaar on Vimeo.

(7 Nov 2009)
sent in by EB reader jzbarton

What Is Inflation and How Does One Measure It?

Michael Shedlock, Mish’s Global Economic Trend Analysis

To understand inflation, one must first understand what money is and how to measure it. Please read What is Money and How Does One Measure It? before attempting to understand what follows.

Unfortunately there is no general agreement as to the definition of inflation. Here are some of the widely used definitions as noted in Inflation: What the heck is it?

Commonly Used Definitions

  1. Decline in purchasing power of the currency held
  2. Rising prices in general (essentially the same as #1 although some might disagree)
  3. Rising consumer prices (CPI)
  4. Rising producer prices (PPI)
  5. Rising prices due to expansion of money supply
  6. Rising prices due to expansion of money supply and credit
  7. Expansion of money supply
  8. Expansion of money supply and credit

Four of those definitions refer to money supply. That brings up another issue. When one refers to “money supply” are they talking about M1, M2, MZM, Money AMS (Austrian Money Supply), or simply the amount of money they have in their bank account or wallet at the time of the conversation?

Definitions 5 and 6 refer to “rising prices” yet fail to distinguish between consumer prices, producer prices, or simply prices in general. It seems we could easily add a lot more definitions.

Furthermore, some people make no distinction between money and credit but others do as noted by choices 5 thru 8.

Still others insist than in the fiat world we are in, the web is so tangled between money and credit that this mess is not even worth bothering to figure out. Those folks simply hold gold and wait for “The Crash”.

However, it is simply impossible to have a debate about inflation (or anything else) unless the parties can agree on a definition.

Like it or not, we live in a fiat world. Therefore we must attempt to have sound definitions that best describe the fiat world we are in.

The definition I adhere to is: Inflation is a net expansion of money supply and credit, where credit is marked to market. Deflation is the opposite: a net contraction of money supply and credit, where credit is marked to market.

Popular View

The most common definition of inflation is rising prices.

Moreover that is the definition central bankers want you to believe. That definition allows central bankers to print money at will, generally inflating prices everywhere (until asset prices crash as they just did), all the while proclaiming they are “inflation fighters”…
(9 Nov 2009)

They can make this rally last for years

ilargi, the automatic earth
Well, yes, I guess that the best thing Obama’s finance gurus could have wished for is for people to believe that if they can pull off something once, they can continue to do so indefinitely. All they’d have left to do after that is pray like a swirling bunch of derwishes that those people will keep on thinking so until either a miracle happens and the economy shows actual growth – to replace the made-up version seen so far- or at least until they are safely out of office.

…Unemployment in the USA, even when calculated in the deceptive and distorted way we have now become so fully accustomed to that we hardly raise our voices anymore, is much higher today than it was a year ago. The official U6 number is at 17.5%, unofficial data indicate more than 1 in 5 Americans are effectively un- or underemployed. A few million more homes were foreclosed on in 2009. The number of hours worked is lower. Pay per hour is stagnant at best. $1.5 trillion in consumer credit card space was pulled. States are reeling and panicking over double digit budget shortfalls. Tax revenues are plummeting. Federal debt has risen by a factor higher than seen since WWII, if not even more. Add your own favorite stats and color the pictures.

Still, before any of these developments had even started, back in 2008 49.1 million US citizens had trouble finding enough food to eat. That probably means 15-20 million children. And don’t forget that if they could have fed themselves, much of the food would have been of an inferior quality, since in most poor areas of the country, there’s a hell of a lot more cheap burgers available than vegetables. Perhaps luckily for them, they couldn’t even afford no high-fructosed whoppers.

But that was last year. In 2009, how many more hungry children did we add to the tally? Whatever their number, Obama and his administration chose and choose to ignore them. For Washington, saving Wall Street institutions is much more important. First you save the banks, and if there’s anything left afterwards, you may -or may not, depending on what the polls say- look at the 30-some million unemployed and the 20-odd million undernourished children…
(17 Nov 2009)
related: Hunger in the U.S.