Half of all US children and most black children will use food stamps at some point during their childhood, according to new research at Cornell University. Ninety per cent of black children, and ninety per cent of single parent children will use the stamps, which, due to social stigma, are not always cashed in.
Manufacturers report higher output, worldwide (comparative chart, here; comparative table, here). But in spite of this, UK and European equities are down very sharply this morning. The exact trigger is not agreed, but banking stocks have been falling over the past few days and news from Irish and Greek banks are adding to the downward pressure. More questionable has been the strength of the rally to date.
News from the US banks is also worrying. Testimony given at Congress reports a sharp deterioration in conditions for commercial mortgage-backed securities. Obama is considering a second stimulus. Some timely research is calling for an extension of government guarantees into 2010.
Australia raised rates to 3.5 per cent, as expected, amid rising confidence in Asia Pacific and emerging markets. The IMF has not ruled out the use of capital controls, after Brazil unexpectedly imposed a 2 per cent tax on short-term inflows last month in an effort to control currency appreciation and bubble formation. There are few alternatives for emerging markets unless China allows its currency to appreciate, which Ben Bernanke has described as “extraordinarily urgent”. But Asia’s rapid rebound is unsustainable without private demand rising to replace government stimulus.
And there is a lack of clarity on the role of markets. Do they find the correct price, performing no social function? Do they, as George Soros says, fail even to find the correct price? Or can they perform some social function, as implied by UN Secretary General’s call on leaders of stock exchanges “to better manage and integrate environmental, social and governance issues into their business practices”? Further debate today (1, 2).
And following Nouriel Roubini’s piece, more debate on the carry trade, picked up by The Economist. Tim Lee argues the carry trade shouldn’t work in theory, as differences in yields between currencies should be explained by inflation differentials or expectations of imminent change in exchange rate. Carry trades can only work if there is (1) government interference in markets and (2) weak domestic demand. (If a carry trade currency experienced strong domestic demand, the central bank would raise interest rates to counter rapid money supply growth, reducing the attractiveness of that currency for the carry trade.)
Both conditions currently hold in the US, and could lead to a nasty shock for markets. If the (speculative) carry trade is supporting money supply growth, the Fed might think policy is looser than it really is. “That could set up the markets for a nasty shock, in which the Fed signals an end to accommodation, the dollar surges, and the carry trade reverses. In such circumstances, not only would asset prices fall but the higher dollar would tighten US economic conditions at a very awkward moment.”