Good News Can Be Bad News

Posted December 04, 2008

Treasury Secretary Paulsen announces a new mortgage program which will use part of the second half of the $700 billion bailout funds. Paulsen met with China and the strength of the yuan is a major topic.


This is like a riddle.  When can good new be bad news too?  The answer is: when productivity rises in the US.  Yesterday, 3/December/2008, it was reported that US productivity rose 1.3%.  That was the good news.  The bad news is that US productivity rose 1.3%.

The reason a seemingly positive report is considered to be a negative is that productivity is rising because people are losing their jobs.  US corporate layoffs are at a 7 year high so workers must work longer and harder.  They are not complaining though, because most are grateful to have jobs.  Everyday it seems like there are announcements of massive layoffs.

Treasury Secretary Paulsen is on the move again as he enjoys his swan song.  On 3/December/2008, he met with China to discuss many trading issues and one of them is the strength of the China yuan.  China has been keeping the currency rate high, but is now indicating it will be letting the currency depreciate in order to protect exporters from the global economic problems.  Europe is the biggest importer of Chinese goods with the US second.  These talks are part of the Strategic Economic Dialogue forum with this being the 5th discussion. 

Paulsen has also indicated he is now willing to ask Congress for some of the remaining $350 billion bailout funding from the TARP legislation.  He has resisted up to this point, but is changing his mind….again.  To be honest, many people are fed up with this fed, because he is changing his position on a day to day basis.  It is no wonder that investors are having trouble developing confidence in the equity markets.  He was supposed to help mortgage foreclosures when the TARP program was first initiated, but he gave the money to the banks instead.

The money Paulsen will probably be requesting will be used to create a massive new mortgage program.  People who are interested in buying a home in 2009 would be able to get a new federally backed loan at 4.5% through Fannie Mae or Freddie Mac.  Finally!  The government is finally using some of the taxpayer dollars to help the taxpayers.  The goal is to prevent further declines in housing prices and thus stop the flood of foreclosures.

Heaven knows the banking systems around the world are broken.  The question is whether they can be fixed.  The European Central Bank and the Bank of England are both planning on announcing interest rate cuts again, because cuts in prior years have worked as an economic stimulus. Unfortunately, the general opinion is the cuts will not do much for the economies any more because the banks are…..broken. The newest victim in the global crisis is Credit Suisse.  The bank just announced it is cutting 5,300 jobs.

So what has been the impact on currencies as a result of all this action? 

The British pound ($1.4750) and the euro ($1.2670) fell against the US dollar.  The reason for the declines is due to the expected interest rate reductions to be announced by the ECB and BOE as mentioned.  Of course, the Australian ($.6424) and New Zealand dollars ($.5285) advanced for the same reason – anticipated interest rate cuts in Europe.

The euro also fell against the Japanese yen ($.0107) as did the South Korean won.

Currencies were actually a bit quiet yesterday with little movement.  Right now investors are playing a bit of a wait-and-see strategy.