KeNo's Housing and Economic Portal: Monday May 9 Housing and Economic stories

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TOP STORIES:

Treasury quietly plans for failure to raise debt ceiling - (www.washingtonpost.com) The White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt: With too little cash to pay creditors, the U.S. government would default. Interest rates would skyrocket. And the economic recovery would collapse. But behind the scenes, Treasury Secretary Timothy F. Geithner has already begun juggling the books to conserve cash, draining a special account at the Federal Reserve. And with the debt forecast to hit the legal limit of $14.3 trillion in just a few weeks, he has a range of tools at his disposal, including borrowing money from a pension fund for federal workers. Geithner also has authority to pay investors first for interest they’re owed on the debt, according to a decades-old legal opinion. A growing number of conservatives argue that by making interest payments first, the government could avoid default and the Obama administration’s predictions of economic Armageddon. But the nation could pay a substantial price in the form of higher interest rates if it relied for long on such evasive maneuvers, the Government Accountability Office said in a recent study. And financial analysts say market confidence could be shattered if Geithner had to cut off pay to combat troops or stop writing Social Security checks — even if he never missed an interest payment.

Prospects bleak for US ‘muni’ funds revival - (www.ft.com) The prospects are bleak for a significant revival in investor appetite this year for mutual funds that buy the debt of US states, cities and other local bodies, according to a survey of municipal bond experts. Only 7 per cent of the 92 municipal bankers, lawyers and issuers who were polled by RBC Capital Markets at a conference sponsored by the Bond Buyer predicted a return to net nflows for this year, the survey released on Wednesday shows. Investors have been abandoning muni mutual funds since November amid fears of rising defaults in the wake of economic recession, with the survey citing year-to-date outflows of nearly $30bn. “Over the near term, at least, we don’t see a substantial reversal in the fund flows,” said Chris Mauro, director of municipal bond research at RBC Capital Markets.

The Biggest US Economic Story Of The Year: The Federal Government Vs. Boeing - (www.businessinsider.com) Buried in the ocean of news regarding our three wars has been what I think is the biggest U.S. economic story of the year: the federal government’s lawsuit against Boeing, seeking to prevent the opening of its $2 billion factory in South Carolina, for which 1000 workers have reportedly already been hired (in case you missed the news altogether: story, story, story). Whatever the ultimate decision in the lawsuit, the very existence of the dispute will change the business landscape here in the U.S. for the next decade or two. First, the fact that this happened to Boeing, a company with vastly more political power than average (you might say that it is practically an arm of the federal government itself) is significant. There are hardly any U.S. or foreign companies that can rely on similar influence. For a U.S. company, for example, the prospect that Boeing’s $2 billion investment might be effectively confiscated by the government will be one more reason to build the next factory in a foreign country. The U.S. government won’t be able to sue to prevent the startup of production in Mexico, Canada, China, etc. For a Chinese investor, for example, contemplating investing in the U.S., imagine the impact of the story. The Chinese investor has no political influence in the U.S., a tenuous grasp of American geography and language, and no hope of getting the ear of politicians who take calls every week from Boeing and its lobbyists. Given the vicissitudes of American politics and this unpredictable aggression against investors by government, the Chinese businessman is not going to finance the U.S. project unless it can deliver a rate of return comparable to what would be expected in other countries where there is a lot of risk from capricious governments (historically these have been Third World countries led by dictators or owned by families).

Japan Debt Outlook Cut to Negative by S&P as Quake Rebuilding Adds to Debt - (www.bloomberg.com) Japan’s sovereign-rating outlook was cut to “negative” byStandard & Poor’s as the nation’s reconstruction needs following last month’s earthquake will likely add to what’s already the world’s biggest debt load. The outlook on Japan’s local-currency debt rating, at AA-, the fourth-highest grade, was lowered from “stable,” S&P said in a statement today. The company had reduced the rating by one step in January in the first cut since 2002. Moody’s Investors Service said last month the disaster may bring forward the “tipping point” for the country’s bond market. Today’s decision adds to pressure on Prime Minister Naoto Kan, who has yet to detail how the rebuilding will be paid for and how he plans to rein in longer-term fiscal deficits. A cross-party group of senior lawmakers said that Kan shouldn’t raise taxes, and called on the central bank to buy more government bonds instead.

Food Costs Seen Reaching a Record High This Year as Inflation Accelerates - (www.bloomberg.com) Global food prices may rise 4.4 percent to a record by the end of the year, driven by demand for meat, oilseeds and grains used to make ethanol, adding to costs that mean inflation is accelerating from the U.S. to China. The United Nations’ Food Price Index may climb to 240 points from 229.84 last month, said William Adams, a fund managerat Zurich-based Resilience AG, which has $22.2 million of assets. Global corn stockpiles are shrinking the most in seven years, inventories of nine edible oils will drop to the lowest since 1974 and U.S. beef stocks will be the smallest since 1999, the U.S. Department of Agriculture estimates. “The stockpiles are being severely depleted,” said Adams, who correctly forecast gains in heating oil and gasoline prices last year. “Eventually it gets to the consumer. The U.S. government isn’t subsidizing pork chops like it is ethanol.”