Five Cent: Come give me a hug

The acting US Mint Director was in Congress today talking about the future of coins and bills. I've been following the ongoing losses the US Mint takes each year on pennies and nickels. Negative seigniorage is not a great long term plan.

As noted here, I've been hoarding nickels as one of several hedges against the purchasing power destruction of US currency via QE and inflation. The Mint was crowing about reducing production costs of pennies and nickels, but admitted that

"The cost to manufacture and distribute the penny and nickel once again exceeded their face values as it has the last six years".

This is a battle they can't win. The only thing to figure out is the terms of their surrender. The raw material costs of the nickel (75% copper, 25% nickel) already exceed the face value. They can prolong the life of the penny and nickel by changing the metal composition to steel, but even so, they have effectively become useless and should be phased out of circulation as Canada has done with their penny.

In 1964, LBJ warned not to hoard silver quarters as they were replaced with a copper/nickel cladding because the US would keep silver prices low and dump Treasury silver on the market. Today, according to the BLS calculator, a 1964 quarter has the same purchasing power as $1.87. Meanwhile, a 1964 silver quarter is worth $6.04, 24 times the face value, or 320% of what the government claims from inflation alone. The hoarders of silver quarters in 1964 made a killing on government lies and currency abuse. It may not work out this time with copper/nickel, but maybe it will.

CFNAI Red Alert

The Chicago Fed National Activity Index is a composite index built from 85 monthly indicators. A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.

source: http://www.chicagofed.org/webpages/research/data/cfnai/current_data.cfm

The CFNAI came in at -0.56 for October and the three month moving average dropped again in October, also to -0.56. This is the lowest reading on the moving average since 2009, and the 8th negative monthly value in a row. The diffusion index came in at -0.32, a sliver away from the critical -0.35 threshold (see below).

There has only been one other time in recent history when a reading this low did not lead to a recession, and that was in 2003. If this is like 2003, we should see a big improvement soon and head back into positive growth territory. If not, well, Merry F'ing Xmas.

The Chicago Fed background document states that a reading above +0.7 indicates inflation danger and below -0.7 indicates recession danger. In a 2012 Chicago Fed Letter, Scott Brave and Max Lichtenstein found that:

the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below). This threshold was determined using the Berge and Jord a ROC method. Additionally, Brave and Lichtenstein found that, on average, the CFNAI Difusion Index signals the beginning and end of recessions one month earlier than the CFNAI-MA3.

California UI Trust Fund Balance update

The California unemployment rate recently dropped to 10.1%. It is one of only three states with unemployment still in double digits (Nevada and Rhode Island are the other two). Mass unemployment drained the state unemployment insurance trust fund in 2009 and it has never recovered.

California has been borrowing from the federal government to pay unemployment claims since 2009, and was supposed to start paying interest on the loans back in 2010. The interest payments were initially deferred again, but I'm not sure of the current status.

While the trust fund balance appears to have bottomed, it is still $9.5 billion in the red. California's state budget is $91 billion, so the trust fund liability is over a 10% deficit by itself. The projected general fund deficit for the current year is only $1.9 billion, so all California has to do is turn that into a surplus for 5 years straight (assuming no interest) to get the trust fund back to zero.

See also:
Is California Recovering Faster?
California: Unemployment Rate falls to 10.1% in October, Payroll jobs increase 45,800

Sometimes a rainbow is better than a pot of gold

It is time for another austerity vote in Greece, with the current prime minister warning of catastrophe if Greece exits the EuroZone.

It seems to me the catastrophe is unfolding at a rapid pace by Greece staying in the EZ burdened by unpayable debt. With 25% unemployment and 5 straight years of deepening recession, you would think the internal political will would appear to force Greece out, but I guess the suffering is not sufficient yet.

People need hope to get up in the morning. The current political economy in Greece does not foster hope, just the hopelessness of trying to get their national debt down to 120% of GDP after 8 more years of austerity. Even that plan is proving to be impossibly optimistic. The prime minister would be better served taking the sage advice of Poison:

Life ain't no easy ride
At least that's what I'm told
Sometimes a rainbow, baby
Is better than a pot of gold