Today's NYT reports:

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

The author at IMF attributed the reason to the fact that Asian countries specialize too much in advanced manufacturing. This is in sharp contrast to China, which specializes in low-end manufacturing.

I call China’s ability to weather this financial storm, “the Walmart Effect”, where during economic recession, the demand for necessity goods tends to decline less than the demand for durable and (or) luxury goods.

Another reason, as I discussed previously, is that China’s export sector plays a much smaller role in China’s GDP growth than commonly thought.

Anyway, the graphs below are stunning (graph courtesy of IMF):

(click to enlarge; source: IMF)

You can read the full presentation of the titled research here.

NYT’s economics reporter, who had written many pieces on subprime mortgages and the “liar loans”, told a vivid personal story of how he foolishly got into a mortgage he couldn’t afford and ruined his personal finance.

My Personal Credit Crisis

(added on May 19, 2009): Now you can listen to the same story from On Point with Tom Ashbrook.

Talking about tax increase is taboo in America. But the current sharp rise of budget deficits and government spending will, sooner or later, make tax increase inevitable. My sense is that not only the top earners will see a tax hike, but the tax increase will be much broader than what Obama Administration had promised.

(graph courtesy of Big Picture)

Ken Rogoff and Nouriel Roubini are racing for the “Dr. Doom” title. A lot of their opinions are right to the point though.

First watch this interesting debate between dollar bull and bear.

Now I will explain why I think dollar will be going down.

First I show you a graph between market volatility index (VIX) and the Dollar, in recent 3 years. The dollar shown in the graph is the dollar index, weighted by the US trade share with its major trading partners.

(click to enlarge)

It’s easy to see that before August/September ’08, the two lines did not move together, and actually they often moved in the opposite direction. But right after Lehman’s fall (as circled in blue), market volatility spiked up, going all the way to above 80, and the dollar rose along with it. The reason is that risk-averse investors moved their assets and investments from overseas back to the country. With huge capital flowing back in, the dollar had a huge appreciation. Dollar benefited from risk-aversion and served a safe-haven during the time of panic.

Recently, with equity market up almost 40% and a lot of talk about “green shoots”, market confidence came back, and the volatility came down. The Dollar just broke below its 200-day moving average (see below graph for a closer relationship between the two in recent months).

My sense is that the Dollar will continue to go down. What you might see is a diverging performance: dollar going down against the commodities currencies, such as Aussie and Canadian Dollar; but going up against Euro, where the economy is weaker and the European Central Bank lags behind in economic stimulation.

(click to enlarge)

In the long term, the single most important factor in determining the Dollar’s direction is the Fed’s monetary policy and US business cycle. This idea came originally from Robert Mundell, the Nobel laureate and the “father of the Euro”.

Below I show you the historical relationship between short term interest rate (in red) and the Dollar (in blue). The short term interest rate is measured by the yield of 3-month treasury bills, which closely matches the Fed funds rate.

(click to enlarge; source: St. Louis Fed)

The history goes back to 1973, where the data is last available. As you can see, the two lines roughly move in tandem with each other, with interest rate leading for the dollar for a few quarters (or even longer).

Of course, the real life is much more complicated, so is the Dollar. There are a few notable exceptions: one was after the 1973 recession, then there was 1982 recession, and lastly the most recent recession.

In the 1973 and 1982 recessions, dollar went up even when the interest went down. This was probably because the relative interest rate between the US and other developed countries was still quite large.

While the recent divergence was obviously the panic trade: the Dollar serving as safe-haven. And this is also the main reason why I predict the US dollar will go down once the economy starts to recover.

The interview of Gary Stern, Minniapolis Fed President, on economic outlook.

In reforming executive pay, two things need to be resolved:

1. How to properly award competent CEOs while discouraging them to take too much risk that may bring down the whole system;
2. How to align short-term gain with long-term health of the firm.

Most of the current discussion simply focuses on capping executive pay without addressing the above two incentive problems.

Some interesting graphs to share:

a. The long swing of Wall Street Pay

(source: WSJ)

b. A similar graph linking deregulation with pay in financial sector:

(source: see my previous post on the evolution on financial sector)

c. recent trend in Wall Street bonuses:

(source: WSJ)

Finally, a historical review on the extravagant Wall Street pay.