So. California bankruptcy filings plunge

My son-in-law, a lawyer specializing in bankruptcies, points me to some rather surprising information: bankruptcy filings in California's Central District (So. California less San Diego county), home to some 19 million people, were down by over 30% in the 12 months ended June 2012. You can see the data in the chart above. Looks to me like things have improved rather decisively in the past year. Well, they've "improved" in the sense that the news is a lot less bad. But that's still welcome progress.

Federal budget update

These charts summarize the current state of the Federal government's finances. The best thing to be said is that revenue growth has outpaced spending growth since the end of the recession, with the result that the deficit has declined both in nominal terms and as a percent of GDP. The worst thing, however, is the deficit is still $1.23 trillion dollars over the past year. In the "thank goodness for small favors" department, spending as a percent of GDP has dropped from a high of 25.3% in 2009 to 23.5% today. That's still higher than during the peak of the early Reagan years, however.

One other thing to note is the dismal performance of revenues in recent years. They have risen, but at a very slow pace, and that is almost entirely due to the fact that the recovery has been miserably slow; the tax base is still way below where it was pre-recession.

The best way to fix the deficit is to keep revenues from rising in nominal terms (as has been the case since mid-2009), and find ways to boost employment. Allowing the Bush tax cuts to expire for those earning over $250K, as Obama has proposed, won't do anything to achieve that goal. More likely, it would retard the growth of employment since taxes on capital would rise significantly, hurting small business owners and entrepreneurs the most. Soaking "the rich" for a few extra dollars has a payoff that is much lower than the payoff of an increase in the size of the workforce.

The euro comes back to earth

The euro has fallen almost 15% in the past year against the dollar, and it is off almost 25% from its 2008 all-time highs. Is this a disaster? Hardly. As the chart above shows, the euro is now worth almost exactly what it has averaged against the dollar since its inception in 1999.

As this next chart suggests, just about the same can be said for the euro's purchasing power relative to the dollar. On an inflation-adjusted basis, the euro today is worth only slightly more (about 6%) against the dollar than its average over the past 40 years. (The green PPP line is my estimate of the euro/dollar exchange rate that would equilibrate prices between the U.S. and the eurozone. When the actual exchange rate trades above its PPP value, then prices in Europe are higher than in the U.S. Today's rate suggests that a U.S. tourist to the eurozone will find that prices are only about 6% higher on average than they are in the U.S.)

It's interesting that despite all of the huge and well-publicized problems plaguing the eurozone today, the euro is not undervalued, at least against the dollar. However, both the dollar and the euro are very weak—and, I would argue, undervalued—relative to gold, as the chart above suggests (I have created a synthetic euro back to 1978, based on the value of the DM, with the idea that the euro is basically an extension of the DM). Over the past 35 years, the yen has held its value against gold far better than either the euro or the dollar. From a long-term perspective, the dollar and the euro have been tracking each other fairly well against gold and against inflation-adjusted prices.

What this suggests is that if you believe that really bad things have yet to happen in the Eurozone, then shorting the euro vis a vis the dollar is not such a bad idea, since the euro's value today does not appear to be distressed at all.