Tuesday, September 28, 2010

Today's Best Reads

1--Shut Down the Fed (Part II), Ambrose Evans Pritchard, Telegraph

Excerpt: The dangers of tipping into a debt compound trap – as described by Irving Fisher in Debt-Deflation Theory of Great Depresssions in 1933 – outweigh the risk of an expanded money stock catching fire and setting off an inflation surge later. Debt deflation is a toxic process that can and does destroy societies as well as economies. You do not trifle with it.

But deliberately creating inflation “consistent” with the Fed’s mandate – implicitly to erode debt – is another matter. Nor can this be justified at this particular juncture. M3 has been leveling out. M2 has begun to rise briskly. The velocity of money has picked up. The M1 monetary mulitplier has jumped. (The usually persuasive Pritchard succumbs to hysteria)

2--More on QE2 and the Fed's monetary endgame, zero hedge

Excerpt: QE1 did little to expand lending, though QE1 likely did prevent even further declines in lending. However, QE alone appears incapable of leading to expanding lending as the problems today shift from one of supply to one of demand.

Even as banks have eased underwriting standards, the demand for loans remains low.

And this leads to our final cost analysis on QE2. Where confidence stands as the key issue for the economy, expanding QE2 may end up doing more damage than good as the confidence loss from a Fed indicating its fears of deflation through expansion of QE2 as well as the follow on loss of confidence from the diminishing impact of further QE leads to a loss in confidence whose costs outweigh those of the benefits of further reductions in long term rates.

3--How Americans' Love Affair with Debt Has Grown, Daniel Indiviglio, The Atlantic

Excerpt: This chart should be startling. It shows that total debt has increased from around $1,186 per person in 1948 to $10,168 in 2010. And remember, that's using 2010 dollars -- and it doesn't include real estate debt either like mortgages or home equity loans. This debt includes credit cards, auto loans, student loans, personal loans, and other non-real estate consumer debt. ...

What we're seeing here is a correction. Credit can't simply grow indefinitely, but must find a healthy equilibrium. It had clearly been extended too far prior to the crisis, and both banks and consumers are now pulling back. But wherever it finally settles will still likely be far greater than the amount of credit per capita prior to 1990 -- unless we are in a drastic and prolonged period of shrinking credit.

4--Income Gap Widens: Census Finds Record Gap Between Rich And Poor , Huffington Post

Excerpt: The top-earning 20 percent of Americans – those making more than $100,000 each year – received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line, according to newly released census figures. That ratio of 14.5-to-1 was an increase from 13.6 in 2008 and nearly double a low of 7.69 in 1968.... The U.S. also has the greatest disparity among Western industrialized nations.

At the top, the wealthiest 5 percent of Americans, who earn more than $180,000, added slightly to their annual incomes last year, census data show. Families at the $50,000 median level slipped lower. (Say "goodbye" to the middle class)

5--Fed Mulls New Bond Approach, Jon Hilsenrath, Wall Street Journal

Excerpt: Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds....

In March 2009, the Fed said it would buy $1.7 trillion worth of Treasury and mortgage-backed securities over a six to nine month period—known inside the Fed as the "shock and awe" approach.

Under the alternative approach gaining favor inside the Fed, it would announce purchases of a much smaller amount for some brief period and leave open the question of whether it would do more, a decision that would turn on how the economy is doing. This would give officials more flexibility in the face of an uncertain recovery. ("Baby steps" won't work. QE should be accompanied by fiscal stimulus, perhaps, a cut in payroll taxes)

6--Rising doubts about the eurobailout, naked capitalism

Excerpt: no country would ever want to borrow from the EFSF, unless it was absolutely unavoidable…

The second is that the overall amount for lending is significantly reduced....

And finally, the whole edifice would collapse if France was downgraded. This is a non-zero probability event, to put it mildly. Without France, Germany would be the sole pillar of the system, a role Germany would probably not accept.

Having looked at this in some detail, I find it hard to conceive of a situation where a country would both borrow from the EFSF (Emergency fund) and live happily ever after. (Gloomy, but thorough)

7--The great income shift, Richard Thaler, economist's view

Excerpt: Fully two-thirds of the income gains in the last economic expansion (2001-2007) flowed to just the top 1 percent. This is not a healthy sign for a society. As Professor Thaler urges, we need to decide whether we want to promote still-greater inequality (by extending the high-income tax cuts) or lean against this trend. Each year the average millionaire gets about $125,000 from the Bush tax cuts, according to the Urban-Brookings Tax Policy Center. Now seems to be a good time to say enough is enough. (The wealth continues to flow upward)

8--U.S. Consumer Confidence Fell More Than Forecast, Bloomberg

Excerpt: Confidence among U.S. consumers fell in September to the lowest level in seven months as Americans became more pessimistic about the labor market.

An unemployment rate that’s forecast to exceed 9 percent through 2011 points to limited income gains, making it less likely Americans will boost their spending, which accounts for about 70 percent of the economy. The report underscores the view of Federal Reserve policy makers that the recovery is “likely to be modest” in coming months.

“Consumers are pretty pessimistic and they certainly are worried about jobs,” said David Sloan, a senior economist at 4Cast Inc. in New York. “Consumer spending is growing at a slow pace. Consumers are facing considerable headwinds.”

9--Why America Cannot Win in Afghanistan, Bonnie Faulkner interview with General Hamid Gul, Global Research (Today's "must read")

Excerpt: The Afghan government is a corrupt government; the Communist government was not corrupt. But this government is a highly corrupt government. Karzai’s government is gangsters government, it is Mafia government. Karzai’s own half-brother, Ahmed Wali Karzai, who is located in Kandahar, he is on the Governor’s council, or probably Governor himself, he is known to be the biggest drug baron. And the drug trade is going on like never before, and I’ll give you some figures of what is the situation on the drug front. Before the Taliban ruled, the men, the Mujahedin, were fighting among themselves, after the Soviet evacuation of Afghanistan. The volume of opium, raw opium, that was produced by Afghanistan was 4,500 tons. In the last year of Taliban rule it dropped down to 50 tons a year, 50 tons only, and that, too, in territories which were not under the control of the Taliban. So much so that the Drug Enforcement Agency of America, through Christina Rocco, who was then the Assistant Secretary of State, gave a prize of $41 million, it is on record, to the Taliban government, even though the Taliban government was under sanction. But the Drug Enforcement Agency thought it fit, that they had done such wonderful work, that they would give them a prize, $41 million. With sanctions on them I don’t know if they were ever paid or not; I think they were probably paid, and accepted by the Taliban at that time.

Now, at this time last year, the opium production in Afghanistan is a record 6,200 tons. Which caters to more than 90 percent of the world’s entire need. Previously, we know that these big drug caches and consignments that were caught in Pakistan, but of late there have been no such catches in Pakistan. So if there is a record level of production of opium in Afghanistan, it is going out to somewhere. After all, it is not being used in Afghanistan. How is it going? It’s not going through Iran, it is not going through Pakistan. Some of it is going to the Central Asian republics. But most of it is being directly flown – now this is very alarming – directly flown from Afghanistan to Europe as well as to America. And, I don’t know, I am not yet sure, that military aircraft are used for it or not, but I am sure the people, bigwigs up there, who are not interested in stopping the drug trade, they are involved in it. Who are those people? That is something that is for the American journalists, because unfortunately this term, “embedded journalism,” it is such a despicable term, to begin with, and it’s such a horrible concept, that truth can never come out. So, let’s first of all, America, allow free journalism to cover Afghanistan, and then they will know what all is happening.

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