Tuesday, October 26, 2010

Today's Best Reads

1--Deleveraging, Yglesias, Think Progress

Excerpt: The fundamental issue here is that middle class households have no choice but to deleverage and pay down their debts......

This is where there’s a role for short-term debt-financed government activities. (ed note: fiscal stimulus) Such activities both provide income to households, facilitating a speedier deleveraging process, and also provide some assurance to businesses that there will be demand in the form of government purchases. That, in turn, should spur further business investment which will provide additional income to households further speeding the deleveraging process. When household deleveraging is done, it would be necessary to reverse course and reduce public debts. But by maintaining a decent pace of GDP growth during the process we can ensure that public debt is paid down from a relatively strong economic base. (Excellent summary of the need for stimulus while households reduce their debts)

2--Romer: Now Isn’t the Time to Cut the Deficit, Economist's View

Excerpt: Make no mistake: persistent large budget deficits are a significant problem. ... And our projected long-run deficits are simply unsustainable. So, the question is not whether we need to reduce our deficit. Of course we do. The question is when.

Now is not the time. Unemployment is still near 10 percent in the United States and in Europe... Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.

3--The Final End of Bretton Woods 2?, Tim Duy, Fed Watch

Excerpt: after two years of scrambling to find the right mix of policies... the US economy remains mired at a suboptimal level as stimulus flows out beyond US borders.

...an excessively high dollar is the explanation for the simultaneous existence of a sizable current account deficit and excessive unemployment....

Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $). That mean that the increase in imports was 87.5% of the increase in domestic demand.

To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new "freshwater" theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately. (Recessions are caused by lack of demand, but imports are hurting demand for US products thus keeping unemployment high)

If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US.

4--Bernanke Leaps into a Liquidity Trap, John Hussman, Hussman Funds

Excerpt: the precise level of long-term interest rates is not the main constraint on borrowing here. The key issues are the rational desire to reduce debt loads, and the inadequacy of profitable investment opportunities in an economy flooded with excess capacity....

One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it.

You can see why monetary base manipulations have so little effect on GDP by examining U.S. data since 1947. Expand the quantity of base money, and it turns out that velocity falls in nearly direct proportion....One wonders why anyone expects quantitative easing in the U.S. to be any less futile than it was in Japan.

Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long..... The Fed is not helping the economy - it is encouraging a bubble in risky assets. (Hussman dissects QE. Sheer brilliance)

5--Roubini: States Are Doomed, CNBC

Excerpt: Municipal debt is up to 20% of GDP, (Roubini) told me exclusively. And unfunded liabilities of state and local pension funds? Those are as high as $3 trillion — another 20% of GDP. So, basically, get ready — especially in Q1 when states can no longer use federal money to plug their budget holes.

“The issue is whether the Federal government will bail out state and local governments with a federal guarantee of their debt,” Roubini told me, likening the scenario to the money received by Greece and to be generalized to other Eurozone members in trouble via the new European "stabilization fund."

6--Slump in household spending highlights the effect of austerity measures on consumers, UK Telegraph

Excerpt: The Government's plans to return Britain to growth have been dealt a severe blow after it emerged that household spending fell in October at its fastest pace since January while debt levels are on the rise for the first time in nine months.

Shrinking incomes drove the cuts to household spending and also appeared to be the trigger for the first increase in debt in nine months, according to the Household Finance Index....

Economists expect growth to keep slowing into next year, amid fiscal austerity measures and a weakening outlook for exports as global demand softens....If third-quarter GDP disappoints, it will cast further doubt on the ability of the Coalition to force through fiscal tightening without throwing the economy back into recession, analysts at Capital Economics warned. (British "deficit hawks" are about to be derailed by reality)

7--Pimco's El-Erian: Expects Greece Will Default In 3 Years, Wall Street Journal

Excerpt: Greece is likely to default, and it will be to the country's and the European Union's benefits, said El-Erian, speaking at the Buttonwood Gathering in New York.

Without an orderly restructuring, he said, Greece's economy could spiral into a lost decade of high unemployment and low growth as seen in Asia and Latin America in the past. That is because the fiscal plan imposed by the International Monetary Fund and EU for Greece's bailout to adjust its debt to GDP ratio will require enormous growth sacrifices, and yet see the country's debt rise further into the future.

8--The U.K. Swallows Austerity So We Don't Have To, Dean Baker, Huffington Post

Excerpt: The U.K. is jumping out front to lay off public sector workers, raise taxes, and cut government programs and supports across the board. It is doing this at a time when the economy has nearly 8 percent unemployment and considerably excess capacity in almost every sector of its economy.

This drive to austerity comes at a time when the short-term rate set by the Bank of England is 0.5 percent and the rate on 10-year bonds is just 3.0 percent. The timing is also perfectly wrong in that most of the U.K.'s major trading partners are also suffering from weak economies and therefore unlikely to provide strong export markets. Nor are they likely to tolerate a substantial devaluation of the pound against their currency....

Turning to the business side of the story, demand growth is generally the most important determinant of investment. Demand growth is almost certain to slow precipitously in the context of the sharp cuts being put forward by the government. If firms are not investing now, it is hard to believe that they will invest more when the economy weakens, no matter how excited they might be over the prospect of lower budget deficits. (Brits leaders pave the way to Depression)

9--Aftermath–Six Questions for Nir Rosen, Scott Horton, Harpers Magazine

Excerpt: I don’t think the Middle East should be viewed through the prism of alleged American “interests.” And I don’t think imposing its will on weaker countries increases American security. Even the weak find ways to resist. America is more insecure when it creates more enemies it didn’t need to have and meddles with the internal affairs of other countries. Certainly the Middle East was more stable before the war. America’s security posture in the Middle East involves colonial and post-colonial relations. American influence there is embattled and changing. The war in Iraq may come to be seen as a turning point, part of a decline in American influence in the region. But there are other things happening at the same time. The Saudi regime is unsustainable and the Egyptian regime is disintegrating. These two countries are pillars of the American regional architecture. And the third pillar, Israel, is not viable in its current form as an increasingly rogue apartheid Jewish state. Finally, the American military is exhausted and losing its conventional skills after nearly ten years of occupation while the power of asymmetrical tactics against a conventional behemoth has been demonstrated.

The irrational American response after September 11 reduced the gap in power and influence between the United States and other regional or global actors. The neoconservative notion that we were at the end of history and the United States could maintain its triumph by any means necessary was proven to be folly. America’s excessive use of force actually weakened its position in the region. Had America paid attention to the people, it might have produced polices that were good for the region and not based on some misguided notion of America’s interests in the region. The United States will now seek to withdraw from the region while avoiding the impression that it has been defeated. But one of the tragedies of American engagement in the Middle East today is that its conduct is regularly driven by efforts not to do the right thing, but to avoid the appearance of defeat. (Excellent interview with "unembedded" journalist Nir Rosen)

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