Thursday, November 4, 2010

Today's Best Reads

1--Beware of Wounded Lions, Kenneth Rogoff, Project Syndicate (via economist's view)

Excerpt: According to a recent ... report..., fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US. If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg..., the ground for populist economics is becoming more fertile by the day. ...

... world leaders ... must recognize the pain that the US is suffering in the name of free trade. Somehow, they must find ways to help the US expand its exports. Fortunately, emerging markets have a great deal of scope for action....

However much we may hope so, the current rut in which the US finds itself could prove to be a problem for the rest of the world. Unemployment in the US is high, while fiscal and monetary policies have been stretched to their limits. Exports are the best way out, but the US needs help. Otherwise, simmering trade frictions could suddenly throw globalization sharply into reverse. It wouldn’t be the first time.


2--US Elections: "The deficit hawks have already won", Jeff Madrick, Project Syndicate

Excerpt: The deficit hawks have also largely won in the U.S. The announcement last week that GDP grew at an annual rate of 2 percent only brings the point home: the U.S. needs a serious fiscal injection quickly. But it is not going to get it. ...

Unemployment stands at 9.6 percent and underemployment above 17 percent. The Congressional Budget Office figures GDP could be six percentage points higher before the economy reaches full capacity—that is, before inflation is any real threat. ... With such weakness, a substantial fiscal stimulus will likely have a high multiplier if it is designed correctly– aid to the states, unemployment insurance, some serious investment in infrastructure, and federal employment of idle workers.

But the deficit hawks, backed by many millions of dollars from powerful interests, will hear none of this. ... The fear-mongering has suppressed serious discourse about the need for stimulus now.


3--Rosenberg's Take On The Election Results And Other Matters, zero hedge From--Breakfast with Rosie)

Excerpt: As an aside, according to various macro models, even a $500 billion package would exert just a 0.25% positive impact on GDP growth (see more on page C1 of the WSJ). The markets are operating efficiently. This was not the case with QE1 when mortgage spreads and corporate bond spreads were in the stratosphere and the capital markets were closed for business.

Is another 50bps cut to the general level of interest rates from their current record-low levels, at the margin, which is what a $500 billion QE2 plan would entail, really convince debt-strapped consumers who are focused on balance sheet repair to go out and borrow and spend more? Or will it entice capacity-idled companies that are already sitting on a trillion dollars in cash to go on a spending and hiring spree (today’s WSJ cites a survey showing that corporate R&D spending has declined for the first time in over a decade)?...

Moreover, if we are talking about the Fed having a really meaningful impact, like enacting a policy that can actually close the output gap completely and totally limit deflationary risks, the numbers we have seen are in the range $4 to $5 trillion worth of asset buying from the central bank. Imagine a Fed balance sheet so big it would be half the size of the overall economy. Yikes! Just the thought of it makes me want to go out and buy more gold and silver mining companies.

What really caught our eye was what Robert Gordon, the Northwestern professor who sits on the NBER (National Bureau of Economic Research) business cycle dating committee, had to say to the NYT on this matter:

“There is a substantial chance that the U.S. economy is headed into a lost decade, similar to what Japan has experienced in the past 15 years, possibly with zero inflation instead of actual deflation. But the consequences for the U.S. population will be much more severe than in Japan because of our higher unemployment rate, our lack of a social safety net, our system that ties medical insurance to employment instead of making it a right of citizenship, our greater inequality and our higher level of poverty.”

4--America’s economic policy mix is a threat to the world, Philippe Legrain, VOX EU

Excerpt: ...trying to force the renminbi up with protectionist threats – as the US Congress demands and many respectable and ostensibly liberal commentators now seem to advocate – is to invite a trade war that would beggar us all.

Current US policy is not just ineffectual, it is also dangerous. Banks that ought to fold are kept on life support. Homeowners who ought to default and move to where the jobs are cling on to their depreciated houses in depressed areas. Bubble-prone investors believe in a Bernanke put. Money gushes out of the US and into emerging economies that don’t need it and can’t cope with it. This is economic vandalism.....

Do Barack Obama and Ben Bernanke really want a repeat of the 1997/98 Asian financial crisis, this time writ-large across emerging economies that account for half the world economy and most of its growth potential? Do they want to pick up the pieces for US investors and financial institutions? Do they not worry that investors might eventually lose all confidence in the devalued dollar and depreciated not-so-safe US Treasuries? Or are they so narrowly focused on the here and now, so blind to alternative policies, and so reckless in abusing American monetary power that they don’t care?

5--Former BIS Advisor And Central Banker Warns Entire World Is On Verge Of Another Bubble That "Could Burst With Disastrous Consequences", zero hedge

Excerpt: In an interview with Dow Jones, William White, who previously was an economic adviser to the Bank of International Settlements, and prior to that spent 22 years at the Bank of Canada, warned that the "massive infusion of credit" accompanying the sudden and dramatic ramp up in the printing of new money as a policy response to all problems, both within the developed and developing worlds, is now "manifesting itself in the sharp rise of asset prices in large developing economies, which could potentially become another bubble that will burst with disastrous consequences for the global economy." He added that the global economy is in a 'particularly dangerous' position that can only be corrected if the currencies of developing countries strengthen relative to those of developed countries, according to William White, one of the few policy makers to correctly predict the onset of the financial crisis....

"Equity prices are going through the roof, house prices are going through the roof, there's a lot of concern that the thing might just collapse," White said.

6--26th Sequential Week Of Outflows From Domestic Equity Mutual Funds, zero hedge

Excerpt: Today's ICI data puts an end to yet another piece of blatant CNBC propaganda. For the week ended October 27, ICI registered a $2.9 billion outflow from domestic equity mutual funds, making 26 straight weeks, or half a year, of neverending outflows. This brings the total to $84 billion. But fear not: now that the Fed will be buying $110 billion worth of stock via the Primary Dealers, courtesy of over 100 POMO operations over the next 8 months, it is more than clear who will be buying any and all stock in the stock market. (Retail investors have lost confidence in the markets and are withdrawing funds)

7--Federal Reserve Rains Money On Corporate America -- But Main Street Left High And Dry, Huffington Post

Excerpt: Meanwhile, savers, retirees and those living on fixed incomes are getting burned.

In November 2008, a month before the Fed lowered rates to near zero, the average bank-offered checking account in the U.S. was paying consumers 0.34 percent interest, and the average savings account was paying 0.49 percent, according to Market Rates Insight, a data provider. Both have been steadily falling since. In September, checking accounts were yielding 0.16 percent; savings accounts were paying a minuscule 0.24 percent in interest.

In the week ending Dec. 10, 2008, just a few days before the Fed lowered the overnight bank-to-bank lending rate to a record low, six-month certificates of deposit were yielding on average 1.93 percent, according to Bankrate.com. They now yield 0.32 percent.

One-year CDs were paying 2.30 percent back in December 2008, while five-year CDs were yielding 3.13 percent. They're now at 0.53 percent and 1.57 percent, respectively, Bankrate.com data show. CDs are offered by banks and are FDIC-insured. (Savers and retirees are getting squeezed to provide a larger subsidy to the banks)

8--Currency wars and the emerging-market countries, Richard Portes, VOX

(Very long) Excerpt: What is happening on the ground? The Bank of Japan has intervened to limit appreciation of the yen and may do further QE. The Bank of England is actively considering additional QE beyond the £200 billion in asset purchases it has already made. The European Central Bank (ECB) is reluctant to expand its balance sheet further, but it may be forced to buy more Greek, Portuguese, Irish, and Spanish bonds if the markets turn against any or all of these sovereign debtors. And if the euro were to appreciate substantially against the dollar, threatening the weak European recovery, the political pressure on the ECB for some form of intervention would be hard to resist. Meanwhile, the only uncertainties about further QE by the Fed are how much and at what speed....

The conventional prescription is to permit the appreciation – after all, it raises real incomes, and competitiveness is underpinned by rapid productivity growth – and switch away from export-led growth to more reliance on domestic demand. But many countries, China most vocally, are concerned that significant appreciation will hit marginal exporters, slow growth, and create unemployment.

If the large developed market countries do more QE, however, then the flow of liquidity to the emerging markets may force the latter to respond. They may try to resist exchange-rate appreciation by intervening in the foreign exchange markets. Here we do have competitive devaluation – the “currency wars”....This is why we see statements like “The US will win this war: it will either inflate the rest of the world or force their exchange rates up against the dollar” (Wolf 2010). But there is a potential downside for the US. Substantial dollar depreciation will weaken the global position of the dollar, as it did in the late 1970s (Chinn and Frankel 2007)

The Fed will proceed with QE. It will not accept foreign constraints on its monetary policy, nor will it run an internationally “coordinated” or “cooperative” monetary policy. Its decisions will be determined by its view of how best to achieve its mandated goal: maximum employment with price stability, which the Ben Bernanke has just defined as “about 2 per cent or a bit below” (Bernanke, 2010). He also observed that actual inflation was significantly lower. There is nothing in the mandate about effects on the rest of the world except insofar as these effects might feed back onto economic activity and inflation in the US. And indeed they might if, for example, Fed policy were to affect the currency composition of emerging-market central bank portfolios. If a major further expansion of the Fed’s balance sheet were to provoke a shift out of dollar assets, US Treasuries in particular, that would affect US interest rates and the dollar exchange rate. But so far, the Fed’s policymakers, including its chairman, have shown no concern for this possibility....

If US monetary policy eases further, it will get the exchange rate depreciation that it wants. It will indeed win the currency wars. Conventional wisdom is wrong: The US can, after all, devalue the dollar. But there are costs:

* A wave of trade protectionism is not excluded, although its probability is low;
* More likely are capital account protectionism, in the form of emerging market capital controls; and
* Damaging exchange-rate volatility, including among the large countries, if QE is not coordinated (simultaneous).

Moreover, in the longer run, this could substantially weaken the hegemony of the dollar in the international financial system.

John Connally, then US Treasury Secretary, famously said in 1971: “The dollar is our currency, but your problem.” Like most aphorisms, the obvious truth in this remark conceals complexities. The “exorbitant privilege” that accrues to the issuer of the major international currency is not to be conceded lightly (Gourinchas and Rey 2007). And the consequences for emerging market countries and the global economy of a shift to multipolarity in international finance, like the shift of weight towards emerging markets in global growth and economic impact, will be very far-reaching. (Must read)

9--The Republican remedy for an anemic economy through election day 2012, Robert Reich

Excerpt: The real message from voters was “Fix this stinking economy.” But Republicans have no intention of doing so.

With Republicans in control of the House, forget spending increases or tax cuts to stimulate the economy.

Republicans don’t believe in stimulating economies. They think markets eventually clear — once the pain is sufficient. Or in the immortal words of Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”

Of course, Mellon was dead wrong. Nothing was purged. Instead, the economy sunk into deeper and deeper depression.

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