Saturday, November 6, 2010

Weekend Links

1-- 2 million people will lose benefits in December and 6 million by the end of next year, zero hedge

Excerpt: Secretary of Labor Hilda L. Solis issued the following statement on the October 2010 Employment Situation report released today:

"With millions of Americans still looking for work, now is not the time to cut key safety net programs like Unemployment Insurance. The Emergency Unemployment Compensation program is set to expire at the end of November. If that happens, 2 million people will lose benefits in December and 6 million by the end of next year.

"While we are on the path of job creation, we cannot forget the millions of Americans who, through no fault of their own, are still unemployed and looking for work. Safety net programs like the Unemployment Insurance program have long been known to be a cost-effective way of keeping families afloat during difficult economic periods, while also serving to boost the overall economy.

2--QE Madness, Paul Krugman, New York Times

Excerpt: It has been really interesting to watch some of the commentary over quantitative easing by the Fed: while people like me see the Fed’s actions as way too timid, there’s a substantial faction out there that sees them as the end of Western civilization. Right now the most popular story on Bloomberg is Jim Rogers saying that Bernanke doesn’t understand economics, that he’s “debasing the currency.”

I’ve seen Rogers in action; he seemed to me to be confused about issues like the difference between assets and liabilities. And please note that inflationistas like Rogers have been wrong about absolutely everything this cycle (and the last cycle, and the cycle before that).

But they have their devotees. And this means that monetary policy, our only real hope at this point, must climb a wall of stupidity.

3--Exporting Our Way to Stability, Barack Obama, New York Times

Excerpt: AS the United States recovers from this recession, the biggest mistake we could make would be to rebuild our economy on the same pile of debt or the paper profits of financial speculation. We need to rebuild on a new, stronger foundation for economic growth. And part of that foundation involves doing what Americans have always done best: discovering, creating and building products that are sold all over the world.

We want to be known not just for what we consume, but for what we produce. And the more we export abroad, the more jobs we create in America. In fact, every $1 billion we export supports more than 5,000 jobs at home.

It is for this reason that I set a goal of doubling America’s exports in the next five years. To do that, we need to find new customers in new markets for American-made goods. And some of the fastest-growing markets in the world are in Asia, where I’m traveling this week. (Obama's plan to destroy the dollar to make the US more competitive continues apace)

4--America’s failing monetary policy, Felix Salmon, Reuters

Excerpt: monetary policy always works like that: savers get hit when interest rates fall, while banks love it. But this time it’s even worse than usual, since businesses aren’t borrowing or investing — and insofar as they are borrowing, they’re using the proceeds to buy back their stock, rather than to employ more people.

The net result is that the banks — whose collective cost of funds is now less than 1% — are now lending overwhelmingly to just one borrower:

U.S. banks now own more than $1.5 trillion in Treasuries and taxpayer-backed debt issued by mortgage giants Fannie Mae and Freddie Mac, according to the latest weekly data provided by the Fed. It’s a 30 percent increase from the week prior to the Fed’s Dec. 16, 2008, announcement that it was lowering the main interest rate to 0-0.25 percent.

Outstanding commercial and industrial loans at U.S. banks have fallen from $1.6 trillion in October 2008 to $1.2 trillion this past September, Fed data show. The $390 billion drop is equivalent to a 24 percent reduction in credit to businesses.

It’s truly outrageous that banks are lending more money to the U.S. government than they are to all commercial and industrial borrowers combined; well done to Nasiripour for connecting these dots and for providing a much-needed dose of outrage at the way in which Bernanke’s monetary policy simply isn’t helping the broad mass of the U.S. population.


Excerpt: (Bernanke talking to college students at Jacksonville University--wonkish) He explains that the Fed “is not printing money”. They are merely swapping treasuries for deposits. As he mentioned in his op-ed the other day there is no reason to believe this operation is inflationary. It alters the duration of debt outstanding and nothing more. QE IS NOT INFLATIONARY.

He says the price increases in commodities (caused entirely by speculators and not fundamental changes) are not a concern because the slack in the economy will make it difficult to pass these costs along to consumers (sound familiar?). Unfortunately, I think the Chairman is overlooking the fact that corporations will be less likely to hire as they see their margins squeezed. This is a significant issue the Chairman appears to be glaring over. It should not surprise any of us that he is viewing this environment as an academic and not as a business owner. Just one more piece of evidence showing he is unqualified for this position.


Excerpt: The most glaring example of failed QE is in Japan in 2001. Richard Koo refers to this event as the “greatest monetary non-event”. In his book, The Holy Grail of Macroeconomics, Koo confirms what the BIS states above:

“In reality, however, borrowers – not lenders, as argued by academic economists – were the primary bottleneck in Japan’s Great Recession. If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something. But when there are no borrowers the bank is powerless.”

In the same piece cited above, the BIS also uses the example of Japan to illustrate the weakness of QE. The following chart (Figure 1) shows that QE does not stimulate borrowing (and the history of continued economic weakness in Japan is coincidental):

“A striking recent illustration of the tenuous link between excess reserves and bank lending is the experience during the Bank of Japan’s “quantitative easing” policy in 2001-2006. Despite significant expansions in excess reserve balances, and the associated increase in base money, during the zero-interest rate policy, lending in the Japanese banking system did not increase robustly.”

Koo goes a step further in describing the failure of QE to promote private sector recovery. His simple example is one I have used often:

“The central bank’s implementation of QE at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at $100 each, tries stocking the shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behavior should change–sales will remain stuck at about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of QE, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.” (Must see charts prove that QE will not work)

7--QE is another wasteful government program, Pragmatic capitalist

Excerpt: (from Hoisington)For instance, as a result of QE1 the banks are holding close to $1 trillion of excess reserves. The important question is why are banks unwilling to put these essentially zero earning reserves to work. Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds.

A parallel situation exists in the corporate sector. Non-bank corporations are sitting on huge cash reserves. In the past two quarters liquid assets amounted to 7% of total assets, the highest level since 1963 (Chart 2). This cash reflects a lack of compelling uses for the funds, as well as the need to hedge against risks, including those of dealing with potential vulnerable counter-parties. The fact that substantial bank and corporate funds remain idle is a strong signal that U.S. economic problems exist outside the monetary sphere.”....

For QE2 to work, a renewed borrowing and lending cycle must take place, resulting in a further leveraging of the already highly overleveraged U.S. economy. Such additional leverage would not be beneficial since increasing indebtedness from these levels ultimately leads to economic deterioration, systemic risk, and in the normative case, deflation, as documented by Rinehart and Rogoff in their book, This Time Is Different. Therefore, at best QE2 can be nothing more than a short-term panacea exacerbating the serious structural problems already facing the United States.

Thus, we believe that QE2 is an ill advised program that offers little prospect of boosting economic activity. If the program achieves success, any gains in economic activity will be for a very limited period of time with major risks that any short-term gain will be swamped by incalculably high costs in the future. These unknown, questionable experiments in monetary policy are being made to correct problems that are clearly of a non-monetary nature.” (Brilliant analysis by Hoisington)

8--The Fed stokes global currency war, WSWS

Excerpt: The US central bank is pursuing a deliberate policy of devaluing the dollar in order to cheapen the price of US exports and make foreign imports more expensive. Under conditions of stagnant markets and negligible economic growth in the US, Europe and Japan, such a policy inevitably fuels countermeasures by America’s competitors. They seek to defend their export industries by intervening to halt the rise in their exchange rates and contain waves of speculative investments pushing up their currencies and overheating their economies.

The fact that the Fed announced its plan to purchase nearly $1 trillion in US Treasury securities barely a week before the G20 summit of leading economies in Seoul, South Korea underscores the provocative character of the action.

Washington is seeking to establish a bloc of European and Asian countries at the summit behind its demand that China allow its currency to appreciate more rapidly. There is an element of blackmail in the Fed’s move—an implicit threat to Germany, Japan and other exporting nations of what they will face if they do not fall in behind the US anti-Chinese campaign....

In essence, the United States, the world’s biggest debtor nation, is seeking to leverage its massive trade deficits and debt—expressions of the decline of American capitalism—using them as weapons against its economic rivals. It is exploiting the privileged position of the US dollar as the world’s primary trading and reserve currency to offload its crisis onto the rest of the world.

9--A Writing Stone: Chapter and Verse, Book review, Keith Richard's memoir "Life", New York Times

Excerpt: For legions of Rolling Stones fans, Keith Richards is not only the heart and soul of the world’s greatest rock ’n’ roll band, he’s also the very avatar of rebellion: the desperado, the buccaneer, the po├Ęte maudit, the soul survivor and main offender, the torn and frayed outlaw, and the coolest dude on the planet, named both No. 1 on the rock stars most-likely-to-die list and the one life form (besides the cockroach) capable of surviving nuclear war.

Halfway through his electrifying new memoir, “Life,” Keith Richards writes about the consequences of fame: the nearly complete loss of privacy and the weirdness of being mythologized by fans as a sort of folk-hero renegade.

“I can’t untie the threads of how much I played up to the part that was written for me,” he says. “I mean the skull ring and the broken tooth and the kohl. Is it half and half? I think in a way your persona, your image, as it used to be known, is like a ball and chain. People think I’m still a goddamn junkie. It’s 30 years since I gave up the dope! Image is like a long shadow. Even when the sun goes down, you can see it.”

10--Ireland is running out of time, Ambrose-Evans Pritchard, Telegraph

Excerpt: UCD professor Karl Whelan, a former Fed economist, told me this morning that there is a “reasonably high probability” that Ireland will have to turn to the EU-IMF even though this will be resisted until the bitter end as a horrible humiliation...

“Yields on government bonds have priced in a high likelihood of default. If this continues, Ireland may not be able to continue borrowing on the sovereign bond market,” he said in an article posted on The Irish Economy website, a good source for anybody following this Gaelic tragedy...

We cannot do `fiscal stimulus’, nor can we devalue our exchange rate, since we do not have one. It is perfectly reasonable to ask how we got into this mess, to allocate blame and to demand retribution. But no amount of ranting can expand the limited range of choices available to the Government.”

(If I may interject: Ireland got into the mess because real interest rates set by the ECB for German needs were minus 2pc for much of the last decade, with utterly predicitable and calamitous results. Could any Irish government have adopted policies – financial repression, fiscal tightening, etc – to offset such idiotic interest rates? Perhaps, at a stretch. But the unbearable truth is that EMU itself caused this crisis).

Back to Prof McCarthy:

“The only factor the Government can do anything about at this stage is the budget deficit. If they do too little to convince the markets, the game is up and the Irish Government will be unable to finance itself, which means an IMF/European bailout and economic policy dictated from outside the country. How bad would that be?”

11--The Big Blink, Raghuram Rajan, Project Syndicate

Excerpt: Emerging markets are worried because they believe that the Fed’s ultra-aggressive monetary policy will have little effect in expanding US domestic demand. Instead, it will shift demand towards US producers, much as direct foreign-exchange intervention would. In other words, quantitative easing seems to be as effective a method of depreciating the dollar as selling it in currency markets would be.

Because they know that it will take time for domestic demand to pick up, emerging markets are unwilling to risk a collapse in exports to the US by allowing their currencies to strengthen against the dollar too quickly. They are resisting appreciation through foreign-exchange intervention and capital controls. As a result, we might not see steady growth of demand in emerging markets. Instead, excess liquidity and fresh asset bubbles could emerge in the world’s financial and housing markets, impeding, if not torpedoing, growth.

In the ongoing showdown over currencies, who will blink first? The US (and other industrial countries) could argue that it has high levels of unemployment and should be free to adopt policies that boost growth, even at the expense of growth in emerging markets. These countries, in turn, could argue that even very poor US households are much better off than the average emerging-market household.

Rather than bickering about who has the stronger case, it would be better if all sides compromised – if everyone blinked simultaneously. The US should dial back its aggressive monetary policy, focusing on repairing its own economy’s structural problems, while emerging markets should respond by allowing their exchange rates to appreciate steadily, thereby facilitating the growth of domestic demand. Is it too much to hope that the G-20 can achieve such a commonsensical compromise?

12--The wars of austerity, Robert Skidelsky, Project Syndicate

Excerpt: The recession reinforced the pattern of poor countries lending to rich ones. With vigorous recovery in East Asia and stagnation in the West, global imbalances have grown. And, as former US Federal Reserve Chairman Alan Greenspan recently noted, “US fixed capital investment has fallen far short of the level that history suggests should have occurred, given the dramatic surge in corporate profitability.” In short, we are heading full steam ahead into the next collapse....

The US accuses China of undervaluing its currency, while China blames loose US monetary policy for flooding emerging markets with US dollars. The US House of Representatives has passed a bill that would allow duties to be imposed on imports from countries, like China, that manipulate their currencies for trade advantage.

Meanwhile, the dollar’s depreciation in anticipation of further quantitative easing has caused East Asian central banks to step up their purchases of dollars and impose controls on capital inflows, in order to prevent their currencies from appreciating. As Asian countries try to keep capital out, the West moves towards protectionism.

We can learn from the experience of the 1930’s. A rising tide lifts all boats; a receding one ignites a Hobbesian war of each against all.

This brings us back to the premature withdrawal of fiscal stimulus. With aggregate demand depressed in Europe and the US, governments turn naturally to export markets to relieve unemployment at home. But all countries cannot simultaneously run trade surpluses. The attempt to achieve them is bound to lead to competitive currency depreciation and protectionism.

As Keynes wisely remarked, “If nations can learn to provide themselves with full employment by their domestic policy…there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbor.” Trade between countries “would cease to be what it is, namely a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases.” It would become, instead, “a willing and unimpeded exchange of goods and services in conditions of mutual advantage.”

In other words, today’s turmoil over currencies and trade is a direct result of our failure to solve our employment problem.

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