Wednesday, March 9, 2011

Today's links

1--Roubini Sees Double Dip for Advanced States If Oil Hits $140, Bloomberg

Excerpt: Nouriel Roubini, the economist who predicted the global financial crisis, said an increase in oil prices to $140 a barrel will cause some advanced economies to slide back into recession.

Underlying how fragile the global economic recovery is, Roubini said the European Central Bank may be making a mistake by raising interest rates “too soon” when debt-ridden countries on the euro region’s periphery struggle to restore the competitiveness of exports.

“If you had the oil price going up to where it was in the summer of 2008, at $140 a barrel, at that point some of the advanced economies will start to double dip,” he told reporters in Dubai today. “In the U.S., where growth is accelerating fast, a 15 to 20 percent increase in oil prices, there won’t be double dip, but growth reaching a stalled speed again.”

2--Charles Biderman On How The Fed Continues To Rig The Market And Why There Will Be A QE 3...And 4, zero hedge

Excerpt: Charles Biderman: "...individuals have been selling, companies are net selling, insider selling and new offerings are swamping any buyback and any cash M&A activity since QE 2 was announced. Pension funds and hedge funds don't really have that much cash to invest. So what nobody's asking is what happens when QE 2 stops: if the only buyer is the Fed, and the Fed stops buying, I don't know what is going to happen...When I was on your show a year ago I was saying the same thing: we can't figure out who is doing the buying it has to be the government, and people said I was nuts. Now the government is admitting it is rigging the market."

"In December of 2009 received a lot of ridicule for saying that the Fed is rigging the market which as everybody is well aware." As for the "sustainable economic recovery" i.e., what happens to Quantitative Easing: "They probably will end for a while, we think there is going to be a QE3 and 4, or until the market says: "No Mas - we are not going to believe this game the Fed is playing... The Fed is printing over $100 billion a month to buy other assets and pay bills, and economic growth is picking up at a $200 billion annual rate. This is very inefficient method of boosting the economy, and then how do we repay these trillions that have been created out of thing air in the future."

3--Home prices falling to level of 1890s, CS Monitor

Excerpt: While many have become convinced that a bottom to the national home price decline was seen during 2010, there is growing evidence to the contrary, including eleven of twenty markets tracked by S&P/Case-Shiller reaching for new lows and multiple home price index sources showing generally that prices have all but retraced the distortive effects of the federal first-time homebuyer program.

Further, while nominally (i.e. not adjusted for inflation) home prices may have gone a long way into correction territory, in real terms (i.e. inflation adjusted), national home prices are still significantly elevated (possibly by as much as 15%-20%) above long-run norms....

Now as we are well aware, real home prices began to swell in the late 1990s reaching a peak in 2006 after having increased by over 80% nationally and even much more in some of the more frothy markets representing a massive and abrupt deviation from the long-run norm.

Since 2006 home prices have continually declined yet the current level is still significantly elevated over the level that had been typical for the 100 years prior to the bubble.

Further, it’s important to note that the ten year rate of change of real national home prices is still positive... we have yet to experience enough of a decline to erase all the gains of the prior ten years.

This paint’s a pretty clear picture… the national home price decline has further to run, possibly as much as 15%-20%, before real prices reach the long-run trend and a level more in-line with fundamentals.

4-- Speculators Gone Wild?, Tim Duy, Fed Watch via Economist's View

Excerpt:... I direct readers to Colin Barr at CNN Money:

The surge of speculative money into the oil futures pits shows that big financial players are expecting the price of WTI crude to surge well above the recent $105 or so seen last week. If they are right, it will bring $4 gasoline a step closer….

…"It does not get any clearer which way Wall Street is trying to take oil," says Stephen Schork, who writes the Schork Report energy markets newsletter in Villanova, Pa.

Schork notes that speculators now own nearly six times as many barrels of oil – 268,622 futures contracts representing nearly 269 million barrels – as can be stored at the WTI trading hub in Cushing, Okla. And since the CFTC numbers released Friday only go through last Tuesday, they likely underestimate the degree of speculative fervor building in the energy markets.

Money appears to be flooding into energy markets to chase a sure thing, with potentially severe consequences for a global economy still on the mend. The article continues:

The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it.

I think this suggests that the recent oil price gains are driven more by speculation that in 2008. And note that we know how quickly oil prices collapsed when the global recession knocked down energy demand. So if oil prices are being driven by even more extreme speculative activity today, the possibility for a sharp reversal also exists – the question is whether that reversal comes before or after oil prices bring the global economy to its knees.

Presumably, growing tranquility in the Middle East would cause speculators to run for the exits. This, however, seems unlikely. Instead, it might be an interesting time for a large, surprise release from the Strategic Petroleum Reserve. This is not something I expect or would really argue for given I don’t think that $100 oil qualifies as a national emergency. But I would like to understand more about the importance of speculative activity in driving oil prices, and perhaps this is something best understood only by catching a lot of traders on the wrong side of a “sure thing.”

5--The Myth Of The Exploding US Money Supply, Pragmatic Capitalism

Excerpt: In recent weeks some hyperinflationists have succumbed to the reality that QE2 isn’t really adding net new financial assets to the private sector – it is indeed just an asset swap. But this hasn’t stopped them from claiming that QE2 directly results in an exploding money supply. This convoluted thinking claims that QE is directly funding government spending (as if the US government would have stopped spending money and folded up shop without QE2). So now the theory is that QE is really resulting in excess of $1.5T in new money in the form of deficit spending. This is flawed for reasons I have previously explained, but let’s not theorize about the money supply – let’s allow the facts to speak for themselves.

Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation. We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow. But regular readers are all too aware that the monetary base has no correlation with the broader money supply. The reasoning is simple – the money multiplier is a myth. So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves. It doesn’t result in more apple sales (loans). Banks are never reserve constrained. The explosion in reserves and continuing decline in loans makes this crystal clear. The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant....

But what about M2? Isn’t it also exploding higher now? Not really. In a recent article Erwan Mahe, an asset allocation and options strategist with OTCexgroup, posted this excellent chart comparing M2 growth across the big three economies. He said:

“As you can see in this graph, China literally allowed its money supply to skyrocket, compared to that of the U.S. or the eurozone, with annual growth averaging +17.4% between 1996 and 2008, which compares to +7.1% in the eurozone and +6.3% in the United States....

The story here couldn’t be more self explanatory. The US M2 money supply is simply not expanding anywhere close to its historical rate. The only country where the M2 money supply is seeing any sort of substantive growth is in China. And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices. While I don’t think it’s incorrect to blame some speculative aspect of this rally on the Fed it is entirely incorrect to blame the Fed for the commodity rally due to their “money printing”. The fact is, the USA is not expanding the money supply at an alarming rate....

So yes, the US government is running a massive $1.5T deficit, however, by any metric of money supply we can see that this is barely offsetting the continued de-leveraging that is occurring across the US economy. We are certain to see higher rates of inflation in 2011 (especially if oil prices surge higher), however, it is not an accurate portrayal of reality to conclude that the USA is “printing money” uncontrollably and flooding the world with dollars that will lead to hyperinflation. That is simply not the case and the data speaks for itself. At best, we are barely printing enough to offset the destruction of de-leveraging….

6--Oil Jump Presents Conundrum for Fed, Wall Street Journal

Excerpt: Higher oil prices can cut two ways. Depending on the economy’s health, they can either lead to inflation if growth is strong and companies raise prices to make up for higher raw material costs, or they can bring about a recession by hurting consumer spending if the economy is too weak. In the worst-case scenario, they can lead to both: a weak economy with high unemployment and high inflation — commonly know by economists as stagflation.

Turmoil in oil-rich North African and Middle East countries has led global oil prices to move sharply higher in recent weeks, leading the European Central Bank to warn it may have to tighten monetary policy to keep euro-zone inflation under control. In the U.S., oil prices would need to go–and stay–higher before the Fed would consider action on the inflation-recession trade-off. But the debate about the right policy response has already begun....

By contrast, Lockhart said the U.S. central bank could launch another round of asset purchases if an oil price shock threatens to tip the economy into recession. The Atlanta Fed President said he wasn’t forecasting an oil spike, but hadn’t ruled one out either.

“I want to remain open to whatever has to be done or needs to be done at a given time,” Lockhart said at a meeting of economists.

“I believe the circumstances in the Middle East .. are at this point unpredictable and we cannot rule out that there would be a higher run-up of energy prices,” he said. He added that oil at $120 a barrel would be manageable for the U.S. economy while $150 a barrel would be more of a concern....

7--Keynesianism and the crisis, Lance Taylor, Triple

Excerpt: ...Three ideas emphasized by Keynes 75 years ago are crucial for understanding the contemporary situation.

The first is that economic actors operate under fundamental uncertainty — at times they cannot predict or even imagine the nature of future developments. In the mid-2000s Federal Reserve Governor Ben Bernanke extolled a “Great Moderation” in macroeconomics. He did not, and probably could not, think about the tsunami that was about to strike. Rather, he accepted widespread market conventions that all was well. Keynes thought that such conventions might persist for a time, but then could rapidly break down.

One key set of conventions revolves around prices of assets, with dynamics independent of prices of goods and services. For example, into 2006 many market actors thought that prices of residential housing would continue to trend upward. But then they collapsed with disastrous consequences.

Finally, the level of economic activity is set by spending, or effective demand. When the crisis hit in 2007 consumers cut back on purchases, and firms invested less. Output and employment fell sharply. The mainstream economics postulate that there is ever full employment (“Say’s Law” in Keynes’s terminology) was decisively falsified.

Ideas raised by Keynes’s followers are also important.

Charles Kindleberger and Hyman Minsky explained that a price bubble like the one for housing and associated “derivative” financial instruments is often accompanied by increasing “leverage” or accumulation of debt to buy the assets in question. When asset prices start to fall (as they always do), many actors are driven into bankruptcy as their levels of debt exceed the plummeting values of their assets. An immediate consequence is a collapse in effective demand....

From a Keynesian perspective there were six fundamental causes of the crisis:

1. ...dismantling financial regulation...

2. The American business cycle continued, with changes in the real interest rate, the profit rate, the labor share of GDP, and household net borrowing driving fluctuations in output....

3. The ratio of household net borrowing to GDP increased by around 10 percentage points between the early 1980s and the mid-2000s. The household debt to income ratio roughly doubled. These trends were accompanied by a sharp decrease in the labor share and an increase in profits. Inequality in the size distribution of income rose markedly.

4. Much of the higher household borrowing was collateralized by rising prices of equity and housing....

5. As a share of GDP, foreign net lending to the US increased by around seven percentage points, “twinned” to rising household net borrowing. By the mid-2000s the US deficit for foreign trade and services was around 1.5% of world GDP. The rest of the world provided the finance, with China and other surplus economies “exporting” short term capital to the US.

8--The Mauritius Miracle, Joseph Stiglitz, Project syndicate

Excerpt: In a recent visit to this tropical archipelago of 1.3 million people, I had a chance to see some of the leaps Mauritius has taken – accomplishments that can seem bewildering in light of the debate in the US and elsewhere. Consider home ownership: while American conservatives say that the government’s attempt to extend home ownership to 70% of the US population was responsible for the financial meltdown, 87% of Mauritians own their own homes – without fueling a housing bubble.

Now comes the painful number: Mauritius’s GDP has grown faster than 5% annually for almost 30 years. Surely, this must be some “trick.” Mauritius must be rich in diamonds, oil, or some other valuable commodity. But Mauritius has no exploitable natural resources. Indeed, so dismal were its prospects as it approached independence from Britain, which came in 1968, that the Nobel Prize-winning economist James Meade wrote in 1961: “It is going to be a great achievement if [the country] can find productive employment for its population without a serious reduction in the existing standard of living….[T]he outlook for peaceful development is weak.”

As if to prove Meade wrong, the Mauritians have increased per capita income from less than $400 around the time of independence to more than $6,700 today. The country has progressed from the sugar-based monoculture of 50 years ago to a diversified economy that includes tourism, finance, textiles, and, if current plans bear fruit, advanced technology....

First, the question is not whether we can afford to provide health care or education for all, or ensure widespread homeownership. If Mauritius can afford these things, America and Europe – which are several orders of magnitude richer – can, too. The question, rather, is how to organize society. Mauritians have chosen a path that leads to higher levels of social cohesion, welfare, and economic growth – and to a lower level of inequality.

Second, unlike many other small countries, Mauritius has decided that most military spending is a waste. The US need not go as far: just a fraction of the money that America spends on weapons that don’t work against enemies that don’t exist would go a long way toward creating a more humane society, including provision of health care and education to those who cannot afford them.

Third, Mauritius recognized that without natural resources, its people were its only asset. Maybe that appreciation for its human resources is also what led Mauritius to realize that, particularly given the country’s potential religious, ethnic, and political differences – which some tried to exploit in order to induce it to remain a British colony – education for all was crucial to social unity. So was a strong commitment to democratic institutions and cooperation between workers, government, and employers – precisely the opposite of the kind of dissension and division being engendered by conservatives in the US today.

9--Long-Run Impact of the Crisis in Europe: Reforms and Austerity Measures, FRBSF

Excerpt: Global markets have been shaken by the euro area’s first sovereign debt crisis. The International Monetary Fund’s programs of fiscal reform and financial assistance for Greece and Ireland mark its first such interventions in the euro area. Yields on sovereign bonds have increased sharply for Greece, Ireland, and some other countries. Divergences in those yields highlight the economic differences among euro-area countries and suggest that markets are questioning whether their governments will repay their borrowing in full. More fundamentally, questions have been raised about the sustainability of the 17-nation euro area as a monetary union.

This Economic Letter discusses the imbalances in the euro area and the policies designed to address the region’s economic and fiscal problems. These policies include austerity measures. But, more importantly, they need to encompass economic reforms that strengthen monetary union rules and safeguard the region from future crises....


The euro area’s first sovereign debt crisis has exposed the fiscal imbalances of its member countries. The crisis has highlighted disparities in macroeconomic fundamentals across the area, raising questions about the sustainability of monetary union. The benefits of a common currency come with the cost of adjusting fiscal policy to monetary union standards and setting macroeconomic goals that converge with those of other member countries. In response to the debt crisis, the area’s most troubled countries have adopted wide-ranging austerity measures focusing on short- and medium-term adjustment. Efforts are also under way at the EU level to promote fiscal stability. To achieve stability, the EU must address the striking disparities in the fiscal positions of its members, although disagreements about how to set fiscal standards are likely. Long-run solutions to Europe’s problems also require economic reforms that increase competitiveness and reduce labor costs in the peripheral countries. Some of those countries have put in place fundamental banking and labor reforms to achieve these goals. If they are implemented, they are likely to promote the convergence of euro-area economies and help sustain the euro area in the long run.

10--Who reaps the rewards of productivity?, Dean Baker, The Guardian

Excerpt: Productivity matters for the prosperity of children because it measures the amount that an average worker produces in an hour of work. If productivity rises by 10% over three years, that means that we can produce 10% more output with the same amount of work than we could three years ago. The size of the economy was roughly $14tn three years. A 10% rise in productivity means that we can produce approximately $1.4tn more this year with the same amount of work. This would come to an additional $18,000 a year for an average family of four.

Alternatively, a 10% rise in productivity would mean that we could produce the same amount of output as we did three years ago, while working 10% less time. We could reduce our 40-hour working week to 36 hours, or we could all take an additional 5 weeks a year of vacation – and still have as much to consume as we did three years ago.

Unfortunately, most workers are not seeing the benefit of these gains in productivity. There are two reasons why workers are not benefiting. First, the country has seen an enormous upward redistribution of income over the last three decades. As a result of this redistribution, most workers have seen very little benefit from their productivity growth. The big winners have been highly-paid professionals like doctors and lawyers, corporate CEOs and their sidekicks, and, of course, the Wall Street gang.

The other reason that workers have not seen much benefit from the 10% rise in productivity over the last three years is the recession. As a result of the recession, the economy is operating well below its potential level of output. The problem right now is that there is not enough demand in the economy, not a lack of supply. In a recession, more productivity is not very helpful. If a carmaker can meet its demand for cars by hiring 20% fewer workers, it is likely to mean that more workers go unemployed.

This gets us back to the deficit. The government is helping to support demand in the economy with its deficit. If we found $1.5tn in completely wasteful spending and eliminated it tomorrow, it would drastically reduce demand in the economy and leave millions of additional workers unemployed. At this point, the politicians start screaming about the debt bankrupting our kids. The problem with this claim is that our kids will own the debt. At some point, all of us will be dead, meaning that the people who hold the bonds that constitute the debt will be our children and grandchildren. ...

Virtually all economists agree that, in the long run, productivity is the main determinant of economic prosperity. This means that if we can sustain high rates of productivity growth, as we are now doing, then the economy will be able to provide our children and grandchildren with a prosperous future – one where they will be far richer, on average, than we are today.

Of course, if we continue to allow the Wall Street boys, the CEOs and their high-living friends to get the bulk of the gains from growth then our children and grandchildren will have much to worry about. But the problem then, as now, will not be the debt that we have left them.

The problem will be that we let the rich take over the country. If we leave the Wall Street crew in charge, then we will have done much to bankrupt our children.

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