Monday, May 16, 2011

Today's links

1--Chart of the Day: Americans Actually Spent Less in April, The Atlantic

Excerpt: Is retail spending really rising? Yesterday, the headlines reported that it was. It increased by 0.5%, according to the Census Bureau. But this doesn't tell the whole story. If you look deeper, you find a very disturbing trend: retail purchases are shrinking.

Throughout 2011, food and gasoline prices have risen steeply. As a result, consumers are forced to spend more of their money on these resources, even if they keep their consumption of gas and food constant. So it helps to take the influence of these items out of the retail spending equation. Only then can we begin to see whether consumers are willingly spending more money. Here's a chart that shows retail spending, without food and beverage stores, restaurants and bars, and gas stations:(chart)

It's pretty clear what's happening since February -- spending growth is declining. In fact, it was nearly flat in April. That 0.5% headline increase reported was due almost entirely to growth in food and energy purchases. Earlier today, we learned that food and gasoline prices rose in April by 0.4% and 3.3%, respectively. So their 1.3% spending growth could very well indicate a decline in consumption of these items. The Census Bureau statistics do not account for inflation.

Without food and energy, retail sales only grew by 0.1% in April. Meanwhile, core inflation -- which excludes those items -- increased by 0.2%. Again, this suggests that the lackluster retail spending growth wasn't real, but due to inflation. It's likely that Americans actually purchased fewer retail goods and services in April than in March.....This is not a good sign for the U.S. economy.

2--Monetarist Pathos, Paul Krugman, New York Times

Excerpt: I feel David Beckworth’s pain. Really, I do.

Beckworth and a few others are trying to keep the spirit of monetarism alive. What I mean by that is that, like Friedman, they’re trying to reconcile a conservative view of government’s proper role with a bit of macroeconomic realism. They accept that a recession represents a huge market failure demanding policy action. But they want to keep that policy action narrowly technocratic, limited to open-market operations by the central bank.

As I’ve argued before, this doctrine has failed the reality test: liquidity traps are real, and blithe assertions that central banks can easily pump up demand even in the face of zero short-term rates have not proved correct.

But what our modern monetarists are facing is a different problem: it turns out that they have no political home. The modern American conservative movement has no room for nuance, for the idea that some forms of government activism are a good idea. Ayn Rand, not Milton Friedman, is their patron saint; in fact, if Friedman were alive today, he’d be shunned as a dangerous radical with inflationary ideas.

And no amount of data will change their minds. If you look at what these people say, they’ve taken to putting scare quotes around the word “data”. Numbers, you see, have a clear liberal bias.

3--It’s Not A Banking Problem, Paul Krugman, New York Times

I’ll need to write more about this, but I thought I should put this up for now: one theme you still find running through many policy discussions, especially about things like taking action on foreclosures, is the constant warning that you mustn’t be mean to the banks — because things are fragile, you know, and we don’t want another financial crisis.

So I thought it might be worth pointing out that this long ago ceased being a banking problem.

The St. Louis Fed has an indicator of financial stress (it’s the first principal component of a vector of different financial measures; aren’t you sorry you asked?). It looks like this: (chart)

You can clearly see the oh-God-we’re-gonna-die period following Lehman’s fall; you can also see that it’s over, and stress is more or less back to normal.

So what’s holding back the recovery? Housing and household debt.

And so the priority in financial policies should be helping to clear up the housing mess and helping arrange debt relief. This is not the time to worry a lot about the banks — and especially not to worry about what bankers say.

4--Hitting the Ceiling, Paul Krugman, New York Times

How bad will it be if we don’t manage to raise the debt ceiling? And what should Obama’s negotiating strategy be? A few thoughts.

The direct effects of hitting the ceiling would be bad enough — sharp cutbacks in spending, which would undermine essential services, not to mention derail the economy. It’s not clear to me whether there would be some wiggle room through the accumulation of arrears — say, not actually paying workers and contractors but promising to make it up when sanity returns. But it would be ugly indeed.

What might make it even worse would be indirect effects, of two kinds.

First, US government debt plays a special role in the financial system: T-bills are the universal safe asset, the ultimate collateral. That’s why, during moments of financial stress, the interest rate on T-bills has actually gone negative. Make that safe asset suddenly unsafe, and it might cause vast disruption.

Second — and I don’t think this is getting enough attention — failure to raise the debt limit could act as a terrible signal about the US political system....
And failing to raise the debt limit could be widely read as a signal that we are, in fact, a banana republic.

5--Americans Turn to Credit to Deal With High Oil Prices, Wall Street journal

Excerpt: It’s all about oil right now.

Faced with soaring energy bills, businesses and consumers have had to develop coping mechanisms. The strategies seem to be helping the U.S. economy weather this headwind. For shoppers, the approach is twofold: spend less on other items and rely more on credit.

On the surface, shoppers are spending freely. Retail sales increased a healthy 0.5% in April, on top of a 0.9% jump in March. But more than half of the two-month gain, 56%, was accounted for by increased sales at gas stations, although that sector is only 11% of total retail sales. The rise reflects the 50-cent jump in gasoline from end-February until end-April. Excluding gasoline, store receipts increased 0.5% in March and 0.2% in April.

Consumers may also be dealing with sticker shock at the pump by pulling out their credit cards. According to the National Association of Convenience Stores, its members are seeing more gasoline bought on credit. (In the U.S., about 80% of fuel is bought at convenience stores.)

“Traditionally, two-thirds of transactions at the pump are by plastic,” says Jeff Lenard, NACS vice president of communications. “I have heard that this figure has increased to 80% or even 90% in many markets.”

The greater use of plastic is borne out in consumer debt data. According to the Federal Reserve, revolving debt — which includes credit cards — increased in March for only the second time since the financial collapse of 2008.

6--Number of the Week: Foreign Banks Bet on China, Mark Whitehouse, Wall Street Journal

Excerpt: 86%: Increase in foreign banks’ lending to China in 2010.

The world’s banks are betting China is the place to put their money. That could complicate Chinese officials’ efforts to cool down the country’s economy and real-estate market.

During 2010, banks that report their holdings to the Bank for International Settlements plowed an exchange-rate-adjusted $77 billion into China, increasing their exposure by 86% from the end of 2009 and bringing the country’s share of global cross-border lending — while still small at 1.1 % — to its highest level on records going back to 1977.

The shift represents a vote of confidence in China, as banks pulling out of financially troubled European countries such as Greece, Portugal and Ireland send more money east. But it also underscores the pitfalls of China’s efforts to find its own solution to a fundamental problem of international finance, the so-called “trilemma”: While countries may want to maintain stable currencies, run an independent monetary policy and keep their borders open to foreign capital, they can do only two of the three.

China has chosen the first two. It tightly controls the yuan’s exchange rate, in part to stimulate its vast export sector. It’s trying to run its own monetary policy, raising interest rates and ratcheting back bank credit to curb inflation. But that choice requires the country to keep out the foreign money that its relatively high interest rates would typically attract. Otherwise, the inflow of cash would either push up the yuan’s exchange rate or stoke the inflation China’s policy makers are trying to rein in.

7--What Would Really Bring about a Dollar Dive?, Econbrowser

Excerpt: It is entirely possible that there will be a negative demand shock for US government debt, going forward. But the story of the last three years has been a series of shocks that have impelled flight to, not away from, US government debt. So, while it is conceivable that there will be no further sovereign debt shocks in the rest of the world (in which case the increase in US debt might very well induce a weakening of the currency), right now, with 2011 US net debt at 72.4% of GDP (IMF WEO April 2011), it is unclear why we should have a dllar crisis when the Euro area has a 66.9% ratio, UK at 75.1% and Japan at 127.8%.....

That leads to the second point, that spending restraint and the early withdrawal of monetary stimulus now would exert a drag on growth, which would also weaken the dollar. A relapse in growth would also worsen the depression in tax revenues which accounts for a large part of the accumulation of debt during the Great Recession; hence, even in a portfolio balance model, too-early fiscal contraction could actually instigate a dollar dive....

How to Engineer a Dollar Crash

For certain, what would be key to causing a crash in the dollar's value would be a failure to raise the debt ceiling in a timely fashion. In almost any model I can think of, that would either cause a flight from US government debt, or -- even if we only go to the brink -- elevating the risk premium, and hence total interest payments, on US Treasury debt indefinitely. Thus, it's the height of irresponsibility to make unrealistic demands for deficit reduction based solely on spending cuts, thereby risking a crisis.

8--Stakes Rise on Debt Vote, Wall Street Journal

Excerpt: A growing number of House Republicans are expressing doubt about the need to raise the federal debt ceiling by Aug. 2, as the Treasury Department insists is necessary, sharply raising the political and economic stakes as congressional leaders try to secure a deal to raise the nation's borrowing limit....

Treasury Secretary Timothy Geithner has said if Congress doesn't raise the $14.294 trillion debt limit by Aug. 2, the federal government won't be able to pay all its bills, which would have a "catastrophic economic impact."

But many conservatives, including some GOP freshman who campaigned in 2010 against raising the debt limit, say he is exaggerating the danger.

They note that Mr. Geithner has already postponed the deadline once, and they insist the U.S. can find ways to shift its money around and cut some spending immediately to avoid cataclysmic consequences.

"When you say the drop-dead day is going to be August, I question that," said Rep. Tom Rooney (R., Fla.). "I'll believe it when I see it."...

The yield on the 10-year Treasury note fell to as low as 3.142% on May 9, though it rose to 3.228% on Thursday.

But a technical default could prompt investors to rethink their view on Treasurys as the global standard for safe investments. "That's when it becomes a game changer," said Justin Hoogendoorn, managing director at BMO Capital Markets' fixed income group....

Most Republican leaders accept Treasury's deadline and continue to push for a debt limit increase before Aug. 2, insisting it be tied to deep spending cuts. But the skeptical attitude of their rank-and-file worries the White House and GOP leaders, who fear the freshmen don't appreciate the potential consequences of the U.S. defaulting on its obligations, something that has never happened....

Geithner has warned that a default could trigger another financial crisis by shaking confidence in Treasurys, the world's most-liquid financial instrument. That could drive up U.S interest rates, hurting businesses and consumers and causing another recession.

On Wednesday, 62 business groups sent a letter to lawmakers asking them to raise the ceiling to avert a financial crisis.

"With economic growth slowly picking up we cannot afford to jeopardize that growth with the massive spike in borrowing costs that would result if we defaulted on our obligations," said the letter, signed by the Business Roundtable, the American Gas Association, the Telecommunications Industry Association and the National Association of Manufacturers, among others.

As of Wednesday, the U.S. government's debt counted toward the debt ceiling was $14.270 trillion, or $24 billion under the cap. Mr. Geithner said last month that the government will reach the ceiling on May 16, but could avoid actual default until July 8 by using "extraordinary measures," such as redeeming Treasury securities held by a federal retirement fund. Then last week, he said that because of better-than-expected tax receipts, Treasury could postpone default until Aug. 2.

9--The Outcome of the Debt Ceiling Battle Could Hurt the Economy, Economist's View

Excerpt: If politicians cannot come to an agreement on the debt ceiling, what economic consequences should we expect? And if a deal is reached, does that end our worries?

If Politicians Do Not Reach Agreement

If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist). There may be some room for the Treasury to use accounting tricks to avoid the worst problems, at least for a time, but it is not at all clear how well this would work to insulate the economy from problems and eventually this strategy will come to an end.

That's potentially bad enough, but it's far from the end of the problems that could occur. Failure to raise the debt ceiling could also undermine faith in the safety of US Treasury bills. If we default on bond payments, or appear willing to do so even if it doesn't actually occur and investors lose faith in US Treasury Bills, they will begin demanding higher interest rates to cover the increased perception of risk. This could be very costly. We depend upon the rest of the world to finance our debt at extremely low interest rates. If the willingness of other countries to do this diminishes, then the cost of financing our debt would rise substantially. And that's not all. In addition to increased debt servicing costs, an increase in interest rates would also choke off business investment potentially lowering economic growth, and the consumption of durable goods by households would fall as well. Rising interest rates would also be bad for the housing recovery (such as it is). Thus, failure to reach an agreement could be very costly.

10--Treasury to tap pensions to help fund government, Washington Post

Excerpt: The Obama administration will begin to tap federal retiree programs to help fund operations after the government loses its ability Monday to borrow more money from the public, adding urgency to efforts in Washington to fashion a compromise over the debt.

Treasury Secretary Timothy F. Geithner has warned for months that the government would soon hit the $14.3 trillion debt ceiling — a legal limit on how much it can borrow. With the government poised to reach that limit Monday, Geithner is undertaking special measures in an effort to postpone the day when he will no longer have enough funds to pay all of the government’s bills.

Geithner, who has already suspended a program that helps state and local government manage their finances, will begin to borrow from retirement funds for federal workers. The measure won’t have an impact on retirees because the Treasury is legally required to reimburse the program.

The maneuver buys Geithner only a few months of time. If Congress does not vote to raise the debt limit by Aug. 2, Geithner says the government is likely to default on some of its obligations, which he says would cause enormous economic harm and the suspension of government services including the mailing of Social Security checks.

11--QE2: The Slogan Masquerading as a Serious Policy, Marshall Auerback, New Deal 2.0

Excerpt: So what has QE2 actually achieved? Little in the way of positive impact, but much in terms of its deleterious impact by fomenting additional speculative activity, notably in the commodities complex — gas and food prices. Obviously, with other determinants of aggregate demand in question, commodity prices and the gasoline price in particular now matter. The price of gasoline is almost as high as it was at its brief peak in May-July 2008. In the past, increases in expenditures on gasoline could be managed by consumers because they had access to credit. That is certainly less true today. Rising fuel prices could tip the economy towards greater weakness. As it now stands, the U.S. economy has been growing around trend (2.7%) and the first quarter was probably below that. Tipping the economy towards weakness would bring growth way below the current optimistic above trend consensus.

Though it cannot be proved, in the minds of many the current wave of speculative and investment demands is tied to the Fed’s emergency measures of ZIRP and QE. Within the Fed itself, a number of inflation hawks have reflected this belief, notably Dallas Fed President Richard Fisher and former Kansas President Tom Hoenig. If so, this inadvertent adverse consequence of QE means that the Fed might be hoisted on its own petard.

In sum, whether one wants to focus on the bank reserves or the deposits created by QE2, it does not increase the “ability” of banks to create loans or the private sector to spend that did not exist before. In both cases, the effect of QE2 is to replace a longer-dated treasury with shorter-term investments within private portfolios, which on balance reduces income received by the private sector. Whether or not that increases spending would depend on whether the private sector wishes to borrow more or to reduce saving out of current income (things they can do anyway with or without QE2). Again, it makes little sense to encourage households and firms to increase debt or to reduce saving within the current context of record private sector debt. But the current prevailing deficit hysteria is, perversely, encouraging precisely that state of affairs.

Ultimately, QE2 screwed savers by robbing them of income through the Fed’s treasury purchases, undermined banks’ earnings by in effect swapping a higher yielding treasury with bank reserves that today yield a mere .25%, and eviscerated the living standards of the middle class by helping to spike the speculative punch bowl in the commodities space. Not a bad trifecta for a Fed Chairman who claims to be doing everything in his power to prevent us from becoming the next Japan but who in fact is hastening our arrival at that very destination.

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