Monday, June 6, 2011

Today's links

1--Johann Hari: It's not just Dominique Strauss-Kahn. The IMF itself should be on trial, The Independent

Excerpt: At the height of the starvation, the IMF suspended $47m in aid, because the government had ‘slowed’ in implementing the marketeering ‘reforms’ that had led to the disaster. ActionAid, the leading provider of help on the ground, conducted an autopsy into the famine. They concluded that the IMF “bears responsibility for the disaster.”

Then, in the starved wreckage, Malawi did something poor countries are not supposed to do. They told the IMF to get out. Suddenly free to answer to their own people rather than foreign bankers, Malawi disregarded all the IMF’s ‘advice’, and brought back subsidies for the fertiliser, along with a range of other services to ordinary people. Within two years, the country was transformed from being a beggar to being so abundant they were supplying food aid to Uganda and Zimbabwe.

The Malawian famine should have been a distant warning cry for you and me. Subordinating the interests of ordinary people to bankers and speculators caused starvation there. Within a few years, it had crashed the global economy for us all.

In the history of the IMF, this story isn’t an exception: it is the rule. The organisation takes over poor countries, promising it has medicine that will cure them – and then pours poison down their throats. Whenever I travel across the poor parts of the world I see the scars from IMF ‘structural adjustments’ everywhere, from Peru to Ethiopia. Whole countries have collapsed after being IMF-ed up – most famously Argentina and Thailand in the 1990s....

The Nobel Prize winning economist Joseph Stiglitz worked closely with the IMF for over a decade, until he quit and became a whistle-blower. He told me a few years ago: “When the IMF arrives in a country, they are interested in only one thing. How do we make sure the banks and financial institutions are paid?... It is the IMF that keeps the [financial] speculators in business. They’re not interested in development, or what helps a country to get out of poverty.”

Some people call the IMF “inconsistent”, because the institution supports huge state-funded bank bailouts in the rich world, while demanding an end to almost all state funding in the poor world. But that’s only an inconsistency if you are thinking about the realm of intellectual ideas, rather than raw economic interests. In every situation, the IMF does what will get more money to bankers and speculators. If rich governments will hand banks money for nothing in “bailouts”, great. If poor countries can be forced to hand banks money in extortionate “repayments”, great. It’s absolutely consistent.

2--The global risk appetite indicator close to panic levels, Pragmatic Capitalism

Excerpt: We’re still only about 5% from the recent market highs, but the level of panic appears to be rapidly on the rise. And with good reason. As this morning’s job’s report showed, the US economy remains deep in a funk. There appears to be a permanent cloud over the economy and market psychology in general. Credit Suisse’s Global Risk Appetite Indicator helps investors visualize this. They say we’re nearing a panic point:

“Although the Global Risk Appetite Indicator – often seen as a contrarian indicator – has moved closer to “panic,” we think it is too early to rush into equity markets right now, but our tactical stance implies using periods of temporary weakness to close underweights in equities and to buy stocks in sectors/industries and regions which we recommend.”

3--Labor's Share Of National Income Drops To Lowest In History, zero hedge

Excerpt: ...the labor share of national income. In a 2004 paper from the St. Louis Fed, the authors make the following statement: "The allocation of national income between workers and the owners of capital is considered one of the more remarkably stable relationships in the U.S. economy. As a general rule of thumb, economists often cite labor’s share of income to be about two-thirds of national income—although the exact figure is sensitive to the specific data used to calculate the ratio. Over time, this ratio has shown no clear tendency to rise or fall." It would be wonderful if this was true, and thus if the US population really had a stable distribution of income between laborers and capital owners. Alas it is dead wrong. In fact, as the latest note from David Rosenberg points out, the "labor share of national income has fallen to its lower level in modern history - down to 57.5% in the first quarter from 57.6% in the fourth quarter of last year, 57.8% a year ago, and 59.8% when the recovery began." And here is where the Marxist-Leninist party of the US should pay particular attention: "some recovery it has been - a recovery in which labor's share of the spoils has declined to unprecedented levels."

4--Economists React: ‘Consider Me Worried’, Wall Street Journal

Excerpt: t is fairly clear that in the face of increasing uncertainty, against the backdrop of a deep recession and shallow recovery, firms decided to stop hiring. The bigger question remains whether this is a temporary hold or the pause before renewed layoffs on a broad scale. Looking at the underlying metrics of the economy, the June employment report will likely be worse than May. Going past the next the several months the economy is in the nexus of a temporary squall today created by the supply chain disruption and higher food and energy prices. All else being equal these issues will resolve themselves and the economy should rebound later in the summer. All else is not equal, however, as China is slowing, QE2 is ending, and no one really knows what fiscal policy is beginning. In sum, these factors will build increasing headwinds to growth whose full effect on real activity is unlikely to be felt for several more months.–Steven Blitz, ITG Investment Research

–We do not think the economy is slouching toward a double-dip but we do believe that we have underestimated the near-term impact of the surge in energy and commodity prices (thanks, in part, to QE2) and the supply-chain disruptions from Japan. The policy consequences are significant, although we do not see much chance of QE3. First, there is no exit from the current monetary policy stance in 2011 and we would expect Bernanke to emphasize that in his press briefing after the next FOMC meeting. Second, the slowdown makes the budget negotiations more difficult by hardening Republican resistance to revenue measures (the economy is too weak to take them) and Democrat to spending cuts. –RDQ Economics

–Overall, this is horrible, and if we thought it would continue for much more than another month or two we would be seriously worried. But we think it is largely a reaction – an overreaction we would say – to the rise in oil prices, and a very real hit to autos and tech from the Japan earthquake. But oil prices have now reversed more than half their gain since Feb, and consumers have not rolled over. The market reaction to these data is understandable, but that does not make it sustainable. –Ian Shepherdson, High Frequency Economics

5--Number of the Week: Profits Rise, but Unemployed Ranks Don’t Shrink, Wall Street Journal

Excerpt: 58.4%: Percentage of U.S. population employed.....

Even as private businesses have added hundreds of thousands of jobs, the percentage of the population gainfully employed has hardly budged. As of May, it stood at 58.4%, a percentage point lower than at the bottom of the recession in mid-2009. That compares to a peak of 62.7% in December 2007.

The discrepancy reflects a number of problematic trends. The average rate of job creation in recent months isn’t much more that what’s needed to offset population growth. A lot of people have given up on finding jobs, and so aren’t included in the official count of the unemployed. The aging of the population also means more old folks out of the work force....

If companies don’t start hiring more and soon, how do we get out of this? The economist’s traditional toolkit has little to offer beyond the advice of John Maynard Keynes: Use government spending to get people back to work. Despite the political opposition to stimulus, we could be back at a point where it’s worth trying — but it wouldn’t be advisable until or unless the government comes up with a plan to get its long-term finances in order.

The work of another dead economist, David Ricardo, suggests tax breaks won’t help much. In a world where people know the government will ultimately have to raise taxes to pay its debts, they aren’t likely to spend much of the windfall. Here, too, getting the government’s long-term debt under control is a prerequisite.

Here’s hoping we’ll have the political will to do what it takes.

6--The Euro’s PIG-Headed Masters, Project Syndicate

Excerpt: Today’s strategy, however, is far more likely to lead to blowup and disorderly restructuring. Why should the Greek people (not to mention the Irish and the Portuguese) accept years of austerity and slow growth for the sake of propping up the French and German banking systems, unless they are given huge bribes to do so? As Stanford professor Jeremy Bulow and I showed in our work on sovereign debt in the 1980’s, countries rarely can be squeezed into making net payments (payments minus new loans) to foreigners of more than a few percent for a few years. The current EU/International Monetary Fund strategy calls for a decade or two of such payments. It has to, lest the German taxpayer revolt at being asked to pay for Europe in perpetuity.

Perhaps this time is different. Perhaps the allure of belonging to a growing reserve currency will make sustained recession and austerity feasible in ways that have seldom been seen historically. I doubt it....

The endgame to any crisis is difficult to predict. Perhaps a wholesale collapse of the euro exchange rate will be enough, triggering an export boom. Perhaps Europe will just boom anyway. But it is hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.

7--The Post Goes Negative on the Economy, Dean Baker, CEPR

Excerpt: It takes roughly 90,000 jobs a month to keep even with the rate of growth of the labor force. This means that if the economy stayed on this growth path, it would take almost a decade to get back to normal levels of unemployment. Furthermore, with house prices falling again and another round of state and local cutbacks kicking in next month, it is more likely that the job growth will be slowing than speeding up in the months ahead.

8--Missing the Will to Fight, The Streetlight blog

Excerpt: ....Since QE2 was launched, real GDP growth has slowed markedly, while inflation and commodity prices have risen. Rightly or wrongly, another dose of the same medicine would certainly be a hard political sell.

9--Contractionary Fiscal Policy and the US Job Market, The Streetlight blog

Excerpt: The government sector of the economy continued to make the jobs picture worse. May was the seventh month in a row during which government layoffs undid some of the work of the private sector in creating jobs. Since January 2009, government employment has shrunk in 21 of 29 months -- and without temporary hiring for the Census, it would probably have shrunk in 25 of the last 29 months.

This steady reduction in government employment is a form of contractionary fiscal policy. (Note that most of the layoffs are at the state and local level, and thus are primarily composed of teachers and public safety personnel.) If government employment were simply keeping up with population growth in the US, we would expect to see about 17 to 18 thousand more state and local government jobs each month. Instead employment has shrunk by an average of 15 thousand jobs per month since the start of 2009....

In other words, in the absence of the sharp cutbacks in government spending that have been prevalent in the US over the past year or two, about 1.3 million additional people would be working now compared to 8 months ago, rather than the actual job growth we've experienced over that time of about 1 million - a 30% difference. That's a pretty tough headwind to fight, especially for an economy that's already struggling.

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