Tuesday, June 7, 2011

Today's links

1--Fatal Fatalism, Paul Krugman, New York Times

Excerpt: Our current economic discourse is pervaded by fatalism. Leave aside the people who insist that somehow Obama has destroyed capitalist incentives by passing Mitt Romney’s health care plan and threatening to raise tax rates to Clinton-era levels. Even among people who should be sensible, you hear many assertions that run something like this: historically, recovery from financial crisis is usually slow, so we have to accept a slow recovery this time around too. Actually, that’s more or less what Obama has been saying.

This fatalism is deeply destructive — because there’s no good reason we need to experience many years of high unemployment. What historical experience shows isn’t that there’s no answer to post-crisis slumps, it only shows that most governments have responded to such slumps with the same kind of fatalism and learned helplessness we’re showing now.

We are not, after all, suffering from supply-side problems. We don’t have high unemployment because workers lack the necessary skills, or are stuck in the wrong industries or the wrong locations; the hypothesis that we’re mainly suffering structural unemployment has been repeatedly shot down by evidence. This is a demand-side slump; all we need to do is create more demand.

So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits.

2--The Silent Jobless?, Robert Reich via Economist's View

Excerpt: ...The American economy is trapped in a vicious cycle. Those who are unemployed can't afford to buy much more than bare necessities, while people who are working are getting skimpier paychecks. ...

You'd think the American public would be demanding government action: a new WPA for the long-term unemployed, a second stimulus to make up for the shortfall in purchasing power, stronger safety nets. But we're not hearing much clamor for any of this. One reason is that those who remain unemployed have little or no political clout....

What do those who are jobless have in common? They lack the political connections and organizations that would otherwise demand policies to spur job growth. There's no National Assn. of Unemployed People with a platoon of Washington lobbyists...

As a result, too many are likely to remain unemployed for months if not years. That's bad news, not only for them but for America.

3--The World After QE2, Barron's

Excerpt: The common perception is that QE2 and QE1 helped to inflate risky assets, such as stocks and commodities, sank the U.S. dollar, buoyed credit markets, boosted inflation expectations and failed to lower interest rates. The circumstantial evidence for this interpretation is strong. The Standard & Poor's 500 Index has gained 23% since Bernanke's Jackson Hole address, after rising more than 20% during QE1. As the bottom left table shows, both QE periods coincided with a weak dollar and surges in oil and other commodities. In equities markets, energy and industrial stocks thrived. Analysts at Bespoke Investment Group calculated that stocks were stronger on POMO days—when the Fed was conducting permanent open-market operations, a.k.a. purchasing assets—than on other days.

Those who attribute the market action of the past nine months exclusively to the Fed's generous hands invoke what happened in the five months between the two QEs. During that stretch, stocks suffered a swift and stinging 9% decline, oil prices receded, the dollar firmed and Treasury yields, somewhat counterintuitively, fell—even as the Fed quit acting as bond buyer of first resort....

While fashioning a plan for a post-QE2 world, one should be mindful of Mike Tyson's wise quip: "Everyone has a plan, until they get hit." But the blows, should they come, probably will be from some financial accident in Europe or elsewhere, a downshift in global growth or another shot to corporate confidence—not the end of QE2.

4--Disastrous US jobs report points to deepening slump, WSWS

Excerpt: US payrolls grew by a paltry 54,000 in May and the official unemployment rate rose to 9.1 percent, an increase of 0.3 percent since March, according to the monthly employment report released Friday by the Labor Department....

The Economic Policy Institute (EPI), a liberal Washington think tank, explained Friday that the official unemployment figure masked an even grimmer reality. It pointed out that the labor force participation rate remained at its lowest point of the recession and that the labor force in May was smaller than it was a year ago, by about 500,000 workers, even though the working-age population grew by 1.9 million in that period.

“Consequently,” it noted, “the proportion of the population that is in the labor force is now 0.7 percentage points below where it was a year ago. If the labor force participation rate had held steady over the last year, there would be roughly 1.8 million more workers in the labor force right now. Instead, they are on the sideline. If these workers were in the labor force and were counted among the unemployed, the unemployment rate would be 10.1 percent right now instead of 9.1 percent. In other words, the improvement in the unemployment rate over the last year (from 9.6 percent to 9.1 percent) is due to would-be workers deciding to sit out the economic storm” (emphasis in the original).

The EPI further pointed out that the official figure of 6.9 million payroll jobs lost since the start of the recession massively underestimates the size of the gap in the labor market “by failing to take into account the fact that simply keeping up with the growth in the working-age population would have required the addition of 4.1 million jobs since the recession started in December 2007.” It continued: “This means the labor market is now 11.0 million jobs below the level needed to restore the pre-recession unemployment rate (5.0 percent in December 2007).”

5--Alok Sheel: Quantitative easing and the great recession, Business Standard

Excerpt: Did US Federal Reserve’s aggressive monetary policy, and in particular quantitative and credit easing, pull its economy from the brink of a second Great Depression?

The Great Depression of the 1930s was caused by a simultaneous contraction in credit and money supply. Deleveraging reduces the velocity of money. According to Fisher’s equation (M*V = P*Q), at any given money supply a reduction in the velocity of money would lead to either a decline in nominal prices (deflation) or output, or both. Hence increasing money supply should stabilise GDP.

Central banks have little control over credit markets. But they can certainly influence money supply. Could better use of monetary policy have prevented the Great Depression of the 1930s? Yes, say two celebrated historians of the Depression, one of whom is none other than Ben Bernanke, current chairman of the US Federal Reserve (the other is of course Milton Friedman)....

The limits of monetary policy were tested in the 1990s during the banking crisis in Japan when interest rates became zero bound following repeated cuts. The Bank of Japan continued to pump liquidity by buying government treasury bonds in what came to be known as quantitative easing. Central banks had long been accommodating fiscal policy through purchase of treasury bonds. However, used as a purely monetary policy tool following zero bound short-term interest rates was a Japanese innovation.

Quantitative easing could not stimulate the Japanese economy back to former levels of growth. There was, therefore, no proof that it was the way out of a liquidity trap....

After retreating for six quarters the US economy is back on the path of growth, albeit tepid and below trend, as is to be expected in the case of balance-sheet recessions. Did aggressive monetary policy, and in particular quantitative and credit easing, pull the economy from the brink of a second Great Depression? This is, at present, a matter of conjecture, and a lively subject for future research. There are, however, at least three reasons to doubt its efficacy.

The response of US households to their damaged balance sheets is to sharply increase savings, which have risen from a low of 1.5-2.5 per cent of personal disposable income in 2004-2006 to almost six per cent at present. Since the post-war average is closer to 10 per cent, the savings rate could continue to rise consequent on balance sheet repair and regulatory tightening. Easy monetary policy is not inducing households to consume more.

Third, the rise in personal savings and fall in investment was countervailed by government dissavings that pushed up the budget deficit from 1.2 per cent of the GDP in 2007 to 8.9 per cent in 2010. This dramatic fiscal expansion, unparalleled in peace time, may be propping demand. It is at, at present, difficult to separate the effects of monetary and fiscal policies in counteracting extreme recessionary conditions. Indeed, it is argued that the firewall between the two has broken down, and that the two have become virtually indistinguishable.

6--The Great Payroll Heist, Alan Abelson, Barrons

Excerpt: WHILE WE ALSO DON'T THINK, as we keep saying, that a double-dip in the economy is imminent, some reasonably ugly interruption in the recovery appears more and more possible. Enhancing that unpleasant prospect is a still vastly overextended and bubbly stock market. On that score, that seasoned technician Alan Newman, major-domo at CrossCurrents, relates that the market is awash with margin debt, which at last count totaled a formidable $361 billion. Also, Alan reminds us, mutual-fund cash-to-assets ratios are scraping bottom at an average 3.4%.

This combination of extreme leverage and minimal fund cash, he cautions, could be the ingredients for something worse than a typical correction. And, we fear, it needn't be a replica of the 2008-2009 crash to take what little starch there is out of the economy.

Moreover, there seems no immediate cure in sight for the truly sick housing market, and attempts by Washington to administer one, as its efforts to date have painfully demonstrated, are an odds-on bet to make it even sicker. Nor, obviously, is the poisonous political atmosphere in Washington conducive to sensible fiscal and monetary policy.

On the contrary, the mood in the capital seems to favor following Europe's lead in pushing austerity at all costs to revive an already-floundering economy. And just as it won't work in the Old World, it won't work here, either....

The 54,000 payroll increase, they point out, was the weakest since the 48,000 posted for September 2010, while the 83,000 gain was the private sector's smallest in a year. The yearly rise in employment of 0.7% was the feeblest since late in 2010, when the awful crunch on jobs started to ease.

More than a little shocking to Philippa and Doug (and to us as well) is that private employment today is 2% below where it stood 10 years ago and, as they've noted before, job loss over a 10-year period is unprecedented since the advent of something resembling reliable tallies began in 1890. So far, they point out somewhat grimly, "we've regained just 1.8 million jobs lost in the Great Recession and its aftermath, or about one in five......

7--Future inflation may be lower than expected, Business Insider

Excerpt: However, I think that too many people ignore the fact that money “velocity”—the rate at which money is spent on goods and services—will be structurally lower than pre-recession levels for a few main reasons:

1) The U.S. personal savings rate will remain higher.

The past decade saw the lowest personal savings rates in the last 60 years. The average historical savings rate (by month) used to be about 6%, but in the period from January 2005 to the start of the financial crisis in September 2008, the savings rate rarely passed 2.5%, and in fact dropped below 1% many times. That’s partially why the financial crisis hit so many people so hard: a deep recession occurred at a time when people had historically low levels of savings to hold them through....

2) The commercial banking industry will continue to abide by stricter lending standards....

3) Interest rates can only rise, but “QE3” is still anyone’s guess.

4) Higher structural unemployment means less people will be earning and spending money.

5) Home equity, the largest retirement “nest egg” for most families, will remain weak.

6) The government will make meaningful measures to reduce the deficit.


When predicting future inflation, investors can’t just look at the growth in money supply alone. Money “velocity” plays just as large a role in determining inflation. For example in 2009, despite hundreds of billions of dollars of stimulus and bailouts, lower money velocity actually caused deflation for a few months. Now, two years removed from the bottom of the recession and after another round of quantitative easing, this continued lower money velocity has kept inflation below the historical average at 3.5% (annualized), even amidst spiking energy and food prices.

There are good reasons why the economy will have structurally lower money velocity than pre-recession levels, and investors can’t ignore the anti-inflationary consequences of that.

8--Goolsbee: Private sector must lead the way, Huffington Post

Excerpt: Although the U.S. private sector added only around 54,000 jobs in May, Austan Goolsbee, chairman of Obama's Council of Economic Advisers, still says the recovery is headed in the right direction.

"Don't bank too much of any one month's jobs report," Goolsbee told Christian Amanpour on her Sunday program The Week. "You want to look at a little bit of a trend to get a more accurate barometer."

Government stimulus might have been essential to preventing the country from sinking into another Great Depression, Goolsbee says, but it's the private sector that must pull the country up. "Our effort now as a government should be to get the private sector, to help them stand up, lead the recovery," he said. "Government is not the central driver of recovery."

To accomplish self-sustaining, private sector growth, Goolsbee explained how recently initiated payroll and business tax breaks will encourage individuals to spend and private industry to hire. "We've got to rely on government policies that are trying to leverage the private sector, and give incentives to the private sector, to be doing the growth."

Despite last month's dismal jobs growth, Goolsbee says to look at larger trends, where optimism appears more warranted. "We were losing 780,000 jobs a month when the President comes into office. Fast forward to now, we've added 1 million jobs over the last six months."

9--Financial Overhaul Is Mired in Detail and Dissent, Louise Story, New York Times

Excerpt: Nearly one year after Congress passed financial changes to rein in the banking sector, more than two dozen of the legislation’s rules are behind schedule, and no end to the wrangling over details is in sight. ...

The rules are mandated by the Dodd-Frank financial regulatory law and range from curbs on executive compensation to consumer banking protection provisions to more transparency in the trading of derivatives, those complex financial instruments that contributed to the 2008 financial crisis....

“There’s an attempt to kill this through delay,” said Michael Greenberger, a law professor at the University of Maryland and a former official at the Commodity Futures Trading Commission, which is in charge of writing batches of the rules. “The difference between eight or nine months and 24 months could be cataclysmic here.”

The setbacks and resistance extend across many types of new rules, including ones to limit the debit card fees that banks can charge retailers and to require banks to retain more of the risk in certain home loans....

“Those in the U.S. financial community who are supporting these efforts to block resources and appointments are looking for leverage over the rules still being written,” Mr. Geithner said.

He specifically focused on derivatives rule-writing, where some financial groups have complained that European rules may differ from the new rules in the United States. He said he hoped regulators in Europe and Asia would create standardized rules to prevent a “race to the bottom.”...

Perhaps nowhere are the stakes higher for the megabanks than with derivatives, which insure against many different risks in the economy. Some of the Dodd-Frank rules center on increasing security and transparency in this $600 trillion market. For instance, many are related to clearinghouses, which provide a central repository for money backing those wagers. Some of the changes threaten to cut into banks’ lucrative profit margins....

The issue of whether new documents or rules give advantages to just a handful of banks is particularly relevant because the Justice Department and the European Commission have been investigating this market for antitrust behavior.

10--The Financial Times Editorial Board Turns Shrill, Joins the Left Opposition, and Calls for More Economic Stimulus, Grasping Reality with Both hands

The Financial Times Editorial Board:

In recent months, both the European Central Bank and the US Federal Reserve have become more vocal in their desire to raise rates. This temptation must be resisted. The west’s inflation problem stems from the voracious demand from Asia’s new industrial powerhouses. This must give hope that a mild dose of stagflation is simply the temporary symptom of an inevitable economic shift. Squeezing domestic inflation to offset it would be counter-productive. In abnormal times, policymakers should also be alive to the balance of risk between inflation and unemployment. Letting the latter rise and become entrenched at a time of weakness would risk hardening the economic arteries further. The real peril now is a double-dip recession rather than inflation. This is no time for tightening.

When the Financial Times's editors join those of us on the left--they are, after all, not the Labor Times or the Manufacturing Times or the Construction Times or the Natural Resource Times--that is a sign that this is a really scary time indeed.

11--25 Million Americans Are Unemployed Or Can't Find Full-Time Work, NPR

Excerpt: Today's jobs report was even worse than expected. The economy added only 54,000 jobs during May — not even enough to keep up with population growth — and the unemployment rate rose to 9.1 percent.

Dig a little deeper, and the unemployment picture looks even worse. Here are a few key numbers.

There are 13.9 million Americans who are out of work and actively looking for a job. These are the people counted in the traditional unemployment number.

On top of that, another 8.5 million people want a full time job but can only find part-time work.

And there are an additional 2.2 million people want a job and have looked in the past year, but haven't looked in the past month.

These numbers combined make up what is sometimes known as the broader unemployment rate (the government calls this measure U-6). The broader unemployment rate is now just under 16 percent.

12--What are the policy options, Pragmatic Capitalsim

Excerpt: With the balance sheet recession in full effect, it’s useful to continue working from the Japan playbook. Unfortunately, the man running the ship (Ben Bernanke) is using his own inaccurate version of the playbook. In a 2003 speech Dr. Bernanke lectured the Japanese on their possible options. In reading this, you can literally see the steps we’ve followed in recent years. He advocated a muti-faceted approach where monetary and fiscal policy are combined to attack the problem from both ends:

“In that spirit, my remarks today will be focused on opportunities for monetary policy innovation in Japan, including specifically the possibility of more-active monetary-fiscal cooperation to end deflation.

…One possible approach to ending deflation in Japan would be greater cooperation, for a limited time, between the monetary and the fiscal authorities. Specifically, the Bank of Japan should consider increasing still further its purchases of government debt, preferably in explicit conjunction with a program of tax cuts or other fiscal stimulus.”

That sounds pretty familiar doesn’t it? It should because it’s almost exactly what has happened in the last 9 months. Unfortunately, the policy is entirely misguided because the man implementing it doesn’t understand how our monetary system functions (this would sound preposterous if his policies before, during and after the crisis hadn’t failed at every step). He continued his Japan lecture by telling them that they were suffering a disastrous national debt problem and that the only way out was to “finance” tax cuts:

“the government’s annual deficit is now about 8 percent of GDP is nevertheless a serious concern….My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.”

All of this is incorrect and proves that Dr. Bernanke does not understand how a fiat currency operates in a nation in which the issuer has monopoly supply in a floating exchange rate system. The problems here are many, but can be summarized in the simple fact that Dr. Bernanke believes the tax cuts need to be “financed”. In other words, QE is necessary to allow the tax cuts to be “paid for”. Of course, a sovereign issuer of currency with monopoly supply of currency in a floating exchange rate system never “finances” its spending. But the good Doctor is working under his entirely defunct gold standard model that no longer applies to the USA. So, aside from the fact that QE was misguided from the beginning, the entire premise from which he is working (that it finances the US government) is completely wrong. It’s no wonder that we took a perfectly good tax cut last year and ruined it by creating a massive gasoline tax in large part thanks to increased commodity speculation.

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