Thursday, June 9, 2011

Today's links

1--Why the U.S. housing market will keep falling, Globe and Mail

Excerpt: History suggests that while a housing bubble can temporarily push prices above the inflation rate, home prices inevitably fall back and remain remarkably constant in real terms. Based on that reasoning, Mr. Baker calculates that U.S. home prices still have 10 per cent further to drop. “That is what would be needed to return us to the real prices of 1996, before the housing bubble began to inflate,” he says.

He has little patience for those who believe the U.S. housing market is ready to rebound. “No one – as in not a single economist anywhere – has presented a remotely plausible reason as to why we should expect house prices to diverge from their 100-year-long trend [of hugging the long-term inflation line],” he wrote in a recent commentary. “Given the continued near-record vacancy rates, and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling any time soon.”

Mr. Baker believes the economy needs a wallop of government stimulus – far larger than the $800-billion (U.S.) package President Barack Obama got through Congress in 2009 – to reignite growth. In the current political climate, that looks unlikely.

Without more stimulus, Mr. Baker thinks growth will be anemic until the U.S. dollar loses a quarter or so of its current value. At that point, a weak greenback will make U.S. goods far cheaper on international markets and spur an export surge. “A lot of people think a weak dollar is bad,” he says. “It’s actually just what we need.”

2--Koo and Krugman are both wrong?, Pragmatic Capitalism

Excerpt: Richard Koo is not without fault in this whole debate. One place where I do agree with Dr. Krugman (and disagree with Richard Koo) is with regards to Koo’s position on the US Dollar. He says there is some risk that QE could cause a collapse in the dollar (he recently reiterated these comments). In his Holy Grail of Macroeconomics Koo states:

“a central bank can always generate hyperinflation by acting so as to lose the public’s trust, its ability to induce modest amounts of inflation depends on whether private businesses are in profit-maximization mode or not.”

Koo resorts to his neoclassical roots here by presuming that bank reserves are lent out and that the central bank can always create inflation if the economy is not in a balance sheet recession. This is factually incorrect. Banks never lend reserves. The fact that we are in a balance sheet recession gives the appearance that reserves are not being lent out, however, the balance sheet recession is only exposing the banking system for what it really is. Banks are never reserve constrained. They lend first and find reserves later. This is a simple reality of modern banking and has been shown in several Fed papers in recent years and is prominently discussed by MMT economists (who are just about the only ones who have these facts accurate).

Koo’s point here is to show that the central bank could potentially generate hyperinflation by being reckless with their policy and losing the trust of the public. I think this is a fundamental misunderstanding of the US monetary system. Helicopter drops (as Koo refers to them in the book) are always fiscal operations (see Scott Fullwiler’s excellent presentation here). The Fed did not monetize the debt. The Fed did not print money. And hyperinflation is a unique event whose historical episodes bear zero resemblance to the modern day United States. Therefore, I think Koo’s fears of a disorderly dollar collapse are totally unfounded. The very foundation from which he is working is fundamentally wrong. And ironically, his misunderstanding stems from the same place that Krugman’s misunderstanding stems from – a basic misunderstanding of the actual operations of a sovereign currency issuer with monopoly supply of currency in a floating exchange rate system.

So, I guess they’re both wrong….At least Koo got the policy right in the first place though.

3-- Philip Pilkington: Down in the Hole – Is America Becoming the Next Japan? Naked Capitalism

Excerpt: So, we do have many similarities between the US and Japan – both experienced crisis after a significant asset bubble crashed out and both have high-levels of net private sector saving which require government deficits to offset. But there are also differences.

If I were to sum up this difference – giving myself room for the sort of crass generalizations that ‘summing up’ always entails – I would say that the US’s current slump is more so driven by demand-side factors, while Japan’s is more so driven by a ‘balance sheet recession’ on the part of companies. The US has seen a pretty straightforward collapse in private sector demand – with unemployment rising and the household sector net saving. Japan, on the other hand, was not hit with a wave of unemployment and household saving actually fell significantly; indeed, their problem was tied to the companies desperately paying down the debt they had incurred after the asset bubbles collapsed.

What is to be done?

Richard Koo claims that the Japanese ‘got it right’ when they allowed the government deficits to open up. This allowed indebted companies time to get their balance sheets in order. Bill Mitchell largely agrees. While Martin Wolf, in an article written in the Financial Times last year, agrees for the most part but claims that Japan has other underlying problems related to opportunities for investment (I’m not going into this here – although, and I’m rather surprised to say it, I think you can derive broadly similar conclusions from Wolf’s argument as yours truly did from Mitchell’s regarding Japan’s future trajectory).

So, there’s quite a bit of consensus among serious, non-hysterical types about the approach needed to fix the Japanese problem: high-levels of government spending to facilitate the private sectors net saving desires (in this case: private-sector deleveraging).

That means that when Mr. Jagger asks “will all your money/keep you from madness/keep you from sadness/ when you’re down in the hole”? We can answer pretty definitively: yes, yes it will. The government certainly does need to create new money to keep the US from falling any further down the hole....

But as we have highlighted, the crisis in the US, while similar to that in Japan in many respects, is not quite the same. In the US the problem is more so to do with unemployment and stagnant aggregate demand. So, even if the ‘smash the technostructure’ argument wasn’t completely poisonous, it would still be inapplicable (unless of course, you substitute ‘zombie’ companies with ‘zombie’ banks – but that’s another argument and another story).

This probably means that the fiscal solution is even more applicable to the US than it was to Japan. While the Japanese economy needed to be kept on life-support for a few years while they got their collective house in order, the US citizenry just need more bucks.

As Martin Wolf points out in another piece back in 2009:

“The big US debt accumulations were not by non-financial corporations but by households and the financial sector.”

Wolf goes on to highlight the skyrocketing debt incurred by the financial sector throughout the period. What he should be highlighting is that, more often than not, fastened to the end of the financial sector’s debt-chain is a low to medium-income human being. And that is where most of these debts ultimately land. That, in turn, is why this is, when we strip away the complexities, a fairly straightforward crisis of aggregate demand.

Households have been pushed into debt because their wages haven’t been allowed to keep pace with productivity growth for decades. Add to this the maniacal desire that possessed certain Democratic administrations to run budget surpluses in relatively good economic times and you’ve got a pretty explosive mixture.

So, it’s clear that the US citizenry need more bucks; but where should they get them? Why, from the government of course. After all, they’re the only realistic source right now. They can do this either through tax-breaks – for the working man, NOT for the rich – or some sort of employment program (I favor the latter, but I recognize that the former is probably more politically realistic).

“Yippee!” cries the Yankee Doodle Naked Capitalism reader. “We’re not nearly as badly off as the Japanese were a few years ago; this’ll be easy.” Not so fast. The US is probably in a much worse position than the Japanese were back at the beginning of the 90s. Why? Eh… because crazy people run the country… duh.

4--Mexican drug gangs building own tanks as war intensifies, McClatchy Newspapers

Excerpt: Mexico's rival crime gangs are in an arms race, and the latest sign of that are the homemade "Mad Max" type heavily armored vehicles they deploy to withstand fierce clashes with each other. The army found two more "narco tanks" over the weekend in Ciudad Camargo in Tamaulipas state along the border with Texas.

In earlier discoveries in April and May, armored vehicles found by authorities contained swiveling turrets, snipers' peepholes and gadgets to dump oil and scatter tire-puncturing nails on roadways.

The latest discovery showed that the gangs are upping their game. The two armored vehicles were cloaked in inch-thick steel plating. Built on a three-axle truck bed with a heavily armored cabin, the latest "narco tanks" are far larger than previous versions.

"You can easily fit 20 armed people in here," an unidentified army officer told El Porvenir TV as he showed the inside of one of the vehicles.

5--A European Generation Takes to the Streets, Spiegel

Excerpt: For weeks, hundreds of young people have been camping out in central Madrid. And others across Europe have now begun following their example. Protests in Lisbon, Paris, Athens and elsewhere show that Europe's lost generation has finally found its voice....

The protestors are trying to create a movement to rival the protests in Madrid and Lisbon. They want tens of thousands of young people to march in the streets of Paris, calling for "démocratie réelle," or real democracy. They believe that there is also potential for such large-scale protest in France, with youth unemployment at more than 20 percent, precarious working conditions and what feels like a constant state of crisis.

"Until now, our problems were always seen as individual problems," says Julien, a 22-year-old physics student who has joined a group called Actions. "You were told that if you couldn't find a job, it was your own fault. Perhaps we are now experiencing a change taking place, and that we are joining forces to form a pan-European movement against this system."

A Fundamental Change

There is a feeling that unites young people throughout Europe, namely the belief that they will not be able to attain the same level of prosperity as their parents did. They feel that they have no future. They are well-trained, and yet they are not finding any jobs. This feeling has been smoldering for years, affecting the generation of "crisis children," who grew up in a world shaped by economic and other crises, but who never took to the streets to fight for their interests.

But a fundamental change is taking place. On March 12, 200,000 people marched down the Avenida de Liberdade, or Avenue of Freedom, in Lisbon. It was the biggest demonstration in Portugal since the 1974 Carnation Revolution, a march of the lost generation.

6--Rx for a Double-dip Recession: Cut Government Spending by 15 Percent, Tax Policy Center

Excerpt: Apparently nostalgic for recession, more than 100 House Republicans have proposed to cut federal spending by $550 billion in 2012. The Republican Study Committee (RSC) doesn’t ever quite say this is their plan, but it is. One hardly knows where to begin.

This is an amazing number. It implies a 15 percent reduction in government spending in a single year—in the midst of a weak economy with unemployment that exceeds 9 percent. It is an austerity budget of historic proportions. Just to compare, the United Kingdom is moving to cut spending by 20 percent over four years. The House Republican budget devised by Budget Committee Chair Paul Ryan (R-WI) would cut 2012 spending by about 3 percent or $110 billion. The RSC would make Ryan look like a crazed liberal. Of course, that may be the idea....

What would $550 billion in across-the-board spending cuts mean? A 15 percent reduction in Social Security benefits would cut monthly payments for a typical retiree by $180. It is hard to imagine the air traffic control system functioning with its budget cut by 15 percent. Does anybody think doctors would treat Medicare patients or that nursing homes would accept Medicaid residents in the wake of a 15 percent payment cut? While the RSC opposes any tax increases, its plan is silent on, say, Medicare premiums. So, it could keep provider payments flat—by doubling premiums.

The RSC would not return my calls so there is a lot we don’t know about its plan. If, however, it exempts defense and homeland security from deep cuts—a key element of the House GOP budget plan– the reductions elsewhere would be even steeper. Instead of a 15 percent reduction in spending, the RSC would have to cut everything else by about 20 percent.

7--Christy Romer’s Reminiscences, The Big Picture

Excerpt: Former White House economics team member Christina Romer gave a speech last month — when the economic numbers were demonstrably better than they have been of late — and described some of the policy discussion and debate that took place during her tenure in the Obama administration. Seems to me the White House and the Fed now have a distinct deer-in-the-headlights feel about them, and Romer’s speech, to me, goes a long way toward explaining why. Here are the highlights:

To bring the unemployment rate down quickly, GDP growth needs to be much more rapid. To repair the damage from this recession, we need to be adding not 100 to 200 thousand jobs a month, but more like 400 or even 500 thousand per month. Unfortunately, virtually no one is predicting growth like that in the coming quarters...

The main problem with the Recovery Act is that, big as it was, it wasn’t big enough....

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery. I remember that fall of 2009 as a very frustrating one. It was very clear to me that the economy was still struggling, but the will to do more to help it had died....

First, I feel strongly that the cause of our high unemployment today is still the recession and low demand. Firms are not hiring workers because there isn’t enough demand for the output those unemployed workers could produce. Consumers are still cautious; firms are not investing particularly heavily; and our net exports have not grown enough to fill the shortfall.

8--Romer versus Geithner, Economist's View

Excerpt: Geithner is the only economic advisor I can think of that's been there from the start, and with the departure of others his influence has likely increased. If you are unemployed, that's not good news:

Geithner: Stimulus is ‘sugar’ for the economy, by Ezra Klein: From Zach Goldfarb’s excellent profile of Treasury Secretary Timothy Geithner’s success inside the Obama administration:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [then chairwoman of the Council of Economic Advisers Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

So Geithner argued against job creation and for deficit reduction?

9--Fed Watch: Clear Message from the Fed, Tim Duy, Economist's View

Excerpt: Clear Message from the Fed, by Tim Duy: We received a pretty clear message yesterday – if you are looking for additional monetary stimulus, you need to find a new hobby. Not going to happen. Yes, we know we have said this before, but this time we are serious....

The description of a recovery that is jerky and lacking robustness brings to mind something Greg Ip said last week:

Still, I was recently reminded by someone who lived through Japan’s lost decade that America is qualitatively, if not quantitatively, following the same script. That means we will often think robust, above-trend growth has begun, only to see it snuffed out by the inexorable post-bubble deleveraging. Japan offers another sobering lesson: its policy flexibility was heavily circumscribed by politics. Bail-outs, deficits and quantitative easing were no more popular in Japan than in America today. Japanese officials are far too polite to say “I told you so.” But they could....

Bottom Line: Federal Reserve officials accept the economy at face value – growth is slower than they would like, unemployment higher than they would like, but policymakers, fiscal and monetary, believe they are pretty much out of bullets. Unless the economy slips badly, don’t expect any more from us. Which leaves the rest of us hoping – against hope, if recent history is any guide – that the economy regains its footing in the second half of the year.

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