Thursday, June 23, 2011

Today's links

1--That Stalling Feeling, Nouriel Roubini, Project Syndicate

Excerpt: But there are good reasons to believe that we are experiencing a more persistent slump. First, the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity: large and rising public and private deficits and debt; damaged financial systems that need to be cleaned up and recapitalized; massive loss of competitiveness; lack of economic growth; and rising unemployment. It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured.

Second, the factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level....

All of these economies were already growing anemically and below trend, as the ongoing process of deleveraging required a slowdown of public and private spending in order to increase saving rates and reduce debts. And now, in addition to the string of “black swan” events that advanced economies have faced this year, monetary and fiscal stimulus has been removed in most of them, or soon will be.

If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending. And, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.

2--This is What a Balance-Sheet Recession Looks Like, and It's Not Pretty, Economist's View

Stephen Gordon says these graphs make him grateful that Canada is not the US:

This is what a balance-sheet recession looks like, and it's not pretty, Worthwhile Canadian Initiative: I had never heard the expression "balance-sheet recession" before this recent episode, and it's time I got around a comparison of the household balance sheets of the US and Canada. Of all my "Canada is not the US" posts, this is the one that makes me most grateful.

The quarterly data goes back to 1990, and it's good to put the last few years in context. I've scaled all the series by price (the consumption spending deflator) and population. Here is the net worth series: (eye-popping charts)

3--Economic signs change; Fed policies do not, Washington Post

Excerpt: The Federal Reserve concludes its latest policy meeting Wednesday amid a starkly different economic backdrop from its sessions in recent months.

Growth is slumping in the United States, and the rumbling European debt crisis has raised the risk of a new financial crisis. And commodity prices, which were spiking earlier in the year, have now ebbed.

The economic environment may be changing, but the Fed’s policies probably won’t. While Fed officials are concerned about the ominous signs in the economy, they still expect growth to pick up in the second half of the year. And with their controversial effort to pump $600 billion into the economy expiring in mere days, they see little wisdom in expanding the program anew.

As such, the real news following the two-day meeting will be not in the form of action, but in words and numbers: How will Fed officials describe their view of the economy and inflation risks in their statement following the meeting? How will they quantify those views in new economic projections? And what tone will Chairman Ben S. Bernanke project in a news conference following the meeting?

4--Are We Heading For Banana Republicanization?, Econospeak

Excerpt: ...Many have commented that the US has two paths it can go: more in a European direction or more in a Latin American direction. With our accelerating inequality, our increasing partisanship leading to a breakdown of the ability of established institutions to make decisions (will the Congress really raise the debt ceiling while cutting $2 trillion in spending without raising taxes or will we just default as many seem to want?), the longer term trends in the US may well be leading us to a point where many may despair of democratic decisionmaking processes and long for a "strong hand" to fix up our messes for us. This was the sort of thing that went on in the 30s, and if things do not pick up reasonably soon, the more unpleasant voices may gain strength.

5--No way out?, Richard's Real Estate and Urban Economics Blog

Excerpt: At a Rand meeting yesterday, Stuart Gabriel called housing the "tail that wags the dog" of the US economy. He was likely referring to this paper or, perhaps, this paper. In any event, the evidence from past business cycles powerfully supports residential construction as a leading indicator.

Here is the St. Louis Fed's depiction of housing starts going back to 1959: More charts)...In an average year, the US economy starts around 1.5 million houses. It has started fewer than 600,000 per year since 2008, and is currently squiggling along at a bottom unprecedented in the St. Louis Fed series.

I find it hard to see how the economy can recover strongly without housing making a comeback. Yet we still have too many houses--builders cannot compete with the inventory currently available. While they try to differentiate new houses from stuff in the foreclosure stock, it is tough to make a sale when price differences are very large. The problem is that stimulating housing is a bad idea too, because we really don't need many more houses in the economy right now. As my colleague Gary Painter points out, one of the reasons we don't need more houses is that household formations dropped dramatically--we actually lost households early in the recession while population grew. Moreover, according to the Department of Homeland Security, illegal immigration dropped by 2/3 between 2000-2004 and 2004-2009. Whatever one thinks about immigrants (personally, I like them), they do fill up houses.

We are left with a quandary. For the economy to be restored to health, housing construction needs to return to normal--but there is no reason for it to return to normal. The alternative--waiting--doesn't seem very appealing either.

6--Blognote in Honor of Thomas Friedman: Spending on the Commerce Department Is Going to Bankrupt the Country, CEPR

Excerpt: The United States has to cut back spending on the Commerce Department or it will bankrupt the country. Okay, I have no evidence for this and it really doesn't make any sense. The Commerce Department's budget is about $10 billion a year, less than 0.3 percent of total spending, but this note is written in the spirit of Thomas Friedman.

Just as Thomas Friedman can tell readers that Social Security and Medicare are bankrupting the country with no evidence, in my blognote I get to blame the Commerce Department. The reality of course is that Social Security is fully funded by its own dedicated tax revenue through the year 2036, meaning the program on net imposes no burden on the government.

Under the law, if nothing is done to increase revenues SS will only pay about 80 percent of scheduled benefits in years after 2036. It is prohibited from spending any money beyond what it collects in taxes. The projected shortfall over the program's 75-year planning period is equal to 0.6 percent of GDP, about one-third of the increase in annual defense spending between 2000 and 2011. It is difficult to see how a program that can only spend what it takes in from taxes could bankrupt the country, but this is Thomas Friedmanland.

7--Pressure stays on Greeks to avoid default, Reuters

Excerpt: Europe kept up the pressure on Greece to push forward with a painful austerity program on Wednesday after the government jumped a crucial hurdle in averting the euro zone's first debt default....

"There is no alternative. We have a plan, now it's time to act on it, it's time to implement it. There is no alternative. There is no Plan B," European Commission spokeswoman Pia Ahrenkilde-Hansen told a news conference....

French government spokesman Francois Baroin said: "We will not accept any payment incident, or default."

Papandreou aims to get parliamentary approval for a package of spending cuts, tax hikes and state asset sales by June 28 and implement it by July 3 to secure 12 billion euros ($17 billion) in aid that is vital to avoid immediate bankruptcy.

ULTIMATUM

The confidence vote followed a European ultimatum linking release of the money -- the next installment of a 110-billion-euro EU/IMF aid package -- to a new five-year belt-tightening plan.

Without the aid, Athens would plunge into default next month, sending shock waves through the global financial system....

Mohamed El-Erian, head of Pimco, the world's biggest bond fund, said he expected Greece to end up defaulting on its debt.

"For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default," he said.

8--Poll: 44% of Americans Worse Off Under Obama, Bloomberg

Excerpt: Two years after the official start of the recovery, the American people remain pessimistic about their current economic circumstances and longer-term prospects.

Fewer than a quarter of people see signs of improvement in the economy, and two-thirds say they believe the country is on the wrong track overall, according to a Bloomberg National Poll conducted June 17-20.

“Gas prices are higher, grocery prices are higher, transportation prices are higher,” says poll respondent Ronda Brockway, 54, an insurance company manager and political independent who lives in a suburb of Harrisburg, Pennsylvania. “The jobs situation nationwide is very poor.”

By a 44 percent to 34 percent margin, Americans say they believe they are worse off than when President Barack Obama took office in early 2009, when the U.S. was in the depths of a recession compounded by the September 2008 financial crisis and the economy was losing as many as 820,000 jobs a month.

9--We are Japan on "fast forward", Pragmatic Capitalism

Excerpt: Richard Koo’s latest note contains a chart that regular readers have seen before. Similar to my recent analysis, Koo attempts to forecast the de-leveraging of US households using broader trends...(chart)

Richard Koo: The bad news is, we are Japan, but the good news is we are Japan on “fast forward”. As I described in mid-2009everything in the USA’s balance sheet recession appears to be occurring much more quickly than it occurred in Japan. So, the good news is that we won’t need government aid as long as the Japanese needed it. In the meantime we must remember that stimulus is not self sustaining recovery. Ultimately, the USA will not be out of the woods until the private sector begins to meaningfully expand, contribute to closing the output gap and help reduce the 9.8% unemployment rate. Based on many macro trends I have said this could be occur as early as 2012, however, any number of exogenous risks could set us back by months or years. Thus far, there are some relatively positive signs coming from the private sector, however, we are still a long ways from sustained private sector recovery.

For now an accommodative Fed, a $1.3T deficit, a general lack of austerity and a tepid private sector recovery is likely enough to sustain economic growth, but not enough to meaningfully close the output gap. This all continues to point to a period of very high unemployment, tepid economic growth and a recovery that feels like a recession. As I said in early 2010 we might be in a technical recovery, but it still very much feels like a recession with a 9.8% unemployment rate. The good news is we’re not talking ourselves off the edge of the cliff. The bad news is the recovery remains tepid and highly susceptible to exogenous risks.”

Roche: So yes, we are Japan. We are destined for slow growth and a generally depressing economic environment in the next few years, but don’t go bury yourself in a bunker somewhere with a bag of rocks you bought at the local pawn shop. The real recovery is coming, the world is not ending and if you plan properly now you might just be prepared to ride the back of the next great period of economic growth.

10--Goldilocks, the Crash, and the Perfect Fiscal Storm, L. Randall Wray, Credit Writediowns

Excerpt: just as policymakers learned the wrong lessons from the Clinton administration budget surpluses—thinking that the federal budget surpluses were great while they actually were just the flip side to the private sector’s deficit spending—they are now learning the wrong lessons from the global crash after 2007. They’ve managed to convince themselves that it is all caused by government sector profligacy. This, in turn has led to calls for spending cuts (and, more rarely, tax increases) to reduce budget deficits in many countries around the world (notably, in the US and UK).

The reality is different: Wall Street’s excesses led to too much private sector debt that crashed the economy and reduced government tax revenues. This caused a tremendous increase of federal government deficits. {As a sovereign currency-issuer, the federal government faces no solvency constraints (readers will have to take that claim at face value for now—it is the topic for upcoming MMP blogs).} However, the downturn hurt state and local government revenue. Hence, they responded by cutting spending, laying-off workers, and searching for revenue.

The fiscal storm that killed state budgets is the same fiscal storm that created the federal budget deficits shown in the chart above. An economy cannot lose about 8% of GDP (due to spending cuts by households, firms and local and state governments) and over 8 million jobs without negatively impacting government budgets. Tax revenue has collapsed at an historic pace. Federal, state, and local government deficits will not fall until robust recovery returns—ending the perfect fiscal storm.

Robust recovery will reduce the overall government sector’s budget deficit as the private sector reduces its budget surplus. It is probable that our current account deficit will grow a bit when we recover. If you want to take a guess at what our “mirror image” in the graph above will look like after economic recovery, I would guess that we will return close to our long-run average: a private sector surplus of 2% of GDP, a current account deficit of 3% of GDP and a government deficit of 5% of GDP. In our simple equation it will look like this:

Private Balance (+2) + Government Balance (-5) + Foreign Balance (+3) = 0.

And so we are back to the concept of zero!

1--That Stalling Feeling, Nouriel Roubini, Project Syndicate

Excerpt: But there are good reasons to believe that we are experiencing a more persistent slump. First, the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity: large and rising public and private deficits and debt; damaged financial systems that need to be cleaned up and recapitalized; massive loss of competitiveness; lack of economic growth; and rising unemployment. It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured.

Second, the factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level....

All of these economies were already growing anemically and below trend, as the ongoing process of deleveraging required a slowdown of public and private spending in order to increase saving rates and reduce debts. And now, in addition to the string of “black swan” events that advanced economies have faced this year, monetary and fiscal stimulus has been removed in most of them, or soon will be.

If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending. And, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.

2--This is What a Balance-Sheet Recession Looks Like, and It's Not Pretty, Economist's View

Stephen Gordon says these graphs make him grateful that Canada is not the US:

This is what a balance-sheet recession looks like, and it's not pretty, Worthwhile Canadian Initiative: I had never heard the expression "balance-sheet recession" before this recent episode, and it's time I got around a comparison of the household balance sheets of the US and Canada. Of all my "Canada is not the US" posts, this is the one that makes me most grateful.

The quarterly data goes back to 1990, and it's good to put the last few years in context. I've scaled all the series by price (the consumption spending deflator) and population. Here is the net worth series: (eye-popping charts)

3--Economic signs change; Fed policies do not, Washington Post

Excerpt: The Federal Reserve concludes its latest policy meeting Wednesday amid a starkly different economic backdrop from its sessions in recent months.

Growth is slumping in the United States, and the rumbling European debt crisis has raised the risk of a new financial crisis. And commodity prices, which were spiking earlier in the year, have now ebbed.

The economic environment may be changing, but the Fed’s policies probably won’t. While Fed officials are concerned about the ominous signs in the economy, they still expect growth to pick up in the second half of the year. And with their controversial effort to pump $600 billion into the economy expiring in mere days, they see little wisdom in expanding the program anew.

As such, the real news following the two-day meeting will be not in the form of action, but in words and numbers: How will Fed officials describe their view of the economy and inflation risks in their statement following the meeting? How will they quantify those views in new economic projections? And what tone will Chairman Ben S. Bernanke project in a news conference following the meeting?

4--Are We Heading For Banana Republicanization?, Econospeak

Excerpt: ...Many have commented that the US has two paths it can go: more in a European direction or more in a Latin American direction. With our accelerating inequality, our increasing partisanship leading to a breakdown of the ability of established institutions to make decisions (will the Congress really raise the debt ceiling while cutting $2 trillion in spending without raising taxes or will we just default as many seem to want?), the longer term trends in the US may well be leading us to a point where many may despair of democratic decisionmaking processes and long for a "strong hand" to fix up our messes for us. This was the sort of thing that went on in the 30s, and if things do not pick up reasonably soon, the more unpleasant voices may gain strength.

5--No way out?, Richard's Real Estate and Urban Economics Blog

Excerpt: At a Rand meeting yesterday, Stuart Gabriel called housing the "tail that wags the dog" of the US economy. He was likely referring to this paper or, perhaps, this paper. In any event, the evidence from past business cycles powerfully supports residential construction as a leading indicator.

Here is the St. Louis Fed's depiction of housing starts going back to 1959: More charts)...In an average year, the US economy starts around 1.5 million houses. It has started fewer than 600,000 per year since 2008, and is currently squiggling along at a bottom unprecedented in the St. Louis Fed series.

I find it hard to see how the economy can recover strongly without housing making a comeback. Yet we still have too many houses--builders cannot compete with the inventory currently available. While they try to differentiate new houses from stuff in the foreclosure stock, it is tough to make a sale when price differences are very large. The problem is that stimulating housing is a bad idea too, because we really don't need many more houses in the economy right now. As my colleague Gary Painter points out, one of the reasons we don't need more houses is that household formations dropped dramatically--we actually lost households early in the recession while population grew. Moreover, according to the Department of Homeland Security, illegal immigration dropped by 2/3 between 2000-2004 and 2004-2009. Whatever one thinks about immigrants (personally, I like them), they do fill up houses.

We are left with a quandary. For the economy to be restored to health, housing construction needs to return to normal--but there is no reason for it to return to normal. The alternative--waiting--doesn't seem very appealing either.

6--Blognote in Honor of Thomas Friedman: Spending on the Commerce Department Is Going to Bankrupt the Country, CEPR

Excerpt: The United States has to cut back spending on the Commerce Department or it will bankrupt the country. Okay, I have no evidence for this and it really doesn't make any sense. The Commerce Department's budget is about $10 billion a year, less than 0.3 percent of total spending, but this note is written in the spirit of Thomas Friedman.

Just as Thomas Friedman can tell readers that Social Security and Medicare are bankrupting the country with no evidence, in my blognote I get to blame the Commerce Department. The reality of course is that Social Security is fully funded by its own dedicated tax revenue through the year 2036, meaning the program on net imposes no burden on the government.

Under the law, if nothing is done to increase revenues SS will only pay about 80 percent of scheduled benefits in years after 2036. It is prohibited from spending any money beyond what it collects in taxes. The projected shortfall over the program's 75-year planning period is equal to 0.6 percent of GDP, about one-third of the increase in annual defense spending between 2000 and 2011. It is difficult to see how a program that can only spend what it takes in from taxes could bankrupt the country, but this is Thomas Friedmanland.

7--Pressure stays on Greeks to avoid default, Reuters

Excerpt: Europe kept up the pressure on Greece to push forward with a painful austerity program on Wednesday after the government jumped a crucial hurdle in averting the euro zone's first debt default....

"There is no alternative. We have a plan, now it's time to act on it, it's time to implement it. There is no alternative. There is no Plan B," European Commission spokeswoman Pia Ahrenkilde-Hansen told a news conference....

French government spokesman Francois Baroin said: "We will not accept any payment incident, or default."

Papandreou aims to get parliamentary approval for a package of spending cuts, tax hikes and state asset sales by June 28 and implement it by July 3 to secure 12 billion euros ($17 billion) in aid that is vital to avoid immediate bankruptcy.

ULTIMATUM

The confidence vote followed a European ultimatum linking release of the money -- the next installment of a 110-billion-euro EU/IMF aid package -- to a new five-year belt-tightening plan.

Without the aid, Athens would plunge into default next month, sending shock waves through the global financial system....

Mohamed El-Erian, head of Pimco, the world's biggest bond fund, said he expected Greece to end up defaulting on its debt.

"For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default," he said.

8--Poll: 44% of Americans Worse Off Under Obama, Bloomberg

Excerpt: Two years after the official start of the recovery, the American people remain pessimistic about their current economic circumstances and longer-term prospects.

Fewer than a quarter of people see signs of improvement in the economy, and two-thirds say they believe the country is on the wrong track overall, according to a Bloomberg National Poll conducted June 17-20.

“Gas prices are higher, grocery prices are higher, transportation prices are higher,” says poll respondent Ronda Brockway, 54, an insurance company manager and political independent who lives in a suburb of Harrisburg, Pennsylvania. “The jobs situation nationwide is very poor.”

By a 44 percent to 34 percent margin, Americans say they believe they are worse off than when President Barack Obama took office in early 2009, when the U.S. was in the depths of a recession compounded by the September 2008 financial crisis and the economy was losing as many as 820,000 jobs a month.

9--We are Japan on "fast forward", Pragmatic Capitalism

Excerpt: Richard Koo’s latest note contains a chart that regular readers have seen before. Similar to my recent analysis, Koo attempts to forecast the de-leveraging of US households using broader trends...(chart)

Richard Koo: The bad news is, we are Japan, but the good news is we are Japan on “fast forward”. As I described in mid-2009everything in the USA’s balance sheet recession appears to be occurring much more quickly than it occurred in Japan. So, the good news is that we won’t need government aid as long as the Japanese needed it. In the meantime we must remember that stimulus is not self sustaining recovery. Ultimately, the USA will not be out of the woods until the private sector begins to meaningfully expand, contribute to closing the output gap and help reduce the 9.8% unemployment rate. Based on many macro trends I have said this could be occur as early as 2012, however, any number of exogenous risks could set us back by months or years. Thus far, there are some relatively positive signs coming from the private sector, however, we are still a long ways from sustained private sector recovery.

For now an accommodative Fed, a $1.3T deficit, a general lack of austerity and a tepid private sector recovery is likely enough to sustain economic growth, but not enough to meaningfully close the output gap. This all continues to point to a period of very high unemployment, tepid economic growth and a recovery that feels like a recession. As I said in early 2010 we might be in a technical recovery, but it still very much feels like a recession with a 9.8% unemployment rate. The good news is we’re not talking ourselves off the edge of the cliff. The bad news is the recovery remains tepid and highly susceptible to exogenous risks.”

Roche: So yes, we are Japan. We are destined for slow growth and a generally depressing economic environment in the next few years, but don’t go bury yourself in a bunker somewhere with a bag of rocks you bought at the local pawn shop. The real recovery is coming, the world is not ending and if you plan properly now you might just be prepared to ride the back of the next great period of economic growth.

10--Goldilocks, the Crash, and the Perfect Fiscal Storm, L. Randall Wray, Credit Writediowns

Excerpt: just as policymakers learned the wrong lessons from the Clinton administration budget surpluses—thinking that the federal budget surpluses were great while they actually were just the flip side to the private sector’s deficit spending—they are now learning the wrong lessons from the global crash after 2007. They’ve managed to convince themselves that it is all caused by government sector profligacy. This, in turn has led to calls for spending cuts (and, more rarely, tax increases) to reduce budget deficits in many countries around the world (notably, in the US and UK).

The reality is different: Wall Street’s excesses led to too much private sector debt that crashed the economy and reduced government tax revenues. This caused a tremendous increase of federal government deficits. {As a sovereign currency-issuer, the federal government faces no solvency constraints (readers will have to take that claim at face value for now—it is the topic for upcoming MMP blogs).} However, the downturn hurt state and local government revenue. Hence, they responded by cutting spending, laying-off workers, and searching for revenue.

The fiscal storm that killed state budgets is the same fiscal storm that created the federal budget deficits shown in the chart above. An economy cannot lose about 8% of GDP (due to spending cuts by households, firms and local and state governments) and over 8 million jobs without negatively impacting government budgets. Tax revenue has collapsed at an historic pace. Federal, state, and local government deficits will not fall until robust recovery returns—ending the perfect fiscal storm.

Robust recovery will reduce the overall government sector’s budget deficit as the private sector reduces its budget surplus. It is probable that our current account deficit will grow a bit when we recover. If you want to take a guess at what our “mirror image” in the graph above will look like after economic recovery, I would guess that we will return close to our long-run average: a private sector surplus of 2% of GDP, a current account deficit of 3% of GDP and a government deficit of 5% of GDP. In our simple equation it will look like this:

Private Balance (+2) + Government Balance (-5) + Foreign Balance (+3) = 0.

And so we are back to the concept of zero!

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