Friday, June 17, 2011

Weekend links

1--Weekly Initial Unemployment Claims decrease to 414,000, CalculatedRisk

The DOL reports on weekly unemployment insurance claims:

In the week ending June 11, the advance figure for seasonally adjusted initial claims was 414,000, a decrease of 16,000 from the previous week's revised figure of 430,000. The 4-week moving average was 424,750, unchanged from the previous week's revised average of 424,750....

This is the tenth straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January. This suggests the labor market weakness in May continued into early June.

2-- Core Measures of Inflation increased in May, CalculatedRisk

Earlier today the BLS reported:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment.

The index for all items less food and energy rose 0.3 percent in May after increasing 0.1 percent in March and 0.2 percent in April. The shelter index rose 0.2 percent in May after increasing 0.1 percent in each of the seven previous months. Both rent and owners' equivalent rent rose 0.1 percent; the acceleration in shelter was due to the index for lodging away from home, which rose 2.9 percent in May after being unchanged in April....

Although the year-over-year increases are below the Fed's inflation target, the annualized rates were above the target in May. However, with the slack in the system, the year-over-year core measures will probably stay near or be below 2% this year.

3--Obama defends Libya war, rejects need for Congress vote, WSWS

Excerpt: The Obama administration argued Wednesday that the War Powers Act, requiring congressional approval for undeclared US wars, does not apply to the nearly three-month-old war against Libya.

In a letter to Congress, the White House revealed that US operations in Libya have already cost $716 million and will top $1.1 billion by the end of September. This funding, it said, would come out of the Pentagon’s existing budget.

At the same time, the letter insists that the US military’s role in the war is too limited to fall under the War Powers Act, which requires that the president obtain congressional approval of any military operation within 60 days of the outset of “hostilities.”

“The President is of the view that the current US military operations in Libya are consistent with the War Powers Resolution and do not under that law require further congressional authorization, because U.S. military operations are distinct from the kind of ‘hostilities’ contemplated by the Resolution’s 60 day termination provision,” an unauthorized version of letter circulated Wednesday states.

It describes the role played by US military forces as “constrained and supporting” and insists that “US operations do not involve sustained fighting or active exchanges of fire with hostile forces, nor do they involve the presence of US ground troops, US casualties or a serious threat thereof, or any significant chance of escalation into a conflict characterized by those factors.”

4--US Housing Crisis Is Now Worse Than Great Depression, CNBC

Excerpt: It's official: The housing crisis that began in 2006 and has recently entered a double dip is now worse than the Great Depression.

Prices have fallen some 33 percent since the market began its collapse, greater than the 31 percent fall that began in the late 1920s and culminated in the early 1930s, according to Case-Shiller data.

The news comes as the Federal Reserve considers whether the economy has regained enough strength to stand on its own and as unemployment remains at a still-elevated 9.1 percent, throwing into question whether the recovery is real.

"The sharp fall in house prices in the first quarter provided further confirmation that this housing crash has been larger and faster than the one during the Great Depression," Paul Dales, senior economist at Capital Economics in Toronto, wrote in research for clients.

5--Global economy menaced by return of living dead, Stephen Roach, Financial Times via Automatic Earth

Excerpt: The global economy is being hobbled by a new generation of zombies — the economic walking dead. American consumers are in the early stages of an unprecedented retrenchment. In the 13 quarters since the beginning of 2008, inflation-adjusted annualised growth in consumption has averaged just 0.5 per cent. Never before in the postwar era have US consumers been this weak for this long....

It will take a long time for American consumers to recover from the ravages of this bubble-induced spending binge. Deleveraging, the paying down of excess debt, has barely begun. Yes, household sector debt came down to 115 per cent of disposable personal income in early 2011. While that is 15 percentage points below the peak ratio of 130 per cent hit in 2007, it remains well above the 75 per cent average of the 1970 to 2000 period.

A similar pattern is evident on the saving side. The personal saving rate stood at just 4.9 per cent of disposable income in March and April 2011. While that’s up from the rock-bottom 1.2 per cent in mid-2005, it is far short of the nearly 8 per cent norm that prevailed in the last 30 years of the 20th century.

Like Japan’s banks, Washington policymakers are doing everything they can to forestall rational economic adjustments. The Federal Reserve has conducted two rounds of quantitative easing in an effort to get consumers to start spending the wealth effects of a policy-induced rebound in equities. Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.

The aim is to get zombie consumers to ignore their festering problems and start spending again — irrespective of the wrenching balance sheet damage they suffered in the “great recession”. The subtext is Washington condones a revival of reckless behaviour.

Unsurprisingly, US consumers are smarter than US policymakers. With fiscal and monetary policies on unsustainable paths, households know that these life support efforts are temporary, at best. That means they need to take matters in their own hands. Sub-par labour income generation and historically high unemployment and underemployment for 24m Americans only underscore the need for belt-tightening.

Spending retrenchment, deleveraging, and saving are the only sustainable options for America’s zombie consumers. That’s especially the case for 77m ageing baby boomers — the first of whom are now hitting retirement age.

Like Japan’s zombies, there is no quick end in sight to the chronic weakness of American consumers. I suspect it will take a minimum of another three to five years before debt loads and saving rates have been restored to more sustainable levels. With consumption still about 70 per cent of gross domestic product, that points to sharply reduced growth in the US economy — unless America is quick to uncover a new and vibrant source of growth. Policy paralysis in Washington is hardly encouraging in that regard.

There are important implications for the global economy. A protracted shortfall of the world’s biggest consumer, as well as weakness in Japan and debt-ravaged Europe, spells lasting pressure on external demand for export-led economies. Barring a quick rebalancing towards internal demand, so-called growth miracles in the developing world could be in for a rude awakening.

Sadly, America’s zombie consumers could be more problematic for the US than the zombie corporates were for the Japanese economy. At 70 per cent of GDP, US personal consumption is 3.5 times the peak share of Japan’s bubble-distorted business capital spending sector in the early 1990s. A failure to learn the lessons of Japan - especially that of post-bubble zombie congestion - leaves the US and the global economy in a very tough place for years to come. Growth-hungry financial markets could be very disappointed.

6--How China could yet fail like Japan, Martin Wolf, Financial Times

Excerpt: Until 1990, Japan was the most successful large economy in the world. Almost nobody predicted what would happen to it in the succeeding decades. Today, people are yet more in awe of the achievements of China. Is it conceivable that this colossus could learn that spectacular success is a precursor of surprising failure? The answer is: yes....

Such arguments rest on two features of China’s situation. The first is that it is a middle-income country. Economists increasingly recognise a “middle-income trap”. Thus, sustaining rapid increases in productivity and managing huge structural shifts as the economy becomes more sophisticated is hard. Japan, South Korea, Taiwan, Hong Kong and Singapore are almost the only economies to have managed this feat over the past 60 years.

Happily, China has close cultural and economic similarities with these east Asian successes. Unhappily, China shares with these economies a model of investment-led growth that is both a strength and a weakness. Moreover, China’s version of this model is extreme. For this reason, it is arguable that the model will cause difficulties even before it did in the arguably less distorted case of Japan.

Premier Wen Jiabao has himself described the economy as “unstable, unbalanced, unco-ordinated and ultimately unsustainable”. The nature of the challenge was made evident to me during discussions of the 12th five year plan at the China Development Forum 2011 in Beijing in March. This new plan calls for a sharp change in the pace and structure of economic growth. In particular, growth is forecast to decline to just 7 per cent a year. More important, the economy is expected to rebalance from investment, towards consumption and, partly as a result, from manufacturing towards services.

The question is whether these shifts can be managed smoothly. Michael Pettis of Peking University’s Guanghua School of Management has argued that they cannot be. His argument rests on the view that in the investment-led growth model, repression of household incomes plays a central role by subsidising that investment. Removing that repression – a necessary condition for faster growth of consumption – risks causing a sharp slowdown in output and a still bigger slowdown in investment. Growth is driven as much by subsidised expansion of capacity as by the profitable matching of supply to final demand. This will end with a bump....

Professor Pettis argues that suppression of wages, huge expansions of cheap credit and a repressed exchange rate were all ways of transferring incomes from households to business and so from consumption to investment. Dwight Perkins of Harvard argued at the China Development Forum that the “incremental capital output ratio” – the amount of capital needed for an extra unit of GDP – rose from 3.7 to one in the 1990s to 4.25 to one in the 2000s. This also suggests that returns have been falling at the margin.

If this pattern of growth is to reverse, as the government wishes, the growth of investment must fall well below that of GDP. This is what happened in Japan in the 1990s, with dire results. The thesis advanced by Prof Pettis is that a forced investment strategy will normally end with such a bump. The question is when. In China, it might be earlier in the growth process than in Japan because investment is so high. Much of the investment now undertaken would be unprofitable without the artificial support provided, he argues.

One indicator, he suggests, is rapid growth of credit. George Magnus of UBS also noted in the FT of May 3 2011 that the credit-intensity of Chinese growth has increased sharply. This, too, is reminiscent of Japan as late as the 1980s, when the attempt to sustain growth in investment-led domestic demand led to a ruinous credit expansion.

As growth slows, the demand for investment is sure to shrink. At growth of 7 per cent, the needed rate of investment could fall by up to 15 per cent of GDP. But the attempt to shift income to households could force a yet bigger decline. From being an growth engine, investment could become a source of stagnation.

The optimistic view is that China’s growth potential is so great that it can manage the planned transition with ease. The pessimistic view is that it is hard for a country investing half of GDP to decelerate smoothly. I expect the transition to slower economic growth and greater reliance on consumption to be quite bumpy. The Chinese government is skilled. But it cannot walk on water. The water it is going to have to walk on over the next decade is going to be choppy. Watch out for the waves.

7--FED WATCH: Fans Of Inflation Targeting At The Fed, But Obstacles Unresolved, Wall Street Journal

Excerpt: There's been a lot of chatter in the market in the past few days about the possibility of the Federal Reserve creating a formal target for inflation, as many other central banks around the world do. Atlanta Fed president Dennis Lockhart embraced the idea in a speech last week, as have other regional Fed bank presidents. News reports are zeroing in on the issue.

There are many fans of an inflation target at the Fed--mostly notably its chairman Ben Bernanke, a long-time proponent. The central bank came close to embracing one last year during discussions about its $600 billion securities purchase program. But the challenges that proved to be an obstacle last year when the idea was discussed seem unlikely to get resolved very quickly.

An inflation target is appealing because it helps to anchor the expectations of the public and investors about future consumer-price increases. That assurance improves confidence and gives business and others certainty about making investment decisions. It also gives financial markets a clearer sense about the path of a central bank's interest-rate decisions. Moreover, it could blunt worries that the Fed's easy money policies are going to cause runaway inflation. The Bank of England, Bank of Canada, European central banks and many others have inflation targets.

The hang-up for the Fed has always been that it has a dual mandate. In addition to being required by Congress to achieve stable prices, it is required to achieve "maximum employment." Fed officials believe there is no conflict between having a medium-run inflation goal of, say 2%, and achieving maximum employment because they see low inflation as a prerequisite for strong employment growth. But they do worry about how they would explain this to the public. If they adopt a formal inflation target of 2%, will it look like they're abandoning their other goal of maximum employment? How can they explain it in a way that avoids creating this misperception, especially at a time when unemployment is so high?

8--Philly Fed Survey: "Regional manufacturing activity weakened in June", CalculatedRisk

Excerpt: From the Philly Fed: June 2011 Business Outlook Survey

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.9 in May to -7.7, its first negative reading since last September. [any reading below zero is contraction]. The demand for manufactured goods, as measured by the current new orders index, showed a similar decline: The index fell 13 points and recorded its first negative reading since last October. The current shipments index fell just 3 points but remained slightly positive. Firms reported declines in inventories and unfilled orders, and shorter delivery times....

This early reading suggests the ISM index could be below 50 in June - is so, this would be the lowest reading since mid-2009.

9--Roach: Return of the Living Dead, Credit Writedowns

Excerpt: in theory, fiscal stimulus can cushion the downturn and hasten real recovery by preventing a spiral into a non-equilibrating economic state. However, in practice, stimulus has been used as an excuse to maintain the status quo, prop up zombie companies and forestall the inevitable. This only lengthens the downturn, misallocating even more resources to less efficient uses. And all of the worries I had about social unrest, populism, and protectionism are coming true nonetheless…

Rather than use the period of fiscal stimulus to promote private-sector deleveraging and saving and to purge malinvestment, politicians will simply use this period as a way to continue business as usual, making the problem even bigger down the line…

What about monetary policy? Well, in a depression where the constraint is overinvestment, leverage, and debt, the question is not a monetary one. As Marshall recently suggested, it appears Fed Chairman Bernanke doesn’t understand the basic economics of central banking. Throwing more money into the system will not make credit-worthy borrowers borrow more. Nor will it necessarily induce banks to lend when they fear that many of their prospective borrowers are not credit-worthy.

By lowering interest rates and expanding the money supply, central banks are not inducing more lending; they are trashing cash. You are not promoting saving with 0% rates; you are looking to re-create the asset-based status quo ante. And when there are insufficient lending opportunities, banks are either forced to sit on billions of cash earning nothing or try other ways of making money (proprietary trading, investment in Treasuries, maybe even lending to non-credit worthy borrowers). Moreover, investors are earning next to nothing as well. How many people have looked at their money market fund statements with the 0.00% interest staring them in the face and decided to switch into bond, equity or commodity funds? It’s what's called liquidity seeking return – a major reason the stock market has been buoyed.

-Moving away from stimulus happy talk to focus on malinvestment, Dec 2009

10-- What's wrong with the economy, (2 minute video) Robert Reich

11--Greek debt crisis deepens, Guardian

Excerpt: The debt drama engulfing Greece deepened as Euro group finance ministers met in emergency session to discuss ways of resuscitating the country's ailing economy and protesters in Athens threatened to thwart passage of further austerity measures by blockading parliament on the eve of a mass general strike.

Tensions escalated as George Papandreou's socialist government confronted negative polls and a relentless stream of demonstrations initially inspired by Spain's peaceful indignados three weeks ago began showing signs of becoming increasingly explosive.

"All it will take is one mistake and the joviality that has marked the protests so far will end in a second," said veteran photographer Spyros Tsakiris, sitting in the heart of the tent city that has formed in central Syntagma Square, site of the Greek parliament.

"The mood has changed noticeably. I watch these people and honestly, I am afraid. At any moment things could go wrong and Greece could go up."

12--Housing prices will fall another 20 percent, Christian Science Monitor

Excerpt: Excess inventories are the mortal enemy of housing prices. Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers. The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.

Those excess inventories are huge. Historically, new and existing inventories listed for sale have averaged about 2.5 million. So that's the normal working inventory level, and anything above 2.5 million is excess. It's currently about 4 million, implying excess inventories of 1.5 million. But wait! There's more! As foreclosures keep mounting, a "shadow" inventory of as many as 500,000 additional homes will become visible as many more Americans choose to sell rather than endure further price declines.

RELATED: Top 5 cities with the fewest foreclosures

This huge and growing surplus inventory of houses – at least 2 million above normal working levels – will probably depress prices considerably from here, perhaps another 20 percent over the next several years. That would bring the total decline in house prices from the April 2006 peak to 45 percent. My forecast may be optimistic, because declines tend to overshoot on the downside just as bubbles do on the upside.

Homeownership is becoming less attractive as many are realizing that it may be many years before house prices stop falling and stabilize, much less revive. Indeed, the homeownership rate nationally has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the first quarter of this year – precisely where it stood in late 1998.

13--Labor's Share of Nonfarm Business Income Plummets, Economist's View

Excerpt ("must see" chart) This graph of labor's falling share of income explains a lot about the growing political discord in the middle and lower classes:

I've talked a lot about the need for job creation, and that is still of utmost importance. But job creation alone is not going to be enough to turn the tide of growing unhappiness with our increasingly two-tiered society.

14-- An Economic Legend, Paul Krugman, New York Times via Economist's View

Excerpt: June 2004: In the movie "The Man Who Shot Liberty Valance," a reporter defends prettifying history: "This is the West, sir. When the legend becomes fact, print the legend." That principle has informed many of this week's Reagan retrospectives. But let's not be bullied into accepting the right-wing legend about Reaganomics.

Here's a sample version of the legend: according to a recent article in The Washington Times, Ronald Reagan "crushed inflation along with left-wing Keynesian economics and launched the longest economic expansion in U.S. history." Actually, the 1982-90 economic expansion ranks third, after 1991-2001 and 1961-69 — but even that comparison overstates the degree of real economic success.

The secret of the long climb after 1982 was the economic plunge that preceded it. By the end of 1982 the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow before the economy returned to anything like full employment.

The depressed economy in 1982 also explains "Morning in America," the economic boom of 1983 and 1984. You see, rapid growth is normal when an economy is bouncing back from a deep slump. (Last year, Argentina's economy grew more than 8 percent.)

15--Maybe government IS the solution, The Big Picture

Excerpt: ... what is the evidence that tax cuts are the best path to revive the U.S. economy? Taxes — federal and state combined — as a percentage of GDP are at their lowest level since 1950. The U.S. is among the lowest taxed of the big industrial economies. So the case that America is grinding to a halt because of high taxation is not based on facts but is simply a theoretical assertion. The rich countries that are in the best shape right now, with strong growth and low unemployment, are ones like Germany and Denmark, neither one characterized by low taxes.

Many Republican businessmen have told me that the Obama Administration is the most hostile to business in 50 years. Really? More than that of Richard Nixon, who presided over tax rates that reached 70%, regulations that spanned whole industries, and who actually instituted price and wage controls?

In fact, right now any discussion of government involvement in the economy — even to build vital infrastructure — is impossible because it is a cardinal tenet of the new conservatism that such involvement is always and forever bad. Meanwhile, across the globe, the world’s fastest-growing economy, China, has managed to use government involvement to create growth and jobs for three decades. From Singapore to South Korea to Germany to Canada, evidence abounds that some strategic actions by the government can act as catalysts for free-market growth.

The Republican Right may be the most out-of-touch but Zakaria goes too easy on the rest of America. The idea that government has any positive role to play is entirely absent from our political culture. We complain bitterly about the lack of enforcement from Washington over a slew of industries and regulations—none more than Washington’s failure to rein in the mortgage and banking industries

16--Can the Fed talk America out of a slump?, Economist

Excerpt: The last few days have me a little wary. The significant and simultaneous rise in the dollar, rise in Treasury prices, fall in equities, and fall in commodities tells me that markets are growing concerned about the growth outlook. Understandably; each day we get another series of stories about the mess in Europe, about a slowdown in emerging markets, and about the continuing failure in Washington to agree on an increase in the debt ceiling. Even if the fundamentals are there for a second-half turnaround, a big enough blow to confidence could get households and firms to retreat back into their shells, just as they did last summer. And that could turn a temporary slowdown into a negative trend.

For this reason, I think there is a case for Ben Bernanke to use next week's FOMC meeting to leave open the real possibility of additional action. The downside to such a statement is political; if he hints that he might do more, Congress might behave more cavalierly, by dropping the idea of a payroll tax cut, cutting more budget items, and taking the game of debt-limit chicken closer to the crisis point. On the other hand, the inflation threat, to the extent there was one, is receding. Commodity prices are down, and inflation expectations fell in June for a second consecutive month. The upside risk to prices is shrinking fast. The downside risk is returning.

I understand why Mr Bernanke, and the rest of the FOMC, would consider it to be too soon to say anything definitive about the future course of policy. But given the mood, and given the way things played out last summer, I believe it would make a lot of sense for the committee to put something in the language from next week's statement to buck up markets. The impression that the Fed is down expanding has likely pulled away the perception of a floor on downward economic swings. Mr Bernanke may not want to keep buying securities at this point. That doesn't mean he can't remind everyone that the floor is still there, that the Fed is determined to keep it there, and that the Fed will face whatever criticism it has to to avoid a Japanese scenario.

The Fed bought credibility as a deflation fighter when it initiated QE2. It should use that credibility to fend off weakness now. Otherwise, it just might have to start building that credibility all over again with a much larger package down the road.

17--A Security and Finance State that Dominates the American People, The Real News

Excerpt: WILKERSON: I think most profoundly it came to me when I realized that the torture issue was not just an aberration. It was a manifestation of where we had come as a country, that we had built ourselves into a state. We'd been state-building since 1945. We'd been building the national security state. We also concomitantly built, as you've pointed out on a number of your shows, a financial apparatus around that national security state that could dominate, at any time and place it chose to dominate, the whole American people. And those two things happening together, the corruption of our very governance process and the fact that we were turning into a country that knew only one way of achieving its purpose, and that was to kill people, really troubled me. It troubled me as both an individual who'd participated in that, from both a diplomatic and a military perspective, and it troubled me as a somewhat historian of our republic and a teacher of presidential decision-making since World War II and how that process had taken place. I'm not sure we can recover from this. I am not in any way, fashion, or form sure that my grandchildren are going to live in a democratic federal republic.

No comments:

Post a Comment