Monday, July 4, 2011

4th of July Links

1--The Rock and the Hard Place on the Deficit, Christina Romer, New York Times

Excerpt: President Obama pressured Republicans last week to accept higher taxes, in addition to reduced spending, as part of a plan to pare the deficit.

The economic evidence doesn’t support the anti-tax view. Both tax increases and spending cuts will tend to slow the recovery in the near term, but spending cuts will likely slow it more. Over the longer term, sensible tax increases will probably do less damage to economic growth and productivity than cuts in government investment.

Tax increases and spending cuts hurt the economy in the short run by reducing demand. Increase taxes, and Americans would have less money to spend. Reduce spending, and less government money would be pumped into the economy.

Professional forecasters estimate that a tax increase equivalent to 1 percent of the nation’s economic output usually reduces gross domestic product by about 1 percent after 18 months. A spending cut of that size, by contrast, reduces G.D.P. by about 1.5 percent — substantially more.

Some in Washington and in the news media have seized on a study I conducted with David Romer, my husband and colleague, that they say shows tax increases having a bigger short-term effect on the economy than spending cuts.

They are mistaken....

There is a basic reason why government spending changes probably have a larger short-term impact than tax changes. When a household’s tax bill rises by, say, $100, that household typically pays for part of that increase by reducing its savings. Its spending tends to fall by less than $100. But when the government cuts spending by $100, overall demand goes down by that full amount.

Wealthier households typically pay for more of a tax increase out of savings, and so they reduce their spending less than ordinary households. This implies that tax increases on wealthy households probably have less effect on the economy than those on the poor or the middle class.

All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. Far better to pass a plan that phases in spending cuts or tax increases over time.

But if federal policy makers do decide to reduce the deficit immediately, reducing spending alone would probably be the most damaging to the recovery. Raising taxes for the wealthy would be least likely to reduce overall demand and raise unemployment.

What about the long-term health of the economy? Here, too, the relative costs of tax increases and spending cuts are often misstated....

On the tax side, nearly every economist I know agrees that the best way to raise revenue would be limit tax breaks for households and corporations....

The bottom line is that tax increases should be part of any comprehensive budget plan. Opinion polls suggest that many Americans understand this. It is time for policy makers to accept this economic reality.

2--Treasurys Stung By Data, Post Biggest Weekly Selloff Since 2009, Wall Street Journal

Excerpt: -The selloff Friday in U.S. Treasury bonds capped one of the bloodiest weeks for the market in two years, giving many bond bears ample hope that the monthslong bull run is at an end.

But given the precarious state of the global economy, not to mention the typical dissension that comes with declaring any such movement is over, there's no consensus.

Goldman Sachs declared Thursday that we are at the end of the bull run, which started in early April and had pushed the 10-year yield to a six-month low at the beginning of the week, and that view was echoed by several market participants.

But others are cautious, saying the selloff is nothing more than a correction of an overbought market and that the sharp rise in yields provides a good buying opportunity.

"I don't think this is the beginning of a bear market," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG's private wealth management unit. "The market is getting back to levels where economy and inflation are doing right now, somewhere between 3%-3.25%." Pollack said yields will stay where they are until the economy strengthens, which could take a couple months.

For this week, though, bears owned the market. The benchmark 10-year note's price, which moves inversely to its yield, fell every session, making for the longest such streak since early February. The yield jumped more than 30 basis points, the biggest weekly increase in nearly two years....In late-afternoon trading in New York, the benchmark 10-year note was down 10/32, pushing the yield up to 3.197%. It briefly touched 3.223%, the highest level since reaching 3.241% on May 19.

3--Pimco’s Scott Simon: There Was Never a Housing Recovery, Wall Street Journal

Excerpt: Q: Could you begin by framing the current state of the housing market? Do you see a double dip market?

A: We are seeing signs of what we have long suspected: There never was a housing recovery. In fact, I argue the market is in a fragile state that is far easier to break than to fix. If policy makers alter the government’s current approach to housing and unwittingly break the market, they may not be able to repair the damage within the foreseeable future. … We anticipate an average decline from here of about 6% to 8% in prices across the country.

Q: Are more foreclosures expected to hit the market?

A: We see potential for a substantial number of foreclosures over the next three years – as many as 6 million to 7 million additional foreclosures, on top of the roughly 2 million we estimate have already occurred. Foreclosures may peak in about two years, but the numbers could still be high for a few years after that and then likely taper off.

Q: Let’s switch gears to discuss housing finance. Is the home-loan market still reliant on government support?

A: Yes, government is essentially considered the mortgage market today, but this needs to be put in context. Government has been involved in housing for some 70 years with pro-housing subsidies of all sorts, from homebuyer tax credits to guaranteeing loans to mortgage interest tax deductions. … If we ended government support in all forms, mortgage rates could rise significantly, because home loan investors would need to be compensated for greater credit risk, and loan availability could decline. Higher rates and less mortgage availability would put downward pressure on home values, with potentially negative consequences for the market and also for the economy as a result of wealth destruction and consumer confidence declining

4--The real story behind the boom, Marketwatch

Excerpt: A new report from TrimTabs, the investment analysts, has blown the whistle on what really went on behind the stock-market “boom” we saw in the first quarter, when the S&P 500 Index rose more than 5%.

No wonder everyone turned bullish by the end of March — just before the market started tanking again.

So who was driving up the market? What was creating this boom?

Turns out it was the companies themselves. TrimTabs says companies spent a thumping $124 billion in the first three months of the year trying to boost their share prices by buying up stock.

That works out at about $2 billion for every day the market opened.

Meanwhile, according to Trim Tabs, guess who avoided buying stock during the first quarter? Company executives. The “insiders.”

These are the guys whose stock purchases tend to strongly signal bull markets and genuine booms. They were spending investors’ money buying their stock, but weren’t spending their own....

“We’ve never seen such a sharp contrast between what insiders are doing with their own money and what they’re doing with the money of the companies they manage,” TrimTabs Chief Executive Charles Biderman wrote in a note. Stock buybacks outnumbered executive stock purchases by the highest ratio TrimTabs has seen since it started tracking the numbers back in 2004.

5--A Small Note on the Stimulus Debate, Paul Krugman

Excerpt: One small followup on the issue of being prematurely right about the stimulus being too small: you might think that hippies like me were basing their views on some wild and crazy, unorthodox version of economics, while the wise, judicious people who thought that $787 billion was just right were using standard analysis.

But actually it was the other way around. The case for a much bigger stimulus came out of basic textbook macroeconomics, and could be justified by fancier but still standard models as well. The argument for doing much less was, by contrast, based on a combination of seat of the pants intuition and political symbolism: policy makers believed, based on no evidence, that a big stimulus would unnerve the bond market, and/or that a temporary boost would be enough to restore all-important confidence, or that it was politically crucial that the number be well under the magic $1 trillion mark. (How different would things be if we did our counting in base 12?)

In other words, wisdom — as perceived — came from rejecting actual economic analysis in favor of feelings, and not waking up to the fact that the analysis was right until a couple of years of massive unemployment later. The hippies read the textbooks; the Very Serious People apparently rely on close analysis of entrails, or something.

6--Soar Losers, Paul Krugman, New York Times

Excerpt: Like everyone who has argued that continuing low interest rates vindicate the Keynesian view of how macroeconomics works, I’ve faced a lot of claims that the low rates were artificial, that as soon as the Fed stopped buying bonds rates would soar. Some big-name private-sector people, notably Bill Gross, have made similar claims.

I was puzzled by this view coming from Gross; pretty basic macro told us that to the extent that quantitative easing matters at all, it’s the stock of Fed holdings, not the flow of purchases, that matters. Anyway, the Fed has now stopped buying bonds; QE2 is over.

And the 10-year rate, although up a bit from its recent lows on optimism about the Greek austerity vote (why?), is still below 3.2%.

7--Obama and the deficits, Marshall Auerback, New Economic Perspectives

Excerpt: It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it. The President is a dick, at least as far as his understanding of basic economics goes. Obama’s perverse fixation with deficit reduction uber alles takes him to areas where even George W. Bush and Ronald Reagan dared not to venture. Medicare and Social Security are now on the table. In fact entitlements of all kinds (excluding the myriad of subsidies still present to Wall Street) are all deemed fair game.

To what end? Deficit control and deficit reduction, despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon. Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments. It may have been impolitic, but “dick” is what immediately sprang to mind as one listened incredulously to the President’s press conference, which went from the sublime to the ridiculous....

A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around. Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs....

Expansionary fiscal consolidations are virtually impossible – the initial conditions, as well as the structure of the economy in question, must be right to support a stronger trade improvement, or a more aggressive spending path by domestic firms and households, which largely OFFSETS the impact of decreased government spending....Without a government deficit, there would be no private saving. Yes, one individual can spend less than her income, but another would have to spend more than his income. It all has to balance in the end, as any accountant can tell you....

Let’s be clear: the government creates 'money' whenever it spends; it destroys 'money' whenever it taxes. The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little. With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity. Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because of the slowing economy will undermine tax revenue.

8--Consumer Income Only Kept Afloat by Government Payments, Wall Street Journal

Excerpt: U.S. households are worried, worried, worried about their future paychecks, consumer surveys show.

Shrinking incomes will be a problem for the economic outlook, creating a headwind that could become more dire if fiscal conservatives have their way and pull the rug out from under the unemployed.

Steve Blitz, senior economist at ITG Investment Research, looked at the performance of personal income during this business cycle. Wage and salary disbursements peaked in March 2008 — three months after the recession started — and cratered until early 2009.

Even by May 2011, paychecks are still shy of where they were at the 2008 peak, Blitz says. The paycheck gap is the result of job losses, loss of overtime and wage cuts put in place during the recession.

So, what allowed consumer spending to surpass its 2008 peak more than a year ago? In large part, cash paid by the government, especially the money that kicks in when economic troubles hit. These automatic stabilizers — such as jobless benefits and family assistance — “mollify the impact from a recession,” says Blitz.

Blitz added government transfer payments — excluding Social Security, Medicare and Medicaid — to wages and salaries. This combination of incomes returned to its March 2008 level in January 2010, right before consumer spending recovered. Since then, it has grown $332 billion, providing money to keep consumer spending rising, if only weakly, so far this year.

“If not for transfer payments, the household sector and, in turn, consumption would have fared much worse,” says Blitz. “Something for the fiscal negotiators to keep in mind as the debt ceiling confabs go on and on and on.”

Fiscal conservatives, however, don’t want to recognize the importance of government help when it comes to the unemployed. Some spending critics even question the efficacy of fiscal stimulus and whether government action did anything to alleviate the pain of the recession.

When it comes to consumer incomes, the answer is yes. Without transfer programs, such as jobless benefits, the recession would likely have been longer and deeper. Given how weak wage growth remains, a case could be made that absent government help, the recession might not even be over.

9--European Manufacturing Slowdown Darkens, Wall Street Journal

Excerpt: The outlook for the European economy darkened Friday as figures showed activity in the manufacturing sector slowed significantly in June, and almost one in 10 people in the euro zone remain unemployed.

The latest monthly survey of euro-zone manufacturers by financial information firm Markit showed growth in the sector slowed to an 18-month low in June as exports weakened and budget cuts hit demand in countries at the heart of the currency area’s debt crisis.

Manufacturing in Germany slowed more than expected, to its weakest rate of expansion for 17 months, while France and the U.K. slumped to their worst levels in 22 and 21 months respectively. Compounding the gloom, manufacturing in Italy, Ireland, Spain and Greece all contracted in June.

“Over the past two months, [euro-zone manufacturing] output growth has weakened to the greatest extent since late-2008,” Chris Williamson, chief economist at Markit, said in a statement.....

Against the backdrop of slowing growth, official figures also showed the euro zone’s unemployment rate was 9.9% for a third consecutive month in May. The number of jobless people rose 16,000 from April, the first rise since November, but the European Union’s data agency said that was insignificant given the total 15.5 million out of work.

“We do not think that jobs growth in the euro-zone will be strong enough to prompt an accelerated recovery in consumer spending in the coming months,” said Jennifer McKeown, a senior European economist at Capital Economics.

10--U.S. Food Stamp Use on the Rise, Wall Street Journal

Excerpt: Growth in the food stamp program continued in the U.S. — with 27 states providing benefits to at least 1 in 7 people.

The number of food stamp recipients increased 0.1% in April, the most recent month available, compared to March, with 44.5 million people receiving benefits, according a new report from the U.S. Department of Agriculture. Food stamp numbers aren’t seasonally adjusted though, meaning a variety of factors could influence the monthly tallies.

11--The commodities bubble, The Big Picture

Excerpt: (Great charts)

12--The Geithner legacy, Pragmatic Capitalism

Excerpt: 22 JANUARY 2010:

“The failure of a strong economic rebound is not only on Obama, in my opinion. It is primarily on his economic advisers – Geithner and Bernanke. Yes, the equity markets have rebounded, but the real economy remains weak and the structural problems that caused the crisis all remain. All he has accomplished is a successful (re)implementation of the policies Greenspan admitted were a failure. He has repeated the policy failures of the past while copying Japan and ignoring Sweden.”...

“I’ve been highly critical of Obama’s economic team over the years because many of them were key players in helping cause the financial crisis. Tim Geithner was the head of the NY Fed when the banks were busy turning themselves into casinos.

…Mr. Geithner, who is a disciple of Summers (who was a disciple of Robert Rubin) remains in power and continues to promote similarly misguided policies. The Summers departure is one step in the right direction, however, President Obama is quickly running out of time as he fails to bail out the water that continues to sink this economy.

…Albert Einstein once said the definition of insanity is doing the same thing over and over again while expecting a different result. What is not insane about the current economy being run by Tim Geithner and Ben Bernanke?”

3 NOVEMBER 2010:

“He never should have appointed Geithner or Summers. They were merely attempts to rehash the Clinton economic team and unfortunately, due to his ignorance of the economic environment, President Obama had no idea that these men played a significant role in causing the crisis.”

13--"Supply-Side Nonsense", Economist's View

Jon Chait:

Today's WSJ Supply-Side Nonsense, by Jonathan Chait: The Wall Street Journal's editorial today plumping for higher economic growth through -- you'll never guess -- regressive tax cuts exposes the largest current logical problem at the heart of the anti-tax argument: a failure to acknowledge that the Bush tax cuts are currently in place. Here's the Journal insisting that ... the problem with the budget right now is that we're growing too slowly...

Right. We're growing really slowly even though the Bush tax cuts have been in place since 2001, and the beloved super-regressive second round of Bush tax cuts since 2003. That would suggest that the Bush tax cuts are not the cure for slow economic growth....

14--The real causes of the economic crisis? They’re history, Washington Post

Excerpt: They say that winners get to write history. Three years after the meltdown of our financial markets, it’s clear who is winning and who is losing. Wall Street — arms outstretched in triumph — is racing toward the finish-line tape while millions of American families are struggling to stay on their feet. With victory seemingly in hand, the historical rewrite is in full swing.

The contrast in fortunes between those on top of the economic heap and those buried in the rubble couldn’t be starker. The 10 biggest banks now control more than three-quarters of the country’s banking assets. Profits have bounced back, while compensation at publicly traded Wall Street firms hit a record $135 billion in 2010.

Meanwhile, more than 24 million Americans are out of work or can’t find full-time work, and nearly $9 trillion in household wealth has vanished. There seems to be no correlation between who drove the crisis and who is paying the price.....

If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $1 trillion annually since the financial collapse. You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy. Instead of focusing on the real cause of the deficit, you conflate today’s budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.

15--Food for thought: from the Financial Times "State is now dominant force in US capital markets" by
Gillian Tett

Quote: "By the time you read this column today, a fascinating shift will almost certainly have occurred in the nature of US finance: for the first time the government will be the biggest source of outstanding home mortgage and consumer credit loans in the US, eclipsing private sector banks or investors.

Or that, at least, is the forecast recently made by Investor Business Daily, a US publication. It recently crunched some Fed data and concluded that the volume of outstanding government-financed mortgage and consumer credit was running at $6,320bn in the US in the first quarter of this year – up from $4,400bn in late 2006. However, private credit provision was just $6,580bn, down from $8,480bn in 2006."

16---A Failed Global Recovery, Stephen Roach, Project Syndicate

Excerpt: There can be no mistaking the decidedly subpar character of the current global recovery. Superficially, the numbers look strong: world GDP rebounded by 5.1% in 2010, and is expected to rise another 4.3% in 2011, according to the International Monetary Fund. But because these gains follow the massive contraction that occurred during the Great Recession of 2008-2009, they are a far cry from the trajectory of a classic V-shaped recovery.

Indeed, if the IMF’s latest forecast proves correct, global GDP at the end of 2012 will still be about 2.2 percentage points below the level that would have been reached had the world remained on its longer-term 3.7% annual-growth path. Even if the global economy holds at a 4.3% cruise speed – a big “if,” in my view – it will remain below its trend-line potential for over eight years in a row, through 2015.

This protracted “global output gap” underscores the absence of a cushion in today’s world economy, as well as its heightened sensitivity to shocks. And there have certainly been numerous such blows in recent months – from Europe’s sovereign-debt crisis and Japan’s natural disasters to sharply higher oil prices and another setback in the US housing recovery.

While none of these shocks appears to have been severe enough to have derailed the current global recovery, the combined effect is worrisome, especially in a still-weakened post-crisis world.

17--What's really at stake in Libya, Pepe Escobar, Asia Times

Excerpt: Expect the US/NATO consortium to fight to the death. For obvious reasons - all linked to the Pentagon's eternal, irremovable full-spectrum dominance doctrine plus a crucial subplot, NATO's new strategic concept adopted in Lisbon in November 2010 (see Welcome to NATOstan Asia Times Online, November 20, 2010).

NATO's definition of "winning" implies Benghazi as the new Camp Bondsteel - the largest US military base in Europe, which happens to double as an "independent" state under the name of Kosovo. Cyrenaica is the new Kosovo. Balkanization rules.

This is a sort of dream scenario for the compound NATO/Africom. Africom gets its much-wanted African base (the current headquarters is in Stuttgart, Germany) after participating in its first African war. NATO extends its crucial agenda of ruling over the Mediterranean as a NATO lake. After Northern Africa there will be only two Mediterranean non-players to "take out": Syria and Lebanon. The name of this game is not Libya; it's Long War.

18--Optimism Pushes Dow to Best Week in 2 Years, New York Times

Excerpt: A rebound in manufacturing surprised investors Friday, sending the Dow Jones industrial average up nearly 170 points. The Dow ended up 648 points, or 5.4 percent, for the week, its best week in two years.

The rally started Monday after Nike reported strong quarterly results. Revenue that beat analysts’ predictions indicated that shoppers were still splurging on more expensive sneakers and sportswear, despite the recent run-up in gas prices. On Thursday, Greece cleared its final hurdle before it receives its next round of loans to avoid defaulting on its debt. The same day, a report showed that manufacturing in the Chicago region had picked up unexpectedly.

A report on Friday from the Institute for Supply Management showed that manufacturing across the country had expanded, reinforcing the growing perception that the slowdown was temporary. The Federal Reserve chairman, Ben S. Bernanke, and a number of prominent economists have argued that the economy will pick up again once the effects of the Japan disaster waned and high gas prices recede....

Many economists and analysts began lowering their estimates for growth in May after a string of negative reports on manufacturing, consumer spending and hiring by private companies. A shortage of computer chips and auto parts from Japan, higher gas prices and severe weather in the South all contributed to what appeared to be a slowdown in the economic recovery. Stocks lost most of their gains for the year by mid-June....”

The Dow Jones industrial average rose 168.43 points, or 1.36 percent, to 12,582.77, on Friday. The Standard and Poor’s 500-stock index gained 19.03 points, or 1.44 percent, to 1,339.67. The Nasdaq composite added 42.51 points, or 1.53 percent, to 2,816.03.

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