Monday, July 11, 2011

Today's links

1--Fed Watch: Grim, Tim Duy, Economist's View

Excerpt: The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.

The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.

The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.

Weakness spread far and wide throughout the report. No way to put lipstick on this pig. As others have noted, the labor force fell, the participation rate fell, the employment to population ratio fell, the number of employed plummeted, and the number of unemployed climbed. Private nonfarm payrolls gains a paltry 57k, and the drag from government cutbacks pulled the overall jobs gain to just 18k. Far short of the numbers needed to even hold unemployment steady.

And wages fell.

2--Debt reduction, Handle with care, The Economist

Excerpt: DEBT reduction, or deleveraging as it is known in the inelegant argot of economists, is a painful process. Growth suffers as consumers and firms, let alone governments, try to reduce their debts. Countries which experienced the biggest asset busts, such as America, Britain and Spain, have had the most disappointing recoveries. And the pain will continue: a careful look at the numbers suggests that the process of deleveraging has barely begun.

A new analysis by the McKinsey Global Institute suggests that over the past year or so total debt levels, measured relative to GDP, have stabilised and, in some rich countries, started to inch down. But if history is a guide, there is still a long way to go. The ratio of total debt to GDP in both America and Britain has fallen by just over ten percentage points from its peak—a fraction of the scale of debt reduction in a typical deleveraging period (see article). Worse, the McKinsey analysis suggests that economies usually stagnate, or even shrink, early in the overall debt-reduction process....

What can be learnt from these various approaches? It is still early days, but four lessons stand out. The first is that in some extreme cases, when a large debt reduction is needed, orderly write-downs are necessary. The foreclosures on American mortgages have been severe, but they mean that household debt is likely to shrink to manageable levels faster than in, say, Britain, where low interest rates on variable mortgages and a lot of “forbearance” by banks have kept defaults artificially low. At the sovereign level the same logic should apply to hopelessly bankrupt Greece: it needs a debt write-down.

Second, nominal growth is essential to bring down the weight of debt. It is hard to ease the debt burden in a stagnant economy with low inflation. That suggests the pace of public-sector austerity, where possible, needs to be calibrated to the scale of private deleveraging. America’s government, for instance, needs a medium-term plan for deficit reduction, but cutting back spending viciously in the short term at a time of private-sector retrenchment would be a mistake.

Third, the best way to ease the pain of deleveraging is with an export-led boom. Here, progress has been painfully slow. The external deficits of ex-bubble economies have shrunk since 2007, but not by enough—and some now seem to be rising again. There has been too little rebalancing of global demand towards big emerging economies. That will require stronger currencies in emerging Asia and weaker ones in the rich world.

3--Deleveraging; You ain't seen nothing yet, The Economist

Excerpt: The process of reducing the rich world’s debt burden has barely begun....FOR Federal Reserve officials, marking down America’s economic outlook has become a depressing routine. A year ago they projected growth of about 4% this year and next. By last month they had chipped those numbers down to 2.8% this year and 3.5% next. “We don’t have a precise read on why this slower pace of growth is persisting,” said Ben Bernanke, the chairman. But he ventured that “balance-sheets and deleveraging issues” may be stronger headwinds than expected.

The same diagnosis may explain similar disappointments in other highly indebted rich countries. In late 2009 the Bank of England reckoned Britain would be growing by 4% this year. It now thinks it will grow by closer to 2%; the private-sector consensus is a mere 1.5%. The Bank of Spain has avoided similar climbdowns by starting out pessimistic and remaining so.

In a study early last year, the McKinsey Global Institute, the consultancy’s research arm, noted that combined public and private debt burdens had reached historic highs in many rich countries. Based on previous episodes of debt reduction, it reckoned that once deleveraging began, countries would on average spend the next six to seven years whittling those debt ratios back by around 25%....

This cannot fully explain Britain’s lacklustre recovery—higher fuel prices and disappointing export growth are also to blame. But it is still a cautionary tale for America. Both Britain and Spain “have adopted sobering deficit-reduction plans that have severely hit households’ expectations of real disposable income whereas the US has not,” says Simon Hayes of Barclays Capital. That may change soon: the Obama administration and Congress are currently negotiating a deficit-reduction package that could amount to $4 trillion or 2% of GDP over ten years. In June the IMF urged America to slash its structural deficit by a cumulative 7.5% of GDP by 2016, enough to trim 0.5-0.75 percentage points off average growth over the period. If that advice is followed, Mr Bernanke should brace for more downward revisions.

4--Read It Here First: Labor Market Slack, The Big Picture

Excerpt: A Bank of America Merrill Lynch research note on the abysmal nonfarm payrolls number for June contained this graph( more "must see" charts)

5--Economists React: Jobs Report an "unmitigated disaster", Wall Street Journal

Excerpt: Ugly. I mean really ugly., The June employment data were stunningly weak. Job gains were the lowest since last September when payrolls declined. Given the measurement error, you cannot even say that any new hiring occurred in June. Worse, the April and May gains were revised downward indicating that smaller businesses are not out there hiring either. That is consistent with the surveys coming out of the National Federation of Independent Business and is a discouraging trend since that is where most of the hiring occurs. Interestingly, there were almost no sectors that showed any strong gains but only a few industries cut sharply. –Naroff Economic Advisors

– Nonfarm establishments added a scant 18,000 workers to their payrolls in June with private sector firms adding 57,000 while governments cut staff by 39,000. As if these markedly weaker than expected news isn’t enough, the weak May data were revised down. The exception to the overarching gloom in the headline numbers was the manufacturing sector, which added 6,000 workers after cutting payrolls by less in May than previously reported. Weakness permeated most industries including private sector education, which fell 17,000, the biggest cutback in nearly two years. Apart from manufacturing, two industries — leisure and hospitality and retail — behaved roughly as expected reversing some or all of the May declines. –David Resler, Nomura Global Economics

– The unemployment rate rose for the third month in a row to 9.2% in June from 9.1% in May – up [0.4 percentage point] in three months and the highest since November 2010. Clearly, the large drop in the unemployment rate heading into the year was overdone. Moreover, the details behind the rise in the unemployment rate were poor. Household employment fell 445,000 in June, the biggest one-month decline since December 2009. –Ethan Harris, Bank of America Merrill Lynch

6--Feel The Pressure, Paul Krugman, New York Times

Excerpt: Regular readers of this blog know that I make a big deal of the failure of interest rates to rise despite massive government borrowing. There’s a reason for that: what happens to interest rates is a key indicator of which economic model, and hence which economic policies, are right.

The Very Serious position has been that government borrowing will drive up rates, crowd out private investment, and impede recovery. A Keynes-Hicks analysis, by contrast, says that when you’re in a liquidity trap, even large government borrowing won’t drive up rates — and hence won’t crowd out private investment. In fact, it will promote private investment by raising capacity utilization and giving firms more reason to expand.

You know what has actually happened:(Chart)...What we usually get in response to this seemingly decisive data are a series of excuses — most recently, that rates were low because the Fed was buying all the bonds. Well, that program has ended, and interest rates are still low.

7--Anti-stimulus, Paul Krugman, New York Times

Excerpt: Here’s the CBO estimate of the effect of the Recovery Act on the deficit — not identical to its likely effect on the economy, but a rough guide — in billions of dollars, by fiscal year (fiscal years start in October of the previous calendar year): (effects of stimulus, now waning)

So stimulus has been fading out fast; in effect, we’re pursuing a contractionary fiscal policy. Meanwhile, the underlying source of our slump, the high level of consumer debt inherited largely from the housing bubble, has declined only slightly.

And quelle surprise, as Yves Smith would say, the economy is sputtering.

If you do the 1937 thing, you shouldn’t be surprised at getting the 1937 result.

8--Austerity USA, Paul Krugman, New York Times

Excerpt: I’m not the only one making this point, but when you hear Republicans saying that what we need to do to create jobs is slash government spending and cut government payrolls, that’s exactly what has been happening for the past year, as the Obama stimulus has faded out. Here’s government employment (that bulge was Census hiring): (must see)

Basically, government has been shrinking for the past year — in practice, fiscal policy has been doing exactly what Republicans say it should be doing. Where’s my confidence fairy?

9--Falling Wages, Paul Krugman, New York Times

Excerpt: Ugh. That was a seriously ugly jobs report (pdf). Almost no job creation, with slow private-sector growth offset by falling public-sector employment; a falling employment-population ratio; and (I don’t know how many people have picked this up), an actual decline in wages, albeit a small one.

Let me emphasize that last point. My bottom line on the inflation-deflation issue has always been to look at wages; you can’t have a wage-price spiral if wages ain’t spiraling. And they aren’t, to say the least.

It’s important to realize, by the way, that stagnant wages are NOT good for recovery; all they do is ensure that the burden of debt relative to income remains high, keeping demand and employment down.

The situation cries out for aggressively expansionary monetary and fiscal policy. Instead, however, all the political push is in the opposite direction.

10--The European project is doomed without reform, James Galbraith, Credit Writedowns

Excerpt: Europe was a bright political project at the formation of the European Community and again when it expanded at the end of the Cold War. Its purpose was not so much power as peace: truly a noble vision.

But that noble project was built on an end-of-history economics, on frozen-in-time free-market notions and on dogmatic monetarism linked to arbitrary criteria for deficits and public debt.

In the wake of a global financial meltdown, these no longer serve. Unless they are abandoned soon, they will doom Europe as surely as communism doomed the empire of the East.

Flawed construction

Europe's structure is also suspended between two stable formations: the federated nation state and the international alliance. This in-between structure is called a confederacy, and it is something that was tried and which failed in North America on two occasions, most recently in 1865....

Today Greece - under a resolute government and against heavy internal protest - has met the onerous conditions imposed on it. But for what?

For loans that are immediately recycled to the European banks, adding nothing to Greece's prospects except more debt? This will not lower interest rates, restore growth, or bring success to ongoing internal reforms. It is an intolerable situation and it will not continue for long.

Along one road there lies a future of defaults, panic, dissolution of the eurozone, and hyperinflation in the exiting countries, with a collapse of the export markets for those that remain.

Along the other road lies the assumption of common responsibilities for sustained convergence, based on a new economics of mutual support.

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