Tuesday, July 12, 2011

Today's links

1--No, We Can’t? Or Won’t?, Paul Krugman, New York Times via Economist's View

Excerpt: .. Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses....

Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend — and ... these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers....

Excuse No. 4: We tried to stimulate the economy, and it didn’t work.

Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office. ... This ... wasn’t the kind of job-creation program we could and should have had. ...

Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.

2--Fall Into the Gap Forever? Economist's View

Excerpt: Here are three graphs showing the gaps in output, consumption, and employment that have opened up since the recession: (charts)

In all three cases, we appear to be growing along a lower growth path than before. The question is whether we are stuck on these lower growth paths forever. Will we ever recover the old growth path, in full or in part? That is, how much of the change in the GDP growth path is permanent, and how much is temporary?

This is important because the level of employment is a function of the level of output. If we stay on the lower growth path, then we will have a permanent gap in employment -- most of the 14+ million unemployed will have little hope of finding work. We can share the jobs that exist, something like that, but we won't ever recover the jobs that were lost.....So it's not 100% certain that we will bounce back to the long-run trend. This time could be different...

3--Economy Faces a Jolt as Benefit Checks Run Out, New York Times

Excerpt: An extraordinary amount of personal income is coming directly from the government.

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

In terms of economic impact, that is slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.

“If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm.

4--What Was Herbert Hoover's Fiscal Policy?, Grasping Reality with both hands

Excerpt: In his Budget Message setting out his plans for taxes and spending for fiscal year 1932, Herbert Hoover begged Congress not to embark on any "new or large ventures of government". He admonished congress that even though "the plea of unemployment will be advanced as reasons for many new ventures... no reasonable view of the outlook warrants such pleas". And he boasted that he was proposing a balanced budget--even though revenues were mightily depressed by the Great Depression.

This is not a time when we can afford to embark upon any new or enlarged ventures of Government. It will tax our every resource to expand in directions providing employment during the next few months upon already authorized projects. I realize that, naturally, there will be before the Congress this session many legislative matters involving additions to our estimated expenditures for 1932, and the plea of unemployment will be advanced as reasons for many new ventures, but no reasonable view of the outlook warrants such pleas as apply to expenditures in the 1932 Budget. I have full faith that in acting upon these matters the Congress will give due consideration to our financial outlook. I am satisfied that in the absence of further legislation imposing any considerable burden upon our 1932 finances we can close that year with a balanced Budget. When we stop to consider that we are progressively amortizing our public debt, and that a balanced Budget is being presented for 1932, even after drastic writing down of expected revenue, I believe it will be agreed that our Government finances are in a sound condition...

In his Budget Message for fiscal year 1933, Hoover wrote:

In framing this Budget, I have proceeded on the basis that the estimates for 1933 should ask for only the minimum amounts which are absolutely essential for the operation of the Government under existing law, after making due allowance for continuing appropriations. The appropriation estimates for 1933 reflect a drastic curtailment of the expenses of Federal activities in all directions where a consideration of the public welfare would permit it.... The welfare of the country demands that the financial integrity of the Federal Government be maintained.... [W]e are now in a period where Federal finances will not permit of the assumption of any obligations which will enlarge the expenditures to be met from the ordinary receipts of the Government.... To those individuals or groups who normally would importune the Congress to enact measures in which they are interested, I wish to say that the most patriotic duty which they can perform at this time is to themselves refrain and to discourage others from seeking any increase in the drain upon public finances...

After he decided that he was President and that the Treasury Secretary Andrew Mellon whom he had inherited from Coolidge worked for him and that Mellon should go off to be Ambassador to the Court of St. James, Hoover did decide to do something to fight the Great Depression. Tax increases to try to balance the budget in order to call down the confidence fairy made up the biggest part of his plan. But Hoover also sought to fund state relief. And he sought to set up GSE's (RTC, HLB) to restart broken capital markets.

But to say that "Hoover was no budget-cutter" misses most of the story. Hoover would have been a budget-cutter in normal times. Hoover was a budget-balancer. Hoover held the line against powerful political forces that sought to increase government spending in the Great Depression for fully 2 1/2 years before endorsing what seem to us to be half-measures.

5--The Euro and You, Credit Writedowns

Excerpt: the ECB holds €1.9 trillion (about $2.6 trillion) of assets. On December 31, 2010, it posted €82 billion in capital and reserves. The leverage ratio is 23:1. If the value of ECB assets falls by 4.3%, it will be insolvent. ("Insolvent": the last time around (2007-2008), The Authorities successfully cooed the media into stating the financial system had "liquidity" troubles. This was true but it was a secondary problem. The primary problem was the too-big-to-fail banks that failed.)

What do those assets consist of? The ECB holds €480 billion of asset-backed securities (ABS) and €360 billion of "non-marketable financial instruments." That comes to 44% of total assets. These asset-backed securities are not the old reliables, such as the once highly-radioactive ABX.HE 07-01. That is, an index composed of sub-prime mortgages that was bundled in 2007 (the '07'), and sported a price that sank in tandem with the rising default rate of the mortgages it housed. No, these are vintage 2010 securitizations, in which year the ECB permitted European commercial banks to bundle their bad mortgages and mortgage securities, sell them at par value to the ECB, which then paid fresh euros to the banks.

As for "non-marketable financial instruments," these presumably include the Portuguese government bonds issued in 1943 and due for repayment in the year 9999. The bankers in Lisbon surely broke out a vintage port when they unloaded the 1943's that settle 8,000 years from now. What else did European banks jettison, accepted at par by the ECB? After ridding themselves of €480 billion - one-half a trillion - of their worst mistakes, how can the banks still be in such bad shape?

Another peculiar "non-marketable financial instruments" are the "own-use" bonds sold by Irish banks to the ECB. These are bonds that Irish banks issue to themselves and then sell to the ECB in return for euros. This arrangement may be difficult to grasp at first since it is so new. An example: Allied Irish Bank (AIB) issued a €2.87 billion "own use" bond on April 26, 2011. (The Bank of Ireland wrote a €2.0 billion own-use bond on the same day and followed with a € 2.2 billion offering (sic) the next day. The program is scheduled to last through August 2011.) By issuing this bond, AIB owes itself €2.87. The €2.87 was used as collateral for cash - euros - wired from the ECB. The Irish government provides the collateral by guaranteeing these bonds. The Irish government has no money and it cannot print euros. Only the ECB can authorize money printing. In what must be quite an understatement, the Irish Independent observed: "Own-use' bonds are popular with banks because they can continue to access funding at the ECB's one percent interest rate even when they have run out of the high-quality collateral typically demanded in Frankfurt." For its part, the ECB insists all of these loans are properly collateralized. One understatement follows another: "This makes some eurozone states uncomfortable, since any losses on the money advanced by the ECB would have to be funded by all 17 states."

6--Class war without mercy, Gregory Elich, Counterpunch

Excerpt: One can never have too much money. In the U.S., the top one percent of the population rakes in almost a quarter of the national income and enjoys 40 percent of the wealth. That class sees this as a problem. It is not enough.

For ordinary workers, the recession brought only economic hardship. But for corporate America, it meant one thing: opportunity. This is the chance to permanently mold the economy into something approximating the Third World model: vast wealth and privilege for those at the top, and unemployment, falling wages, and inadequate or nonexistent social services for the rest of society.

The recession ended two years ago, yet more than nine percent of the population remains without work. If one takes into account discouraged workers and part-time workers wanting a full-time position, nearly one sixth of the workforce is underutilized. For people of African descent, the situation is even more dire, with unemployment approaching a rate twice as high. Yet, a jobs program has never been on lawmakers' agenda.

Instead, the trend has been to slash benefits at a time of heightened need, while simultaneously calling for more tax cuts for the wealthy. Deficits run up by the George W. Bush Administration and President Barack Obama have handed the right wing a cudgel to impose their will and discipline workers. President Obama needed no votes from Congress had he been willing to simply let the Bush tax cuts expire. By insisting on an unwinnable partial continuation of the tax cuts, Obama ensured that the entire package would remain in effect. At a time when the recession has caused a plunge in tax revenue, starving the government of funds when it is most needed is exacting a toll on the well being of the population, and opened the door for slashing benefits. According to the Congressional Budget Office, continuation of the Bush tax cuts through the year 2020 will contribute $3.3 trillion toward the national debt. This is money that would be better utilized in providing much needed social services and launching a real jobs program, assuming of course, the political will to do so - which has been noticeably lacking.

7--The President’s Press Conference: The Disappointing Embrace of Job killing austerity, Mark Thoma, Moneywatch

Excerpt: he president just held a press conference on deficit reduction talks with Republicans. I found the president’s remarks during the press conference disappointing on several fronts. First, I am disappointed that the president has adopted austerity as a valid means of stimulating the economy. There is no evidence that this works in a situation like ours, i.e. that deficit cuts create so much confidence that they stimulate the economy, and there is plenty of evidence that the fall in demand from the deficit cuts is harmful, and that such cuts are likely to impede the recovery. The president has embraced the idea that uncertainty about the future, particularly worries about the deficit, is holding back the economic recovery even though this cannot be justified from the historical record. It’s hope over experience.

Uncertainly may be a problem, but it’s not uncertainty about the deficit. What’s holding the economy back is uncertainty about jobs, worries about the slowing recovery, and whether a second recession is coming. The policy the president wants, deficit reduction as large and as soon as possible, is likely to make the prospects for recovery even worse. The president claims that the “single biggest boost to business certainty and confidence” would be to cut the deficit, but I think confidence depends upon the state of the economy. Evidence of growth and employment increases are what is needed, and until that happens, businesses are going to remain cautious. Taking actions that make the economy worse right now is the wrong way to proceed, the fall in GDP will have a larger impact on confidence than deficit reduction.

8--Italy and Spain must pray for a miracle, Ambrose Evans Pritchard, Telegraph

Excerpt: Once again Europe's debt crisis has metastasized, and once again the financial authorities face systemic contagion unless they take immediate and dramatic action....

If the ECB's Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago - and I think he is - it is hard see how the threat is any less serious right now.

Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.

Yields on Italian 10-year bonds hit a post-EMU high of 5.3pc on Friday. This is not just a theoretical price: the Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy's €1.84 trillion stock of public debt is about to rise very fast.

Spanish yields punched even higher, through the danger line of 5.7pc. The bond markets of both countries are replicating the pattern seen in Greece, Portugal, and Ireland before each spiraled into insolvency. And the virus is moving up the European map. French banks alone have $472bn (£394bn) of exposure to Italy and $175bn to Spain, according to the Bank for International Settlements.

"We believe the European sovereign crisis might be entering a new phase with contagion reaching the larger economies," said Jacques Cailloux, chief Europe economist at RBS.

9--Broad Survey of Labor Indicators Highlights Weak Jobs Recovery, Kathleen Madigan, Wall Street Journal

Excerpt: Despite a miserable jobs report for June, a compilation of U.S. labor indicators edged up for that month, the Conference Board said Monday.

The board said its June employment trends index rose 0.5% to 100.0, up from May’s revised 99.5, first reported as 99.7. The June index is up 5.4% from a year ago.

Gad Levanon, associate director at the board, said, “The behavior of the [index] in recent months is consistent with weak job growth, rather than an outright decline.”

The Labor Department reported last Friday the U.S. economy created only 18,000 jobs in June — far below the 125,000 gain expected. That miserable number followed only 25,000 hired in May. The June unemployment rate was 9.2%.

The “abysmal” pace of hiring during the past two months “is not just a reaction to the slowdown in economic activity in the first half of 2011, but also a result of employers becoming downbeat about their hiring needs in the coming months,” said Levanon.

Only three of the eight components increased last month. The positive indicators included jobless claims, the percentage of firms with positions not able to fill right now and real business sales.

10--Radiated Rain; Radiation Levels in Northwest Rain Were Up to 130 Times Safe Drinking Water Standards Following Fukushima, Counterpunch

Excerpt: Radiation levels in rainwater collected in Portland, Oregon on March 25, 2011 were 86.8 pCi/L for Iodine 131 (I131), amongst the highest recorded in the US after Fukushima. Rain in Olympia had even higher levels of radioactive Iodine. The Portland result was not posted by EPA until April 4.

The maximum level of Iodine 131in rain in Olympia, WA was 125 pCi/L on March 24, which was not posted by EPA until April 4.

Highest levels in rainwater in California were collected March 22, 2011 in Richmond, CA with levels of 138 pCi/L.

The Drinking Water Standard is just 3 pCi/L (picoCuries per Liter, which is a very small measurement). Thus, people drinking undiluted rainwater n Portland would have consumed and been exposed to Iodine 131 at levels nearly 30 times the DWS, and 41 times the standard in Olympia. There are no results for Seattle or Bellingham areas. The DWS is set at a level based on drinking 2L/day resulting in a 4 mrem per year dose, which is a 1 in 10,000 lifetime risk of fatal cancer in adults, if consumed daily over 30 years. Children are 3 to 10 times more susceptible to develop cancer from the same does, especially because Iodine concentrates in young thyroids. Of course, Iodine 131 may cause non-cancerous health conditions.

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