Tuesday, July 26, 2011

Today's links

1--China's spectacular real estate bubble is about to go pop, Telegraph

Excerpt: Little noticed amid the furore of the euro crisis, HSBC’S preliminary survey of China’s factories, published this week, indicated manufacturing activity in the world’s second-biggest economy actually declined in July from the month before, the first such contraction in a year. The HSBC purchasing managers index for China has been falling for months now, indicating a protracted fall off in growth as the Chinese authorities act to rein in rampant inflation.

House prices look like being a major victim of this slowdown. Up to a point, this is deliberate policy for China. With the example of the Western property bubble, which ended very badly indeed, serving as a salutary reminder of the dangers of unchecked real estate prices, the Chinese authorities have taken a number of steps to cool the country’s overheated housing market. And it is working; residential property prices have risen on average by “only” 7pc over the last year, and transaction volumes are lower.

But here’s the problem. Residential and commercial property development have been such a big component of growth in recent years that anything that damages the property market risks upsetting the entire apple cart. Nobody can forecast with any certainty when the crash will come, but come it will. You cannot cram that much development into such a short space of time without there eventually being a correction.

And when it comes, its knock on consequences are going to be extreme, possibly just as seismic as the rolling series of banking crises we’ve had here in the west.

2--Even before a budget cuts, US households looking vulnerable, Credit Writedowns

Excerpt: Economists at the Northeastern University in Boston recently found that corporate profits captured 88% of the entire US economy’s income growth between the second quarter of 2009 and the fourth quarter of 2010, with workers taking just 1% of the increase. Recent Department of Labour data showed unit labour costs edged up 0.7% in the year to March though not enough to make up for a 2.9% fall in the previous 12 months. Northeastern economics professor Andrew Sum says the mismatch is “historically unprecedented” and bodes ill for future growth, especially given many companies are sitting on their cash rather than investing it. “Workers have no money, no purchasing power, so that’s why consumption is not moving”. By sitting on their profits firms are acting like earners “who take their money and stuff it in the mattress. That’s happening across the economy”. This means that US growth is either financed by debt (mainly Federal debt) as household income is not keeping pace with GDP growth, or secondly by exports which makes H2 potentially vulnerable to a slowdown as the international markets start to slow.

3--Wall Street analysts and economists have this recession recovery wrong, Barry Ritholtz, Washigton Post

Excerpt: In a nation of 307 million people with about 145 million workers, we have to gain about 150,000 new hires a month to maintain steady employment rates. So 18,000 new monthly jobs misses the mark by a wide margin.

Why have analysts and economists on Wall Street gotten this so wrong? In a word: context. Most are looking at the wrong data set, using the post-World War II recession recoveries as their frame of reference.

History suggests the correct frame of reference is not the usual contraction-expansion cycles, but rather credit-crisis collapse and recovery. These are not your run-of-the-mill recessions. They are far rarer, more protracted and much more painful.

Fortunately, a few economists have figured this out and provide some insight into what we should expect. Among the most prescient are professors Carmen M. Reinhart and Kenneth S. Rogoff. Back in January 2008 (!), they published a paper warning that the U.S. subprime mortgage debacle was turning into a full-blown credit crisis. Looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977) — the professors warned that we should expect a prolonged slump. These other crises had a number of surprisingly consistent elements:

First, asset market collapses were prolonged and deep. Real housing prices declined an average of 35 percent over six years, while equity prices collapsed an average of 55 percent. Those numbers were stunningly close to what occurred in the U.S. crisis of 2007-09.

Second, they’ve noted that the aftermaths of banking crises “are associated with profound declines in employment.” They found that following a crisis, the average increase in the unemployment rate was 7 percentage points over four years. U.S. unemployment climbed 6 percentage points (from about 4 percent to about 10 percent), while the broadest measure of joblessness gained over 7 percentage points (from about 9 percent to about 16 percent). Again, they were right on the money.

Third, the professors warned that “government debt tends to explode, rising an average of 86 percent.” Surprisingly, the primary cause is not the costs of bailing out the banking system, but the “inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged contractions.” They also warned that “ambitious countercyclical fiscal policies aimed at mitigating the downturn” also tend to be costly.

Hmmm, plummeting tax revenues just as the government tries to stimulate the economy . . . does any of this sound familiar? It should.

4--Europe's ideologues took the whole world to the brink of disaster, Ambrose-Evans Pritchard, Telegraph

Excerpt: Clause 7 of the Brussels accord states that Europe's bail-out fund (EFSF) will have powers to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments" in any EMU country, opening the way for a `Euro-TARP' to rescue banks. The German bloc can henceforth blanket the entire South with its AAA rating, if it dares.

This is the start of a liability union and a proto EU Treasury, the "collectionization of risk" that Dr Merkel has battled against for months. Italy and Spain can breathe easier. Europe can hope to muddle through the summer. Armageddon is postponed again.

Dr Merkel denies that Germany has crossed the line towards shared fiscal destiny. Berlin retains a veto on use of the EFSF. "As I understand it, a transfer union would be automotic subsidies," she said.

To the extent that Germany does have a meaningful veto, then the deal agreed on Thursday will inevitably be tested by markets. Investors will want to know whether she can secure Bundestag approval for the colossal sums needed to make the EFSF credible. Mrs Merkel cannot hve it both ways....

Europe is advancing "with big strides towards an uncontrolled transfer union. Budgetary power must not under any circumstances be exercised without democratic legitimacy."...

Europe's leaders have at least stopped imposing 1930s debt deflation and depression on the rescued trio of Greece, Portugal, and Ireland. There is a genuine switch from austerity to growth. The penal loan rate has been cut to 3.5pc, with a Marshall Plan for good measure. These countries are no longer condemned to a certain death spiral.

Ireland can hope to stabilize its debt trajectory. With a fat trade surplus, it has every chance of pulling through. The policy of "internal devaluation" within EMU through wage deflation may in this particular case work, thanks to flexible labour markets....

Angela Merkel said Europe's leaders had finally tackled the "root problem". They did no such thing. The root problem is that vastly disparate nations with different growth rates, productivity patterns, debt structures, sensitivity to interest rates, legal systems, wage bargaining practices, and inflation proclivities, were meshed together by Hegelian politicians acting against the warnings of the Bundesbank and the European Commission's economists.....

One "solution" to this root problem is for the Geman bloc to pay subsidies to the South equal in scale to Versailles reparations, for decades. This is where fiscal union ultimately leads. Or Germania can opt for an orderly departure from monetary union before sinking deeper into this morass. Take your pick.

5--The Fed Audit: "U.S. provided a whopping $16 trillion in secret loans to bail out US and foreign banks", Global Research

Excerpt: The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

6--The age of Hicks, Paul Krugman, New York Times

Excerpt: let me use this as an occasion to make again a point I’ve made a number of times, this time slightly differently: what we’ve seen in the Lesser Depression is a spectacular vindication of one approach to macroeconomics, namely the modified Keynesianism of John Hicks. (Decent summary here.) What I and others have done on the liquidity trap can basically be viewed as elaborating and providing firmer foundations for the basic Hicks framework.

The real test of an economic model (or any model) is how it performs out of sample, that is, under conditions different from the usual. Hicksian theory makes two assertions that are very much at odds with what conventional wisdom suggests:

1. It says that once adverse demand shocks have pushed the economy into a liquidity trap, even very large increases in the monetary base — the sum of currency and bank reserves, which is what the Fed controls — will be basically sterile, leading neither to a boom nor to inflation.

2. It also says that under these conditions even large government borrowing will not crowd out private investment, and will not drive up interest rates.

3--Only Certainty in Impact of U.S. Default Is More Uncertainty, Kathleen Madigan, Wall Street Journal

Excerpt: Yes, the sun will rise if the U.S. debt ceiling isn’t lifted. But the ensuing day will bring chaos to financial markets and the economy.

Even as they expect a resolution, economists are sorting out the fallout from a failure to raise the debt ceiling and the subsequent downgrade to the Treasury’s credit rating. The problem is — with no past to point to — ideas of the consequences are mostly “guesstimates.”

“There is little precedent to turn to for an indication of how markets and the economy might react to a downgrade,” write economists at Wells Fargo Securities.

Clearly, a sustained federal shutdown would cut gross domestic product growth. If Washington could only spend current revenues, it would subtract about $100 billion in economic output just in August, say most economists. What’s unclear is the negative multiplier impact on the private economy. It depends on what bills aren’t paid: no Medicare payments will hit hospitals, shutting down federal parks will hurt consumer spending and jobs.

7--S&P: Shadow inventory slowing recovery, Housingwiire

Excerpt: Although the drop in default rates shows promise, the amount of shadow inventory still creates a dark loom over the future of housing prices, according to latest results from Standard & Poor's U.S. Residential Performance Index.

The shadow inventory of unresolved distressed properties is currently at an estimated $405 billion, representation four years of housing inventory and one-third of the outstanding U.S. non-agency residential mortgage debt.

The report states that full recovery will only occur once the supply of distressed properties shrinks to less than a quarter of the current volume.

The bigger drag will be uncertainty. “Worries over the intractable politics of deficit reduction and raising the federal debt ceiling have cast a pall over the economy,” note economists at IHS Global Insight.

8--- US data, US economy, Rebecca Wilder, Angry Bear

Excerpt: Next week the Bureau of Economic Analysis will release its estimate of Q2 US GDP growth. Of 69 economists polled, the bloomberg consensus is that the US economy grew at a 1.8% annualized rate spanning the months of April to June over January to March. In all, this quarterly growth rate implies just 1.9% annualized growth during the first half of 2011. Not much of an expansion.

Economists have put their 'hope' into the second half of 2011. But high frequency data show that the third quarter is setting up to be a doozy as well. This is too bad because we're talking about jobs and the welfare of American families here.

I like to follow two weekly indicators to get a feel for the labor market and the corporate trucking business. The message is clear: the economy is not improving.

First, the bellwether of the state of the US labor market - weekly initial unemployment claims - continues to disappoint. In the week ending July 16, seasonally adjusted initial claims increased 10,000 to 408,000. The 4-week moving average was 421,250, which is just 19,000 below its May peak of 440,250. This week's report fell on the BLS' survey week, so the July employment report is likely to be another weak one

9---How the deficit got this big, New York Times

Excerpt: With President Obama and Republican leaders calling for cutting the budget by trillions over the next 10 years, it is worth asking how we got here — from healthy surpluses at the end of the Clinton era, and the promise of future surpluses, to nine straight years of deficits, including the $1.3 trillion shortfall in 2010. The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions....

Despite what antigovernment conservatives say, non-
defense discretionary spending on areas like foreign aid, education and food safety was not a driving factor in creating the deficits. In fact, such spending, accounting for only 15 percent of the budget, has been basically flat as a share of the economy for decades. Cutting it simply will not fill the deficit hole.

A few lessons can be drawn from the numbers. First, the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels. Second, a healthy budget requires a healthy economy; recessions wreak havoc by reducing tax revenue. Government has to spur demand and create jobs in a deep downturn, even though doing so worsens the deficit in the short run. Third, spending cuts alone will not close the gap. The chronic revenue shortfalls from serial tax cuts are simply too deep to fill with spending cuts alone. Taxes have to go up.

In future decades, when rising health costs with an aging population hit the budget in full force, deficits are projected to be far deeper than they are now. Effective health care reform, and a willingness to pay more taxes, will be the biggest factors in controlling those deficits.

1 comment:

  1. All this talk about the CCPI has centered on SS , there are tons of us out here who would be affected too. To name a few , the military, retired govt employees, some school teachers , state employees,lot of pensions funds.