Thursday, August 4, 2011

Today's links

1--This Morning’s Grim Eurothought, Paul Krugman, New York Times

Excerpt: Ryan Avent has a further take on the mess in Yurp:

The European Union, and its single-currency extension, were forged in the decades following the war in an effort to make sure that war never again divided and savaged the continent. But strangely enough, in the effort to tie itself together, Europe imposed some of the same fiscal and monetary constraints that precipitated the collapse of the 1930s. And here we are, watching history repeat itself. Within a Europe riven by imbalances, the fiscal and monetary screws are once again being applied to countries with no hope of escaping their financial burdens. Markets are attacking, and efforts to salvage the situation through massive aid packages are emerging too small and late to matter. The pressure within the squeezed economies is building, and that pressure will find a release, one way or another. A Europe hoping never to repeat its historical tragedies has gone and blundered into institutions that make those same tragedies more likely. The European project, as it looks now, has failed.

Indeed. The Great Depression in Europe, which was key to the political disaster of the 1930s, had a lot to do with the constraints of the gold standard.

It’s therefore a bitter irony that in the attempt to prevent history from repeating itself, European leaders imposed what amounts to a new gold standard — and when things went wrong, demanded that afflicted nations impose Chancellor Bruening policies.

Avent is right that this is all taking place on a much smaller scale than in the 1930s; I don’t expect to see fanatical Greek armies overrunning the continent. But it’s still a terrible story of folly.

2--Our Sputtering Economy, by the numbers, Politico

Excerpt: Annual rate at which the GDP grew this year: 1.3 percent between April and June, 0.4 percent between January and March

Average annual GDP growth from 1998-2007: 3.02 percent
Total jobs lost since January 2008: 8.7 million

Total jobs recovered since January 2008: 1.8 million
Recession technically ended: over two years ago, in June 2009
Current unemployment rate: 9.2 percent

The "natural unemployment rate": 5 percent
Months that the unemployment rate has been around 9 percent or more: 28
Number of unemployed people in June 2011: 14.1 million

Growth in number of unemployed people since March 2011: 545,000
Number of long-term unemployed people in June 2011: 6.3 million, or 44.4 percent of the unemployed
Pace at which jobs were added throughout the late 1990s: 350,00 per month
Jobs that were added in June: 18,000

Jobs the U.S. needs to create to 5 percent unemployment rate: 6.8 million, as of January 2011
Years it will take to get back to an unemployment rate of 5 percent: four years if we're adding jobs at 350,000 per month; 11 years if we're adding jobs at the 2005 rate of 210,000 per month
Unemployed workers per job opening: 4.98

Number of people who weren't in the labor force, but wanted work, as of June 2011: 2.7 million
The last time the labor force participation rate was lower than it is now: 1984
The amount of state budget spending that comes from the federal government: about 1/3, or $478 billion in 2010

Increase in before-tax corporate profits in the first quarter of 2011: $140.3 billion
Percentage of Americans' total personal income that comes from federal funds: almost 20 percent
Spending cuts in the proposed budget: at least $2.3 trillion over a decade from 2012-2021
How long you can currently receive unemployment benefits: up to 99 weeks
The number of those weeks funded to some extent by federal aid: up to 73
People currently relying on federal unemployment benefits: 3.8 million
How long you'll be able to receive unemployment benefits if you lose your job after July 1, 2011: 20 to 26 weeks, depending on your state

Recovery-funded jobs reported by recipients, according to 550,621
Amount of stimulus money left to be spent: $122.8 billion of the original $787 billion

3--More people borrowing from 401(k) accounts, McClatchy

Excerpt: As the economy struggles in recovery, more working Americans are making dicey moves to pluck cash from their 401(k) retirement accounts.

A record one in five employees sitting on these popular nest eggs had borrowed from accounts at the end of 2009. Recent reports show that number has continued to climb.

The money helps families cope with high-cost credit card debt and medical bills, fund educations and improve or buy homes.

Borrowing it, however, also can set personal finance traps.

The biggest risk for borrowers is getting laid off. That typically means the 401(k) loan has to be repaid promptly, even though the paychecks have stopped.

And an unpaid loan damages the worker's contribution to his retirement security even as the nation debates cutting future Social Security and Medicare benefits.

Workers have drawn millions of dollars out of their 401(k) accounts though loans, reports from their employers show.

"We have definitely seen an increase in the number of participant loans and participants who are requesting loans," said Greg Marx, benefits manager at Commerce Bancshares Inc.

Commerce employees owed their 401(k) accounts $8.6 million at the end of 2010, a 21 percent increase from 2008.

Data covering more than 20 million participants in 401(k) plans nationwide showed 21 percent had taken out loans against their accounts at the end of 2009, up from 18 percent in the three previous years.

It was the highest level ever found by the Employee Benefit Research Institute since it began collecting the information in 1996.

4--My worst fears are slowly, but surely coming true, Pragmatic Capitalism

Excerpt: Over the course of the last 3 years I have written hundreds of articles describing the balance sheet recession and why the government was the only entity that could step in and fill the void as the consumer remained weak due to the bubble era debts. I said the government should focus its efforts on helping the root of the problem - Main Street and not Wall Street. And while the stimulus did a great deal to help bolster the private sector over the last 2 .5 years, it’s now becoming a drag on the economy as it wears off and reveals a still very fragile U.S. consumer.

When the Congress passed the tax cut at the end of last year it looked like we were avoiding the austerity bug. How quickly things change....

According to ZeroHedge and JP Morgan the recent debt package is going to result in a near stagnant economy in the coming year:

“Regarding the cuts that CBO didn’t score, one of two things can happen: either the Committee successfully finds $1.5 trillion in deficit savings over ten years, or they are unsuccessful and sequestration automatically reduces spending by $1.2 trillion evenly over ten years beginning next October, with the onset of fiscal year 2013. In the former case, if we assume the cuts ramp up slowly, as is the case with the discretionary caps, then this might add about another $20 billion of fiscal tightening in the coming year. If the latter, we would also see spending decline by a similar amount, though all back-loaded in the last quarter of 2012. As such, regardless of how the Committee fares, it appears that a first rough estimate is that the total tightening implied by the recent legislation would subtract about 0.3%-point from GDP growth next year.

This drag may appear fairly small, but it is on top of the substantial tightening that was already in place prior to the passage of the debt deal. Most of that fiscal tightening comes about through the automatic expiration of temporary stimulus measures. The table below details those measures, the largest of which is the one-year 2%-point payroll tax holiday, which expires next January. Other large programs that are scheduled to expire or phase out are emergency unemployment benefits, accelerated depreciation, increased transfers to the states, and much of the remaining spending associated with the 2009 Recovery Act. All in all, by our estimates federal fiscal policy will subtract around 1-3/4%-points from GDP growth next year. Given that GDP growth has been 1.6% over the past four quarters when fiscal policy has been much less of a drag, this doesn’t bode well for next year. There are elements of uncertainty in our 1-3/4%-point drag estimate, and the largest such uncertainty is probably political, as some measure could get extended. Respecting that uncertainty, it does appear that fiscal policy poses a downside challenge to our projection for 2.7% GDP growth in 2012.”

As Warren likes to say, because we think we’re the next Greece, we’re becoming the next Japan...

5--The Second Great Contraction, by Kenneth Rogoff, Project Syndicate via Economist's View

Excerpt: ..the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.
A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book... The first “Great Contraction” of course, was the Great Depression... The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic. ...

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.

6--Moving forward after the debt deal, Lawrence Summers, Washington Post

Excerpt: Economic anxiety. The issues pressing the United States today are much more about jobs and a growth deficit than an excessive budget deficit. Consider that a single bad economic statistic — the manufacturing purchasing managers survey — more than wiped out all the stock market gains from the avoidance of default and that bond yields reached new lows at the moment of maximum apparent danger on the debt limit.

On the current policy path, it would be surprising if growth were rapid enough to reduce unemployment even to 8.5 percent by the end of 2012. A substantial withdrawal of fiscal stimulus will occur when the payroll tax cuts expire at the end of the year. With growth at less than 1 percent in the first half of this year, the economy is effectively at a stall and facing the prospects of shocks from a European financial crisis that is decidedly not under control, spikes in oil prices and declines in business and household confidence. The indicators suggest that the economy has at least a 1-in-3 chance of falling back into recession if nothing new is done to raise demand and spur growth.

Soon, relief will give way to alarm about the United States’ economic future. Among all the machinations ahead, two issues stand out: First, the single largest and easiest method of deficit reduction available is the non-extension of the Bush tax cuts for upper incomes. President Obama should make clear that he will not accept their extension on any terms. Clarity on that trillion-dollar point, along with very modest entitlement reform, will be sufficient to hit current targets for deficit reduction. Second, it is essential that the payroll tax cut be extended and that further measures, such as infrastructure maintenance and extension of unemployment insurance, be taken to spur demand. There is still time to confirm Churchill’s maxim that the United States always does the right thing after exhausting all the alternatives.

7--Is Deflation Back?, New York Times

Excerpt: Deflation has returned.

For the first time in a year, consumer prices fell in June, according to a new report from the Commerce Department released Tuesday. The price decline was driven by energy declines, and is just one month’s data point, but even so, the figure is worrisome. The Federal Reserve pays close attention to this price index (more so, reportedly, than to the Consumer Price Index released by the Labor Department); and you may recall that part of the reason the Federal Reserve engaged in quantitative easing was the threat of a deflationary spiral.

The Commerce Department’s report delivered other bad news, too.

Nominal personal income increased by just 0.1 percent in June — and the increase was due to higher government transfer payments (like unemployment benefits) and capital gains income, not wages and salaries.

In fact, private wage and salary income fell in June.

None of these facts bode well for growth in the third quarter of this year, given that the economy is so dependent on consumer spending. And the austerity measures created by the recent debt ceiling deal look unlikely to make things better.

8--Spend more and get tax receipts up!, Angry Bear

Excerpt: Readers here will know more about the US federal government income statement than I. However, given the near ubiquitous deficit hysteria, I wanted to illustrate the truth about the budget deficit. The truth is, that deficit hysteria has been set in motion by A surge in government spending on items like unemployment compensation, food stamps, and other types of 'support payments to persons for whom no current service is rendered' AND low tax receipts. Yes, long-term reform is needed; but my general conclusion is that the deficit hysteria is sorely misplaced....

Deficit hysteria should be more appropriately placed as "lack of jobs and tax receipts hysteria". At this point, the budget could just as easily worsen as it could improve, given the fragile state of the US economy (see Tim Duy's recent post at Economist's View).

Why the wrong hysteria?

Reason 1. Taxes. Some would love to increase taxes - but the fact of the matter is, that tax receipts remain well below their long-term average of 18% of GDP. Tax receipts will not improve without new jobs since individual income taxes account for near 50% of total receipts....

According to the GAO's budget glossary (link here, .pdf), this item includes the following cyclical spending:

Support payments (including associated administrative expenses) to persons for whom no current service is rendered. Includes retirement, disability, unemployment, welfare, and similar programs, except for Social Security and income security for veterans, which are in other functions. Also includes the Food Stamp, Special Milk, and Child Nutrition programs (whether the benefits are in cash or in kind); both federal and trust fund unemployment compensation and workers’ compensation; public assistance cash payments; benefits to the elderly and to coal miners; and low- and moderate-income housing benefits.

It's spending on unemployment and food stamps that's driving spending at the margin.

The same deal exists with the 'smaller ticket items'. Of these <5% of total spending items, energy, environment, and veterans have arguably broken trend. I would surmise that some of the 'veterans' spending is tied to the business cycle, given the timing of the surge....OK - so deficit hysteria is about, but it's misplaced. One could argue for more, not less, spending to get the jobs growth, hence tax receipts, up. 9--Panel Sees Odds of U.S. Recession Rising, Bloomberg

Excerpt: The two-year-old U.S. recovery’s staying power may be diminishing as consumers and the government pare spending, say five of the nine economists on the academic panel that dates recessions.

“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”

A greater-than-expected slowdown in the first half of 2011 poses risks for the world’s largest economy, said economist Robert Hall of Stanford University, the panel’s chairman. Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29.

“The slower the growth rate, the more likely it is that an adverse shock would cause a recession,” Hall said in an interview....

Consumer spending unexpectedly dropped in June for the first time in almost two years, while the savings rate rose, Commerce Department figures showed yesterday in Washington.

Squeezing Spending

“Consumption is down because debt repayments are squeezing spending even this long after the crisis,” Hall said. “It will be a painful process until debt-dependent consumers are back on their feet.”...

Stimulus Withdrawn

“The government is a source of contraction this year,” Frankel said. “Fiscal stimulus is being withdrawn at the federal, state, and local levels.”

10--The Three-Year Tightening Cycle of U.S. Monetary Policy, Macro and other musings

Excerpt: monetary policy has been on a passive tightening cycle for the past three years. For nominal spending began to fall in June 2008 and has yet to return to any reasonable trend level growth path (i.e. one that accounts for the housing boom). It is even worse if we look at domestic nominal spending per capita. Not only has it not returned to a reasonable trend level growth path, it has yet to return to even its peak value in late 2007, as seen in the figure below....

A key problem behind this passive tightening of monetary policy is that money demand has been and remains elevated and the Fed has yet to successfully address it. What is frustrating is that the Fed could meaningfully undo this three-year passive tightening cycle by adopting something like a nominal GDP level target. For many reasons--its political capital is spent, internal Fed divisions, the popularity of hard-money views, etc--it won't and so the U.S. economy remains mired in an anemic recovery.

11--What the Debt Limit Deal Means for States, Off the charts

Excerpt: The debt limit deal inevitably will lead to large federal cuts in programs that directly benefit families and communities, adding to the deep and widespread cuts that states have made in their programs — everything from preschool to services for the elderly.

The recession triggered the largest decline in state revenues on record, opening up more than $430 billion in budget shortfalls over the past four years (see graph). States have balanced their budgets mostly by cutting services and shedding employees: 34 states have cut K-12 education, 43 have cut college funding, 29 have cut services for the elderly, and 31 have cut health care....

States and localities have also shrunk their workforces by 577,000 jobs since 2008 and continue to shed tens of thousands of jobs per month.

Now, the federal government will pile on by making deep cuts. We do not yet know exactly how Congress will meet the savings targets in the new debt limit deal, but we know that:

The required cuts in federal “non-security discretionary” funding will likely hit states hard. Fully one-third of this category of federal spending flows through state governments in the form of funding for education, health care, human services, law enforcement, infrastructure, and other services that states and localities administer. The debt limit deal likely will lead to well over half a trillion dollars in cuts in non-security discretionary funding over the next decade. Large cuts in federal funding to states would force states to make still-deeper cuts in their budgets.

Congress could spare aid to states while taking all the required savings from purely federal areas of spending, like the FBI and the National Institutes for Health. But that’s extremely unlikely, since the resulting cuts in those areas would be prohibitively large.

There’s a significant threat that the committee charged with recommending further deficit-reduction measures will find large Medicaid “savings” that merely shift costs to states....

So, from a state’s perspective, the debt limit deal means that it will have to scale back or eliminate many education, health, public safety, and other services that the federal government has helped support unless the state comes up with replacement dollars — dollars that most states just don’t have.

11--Welcome to the United States of Austerity, Mother Jones

Excerpt: The Obama-GOP plan cuts $917 billion in government spending over the next decade. Nearly $570 billion of that would come from what's called "nondefense discretionary spending." That's budget-speak for the pile of money the government invests in the nation's safety and future—education and job training, air traffic control, health research, border security, physical infrastructure, environmental and consumer protection, child care, nutrition, law enforcement, and more.

Pollack's calculations suggest the cuts in Obama's plan are almost as deep as those in Rep. Paul Ryan's slash-and-burn budget, which shrunk non-defense discretionary spending down to just 1.5 percent of GDP. The president has claimed that the debt deal will allow America to continue making "job-creating investments in things like education and research." But on crucial public investment, Obama's and Ryan's plans are next-door neighbors. "There's no way to square this plan with the president's 'Winning the Future' agenda," Pollack says. "That agenda ends."...

Jobs programs could also go under the knife. Rick McHugh, a staff attorney at the National Employment Law Project, points to two endangered programs: the Workforce Investment Act, which funds job training programs for young, adult, and dislocated workers, and the Trade Adjustment Assistance program, which provides benefits and training to workers whose jobs were lost due to outsourcing. McHugh says both programs are necessary at a time when 14 million Americans are out of work.

McHugh adds that the bill does not include an extension of federal funding for unemployment benefits, which is set to expire at the end of the year. All told, he fears that already weak job market could be dealt a massive body blow by the Obama-GOP debt deal. "To have this big of an austerity proposal in Washington is disconcerting and misguided," he says.

When it comes to public funding for education, the picture is more mixed....

What's not in the deal could hurt too. In particular, EPI's analysis estimates that not extending federal unemployment benefits and the payroll tax cut, combined with the deal's array of cuts, will result in 1.8 million fewer jobs and a loss of $241 billion in economic output in 2012. "It's going to suck a good deal of demand out of the economy," EPI's Pollack says. "It's going to be devastating."

12--The Hostage Crisis Continues: Why Obama Can’t Pivot to Jobs and Growth, Robert Reich's blog

Excerpt: "And in the coming months I’ll continue also to fight for what the American people care most about: new jobs, higher wages, and faster economic growth.”

But what precisely will he fight for now that the debt deal has tied his hands?

He says he wants to extend tax cuts for middle class families and make sure the jobless get unemployment benefits.

Fine, but the new deal won’t let him. He’ll have to go back to Congress after the recess (five weeks from now) and round up enough votes to override the budget caps that now restrict spending. What are the odds? Maybe a little higher than zero....

He says he wants an “infrastructure bank” that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart.

Fine, but the new deal he just signed may not let him do this either – if the infrastructure bank relies on federal funds or even federal loan guarantees to attract private money. The only way he could create an infrastructure bank without sweetening the pot would be by privatizing all the new infrastructure. That means toll roads and toll bridges, user-fee airports, and entry fees everywhere else.

Apart from its potential unfairness to lower-income people, such a privatized infrastructure would have the same effect as a tax increase. After paying more for roads and bridges and all other infrastructure, Americans would have less cash for to spend on goods and services. That means no boost to the economy....

More importantly, the deal he just signed makes it impossible for the President and Democrats to launch any major jobs program – no WPA or Civilian Conservation Corps, no major lending program to cash-starved states and locales, no new help for distressed homeowners, and so on. Nada.

13--Small Business Owners Using Pawnshops to Make Payroll, Naked capitalism

Excerpt: From CNN Money (hat tip reader Valissa):

Squeezed by tight credit and tempted by record high gold prices, small business owners are finding an alternative to the bank: the pawn shop.

More than half of the customers at online pawn shop, Pawngo, are small business owners, said Todd Hills, CEO of the Denver-based company.

“These guys can’t wait. They have businesses. They have employees they need to pay,” said Hills, who launched Pawngo in June. “This is a great way to solve a short-term need.”..

With pawning, there are no applications, credit checks or dings to the credit report if the customer defaults on the loan. “You can still bring your stack of papers into the bank, it doesn’t guarantee you will get a loan,” said Hills.

While individual consumers may walk into a pawn shop with a couple hundred dollars worth of jewelry looking for cash to fill up the gas tank or the refrigerator, small business owners tend to come in with more expensive items, said Ray Shaffman, a salesman at Gables Pawn and Jewelry in Miami.

Gables Pawn and Jewelry has seen customers come in with watches made by Rolex, Cartier and Patek Philippe. It pays between $5,000 and $10,000 each for them, said Shaffman.

“To make payroll is the number one reason” small business owners come to the shop, said Shaffman. “They don’t have enough flow, enough cash, to pay their employees. And they got to pay their employees. Otherwise, they have much more complicated problems.”

14--Junk-Bond Trading Lowest Since 2008, Bloomberg

Excerpt: Trading in high-yield bonds plummeted to the lowest level in three years as investors fled from riskier assets on concern that a sovereign debt crisis was spreading to the U.S. from Europe.

About $3.7 billion of publicly traded junk debt exchanged hands daily on average in the U.S. during July, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with a daily average of $4.3 billion last July and $5.4 billion for July 2009, the data show.

Investors are slowing their high-yield bond purchases as the U.S. and Greece implement austerity plans to reduce potentially crippling deficits. Debt buyers are waiting until they get a clearer sense of the European debt crisis and how significantly U.S. economic growth has slowed before increasing their speculative-grade bond purchases, said CreditSights Inc.’s Chris Taggert.

15--Flying Blind, The Economist

Excerpt: ON DECEMBER 16th, 2008, President-Elect Barack Obama met in Chicago with key members of his economic team to discuss their response to the deteriorating economic situation. Just two weeks earlier, the Bureau of Labour Statistics reported that 533,000 jobs had been lost in November, after a decline of 302,000 in October. According to the latest output figures, the economy had contracted by 0.5% in the third quarter, and much worse was expected of the fourth. The New Yorker's Ryan Lizza describes the debate:

The most important question facing Obama that day was how large the stimulus should be...A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion...[CEA Chair Christina] Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. [NEC Director Larry] Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”...In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option...[Chief of Staff Rahm] Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink.

On January 10th of 2009, Ms Romer and Jared Bernstein, economic adviser to Vice-President Joe Biden, released a now-infamous assessment of the likely effect of a "prototypical" stimulus package worth about $800 billion. A day earlier, the BLS announced a rise in the unemployment rate to 7.2%, after a December employment drop of 524,000. November's employment drop was revised from 533,000 to 584,000. In their analysis, Ms Romer and Mr Bernstein projected that without stimulus, employment might fall to just under 134m, from a previous recession peak near 138m. With stimulus, by contrast, employment should be close to its previous peak by the end of 2010. Stimulus would limit growth in unemployment to about 8%, falling to 7% by the end of 2010.

President Obama was inaugurated on January 20th, and a stimulus bill was introduced in the House of Representatives on January 26th. A stimulus package worth $819 billion passed in the House just two days later....

We can't know exactly how things would have played out in a world in which key policymakers had better data. If the true scope of the economic disaster in the fourth quarter had been clear, however, it seems certain that Ms Romer's models would have shown a need for more stimulus, that the White House would have agreed to push for more (and perhaps a lot more), and that Congress would have been much more receptive to a bigger bill. A drop of 8.9% does seem much more terrifying, after all, than a 3.8% decline. Bigger stimulus would have reduced the economic deterioration in subsequent months. The Fed might also have been more aggressive.

Of course, it's not impossible that knowledge of the dire state of the economy would combine with a bigger stimulus plan to shake faith in American finances. It is unlikely, however. At the end of 2008, America's net debt-to-GDP ratio was less than 50%. Other large economies were also tanking, and money was flooding into Treasuries. In late December of 2008, yields on 10-year Treasuries fell to near 2%.

16--Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. economy really is, The Onion

Excerpt: Claiming he wasn't afraid to let everyone in attendance know about "the real mess we're in," Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood's Corner Tavern about how absolutely fucked the U.S. economy actually is.

Bernanke, who sources confirmed was "totally sloshed," arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was "pretty goddamned awful if you want the God's honest truth."

"Look, they don't want anyone except for the Washington, D.C. bigwigs to know how bad shit really is," said Bernanke, slurring his words as he spoke. "Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I'm telling you."

America had plenty of room and every reason to borrow and spend heavily. What it didn't have, unfortunately, was an accurate picture of the economic situation. And that was a crippling limitation indeed.

What's striking to me is that as new data have revealed the true dimensions of the 2008 collapse, the public's perception of events hasn't much changed. Critics still jeer the stimulus for its failure to deliver promised results, despite the now-obvious inadequacy of the package. Few in Washington seem willing to discuss how drastically officials underreacted in 2009, and how the results of that underreaction are still with us, waiting for a more appropriate policy response. I don't know which tragedy is the more troubling: the failure to see the true scope of the disaster when accurate numbers weren't available, or the failure to see it now that they are.

17--What’s missing from the debt ceiling debate? Jobs, EPI

Excerpt: The unemployment rate, currently above 9 percent, is projected to remain high for a long time. For example, the current Blue Chip Economic Indicators consensus forecast puts the average unemployment rate for 2012 at 8.3 percent. The agreement to raise the debt ceiling just announced by policymakers in Washington not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs. The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy.

The agreement would reduce spending by at least $1 trillion over 10 years through budget caps on non-mandatory programs, with additional reductions under discussion in a second phase. While the bulk of the cuts are back-loaded – coming more in the future – the near-term cuts would still have an immediate impact. Applying conventional multipliers, the reduction of $30.5 billion in calendar year 2012 would reduce GDP by 0.3%, and result in roughly 323,000 fewer jobs (as depicted in the table below).

In addition to the immediate cuts to spending, the debt ceiling agreement fails to continue two major policies which had been part of broad agreements in the past. The payroll tax holiday and extended unemployment insurance were passed last December along with the two-year extension of the Bush-era tax cuts; but are set to expire at the end of 2011. While Congress could still extend these policies between now and the end of the year, that scenario is looking much less likely today. (Any economic support subsequent to this deal would have to be offset by other tax increases or spending cuts in 2012 or a further increase in the debt ceiling, neither of which seems politically viable.)

The payroll tax holiday reduced the Social Security payroll tax for all workers by two percentage points. Extending that tax cut for another year would provide roughly $118 billion in stimulus through increases in employees’ take-home pay, which would boost economic activity by an even greater $128 billion. Allowing this policy to expire would lower GDP by 0.8% in 2012, and would lead to roughly 972,000 fewer jobs...

The continuation of unemployment insurance benefits to long-term unemployed workers (up to 99 weeks of benefits) is also set to expire at the end of the year. Allowing that provision to expire on schedule would mean $45 billion less in assistance to unemployed workers, and $70 billion less in economic activity (unemployment insurance has one of the largest bang-per-buck of any job-creation policy). That reduction in purchasing power would lower GDP by 0.4%, and mean roughly 528,000 fewer jobs. Approximately 3.8 million Americans currently receive unemployment insurance because of this program; failure to continue these emergency benefits would put an additional drag on the economy.

If Congress fails to renew these existing programs or enact improved versions, we can expect slower growth, fewer jobs, and higher unemployment. Specifically, there could be 1.8 million fewer jobs and a 0.6 percentage point increase in the unemployment rate in 2012 as a result of abandoning current budget policies. The national unemployment rate would average closer to 9% instead of trending toward 8%, as projected by the Blue Chip consensus forecast.

18--States cutting unemployment benefits, Calculated Risk

Excerpt: Here is a depressing report from the National Employment Law Project: States Made Unprecedented Cuts to Unemployment Insurance in 2011

NELP’s new analysis shows that in 2011, six states cut the maximum number of weeks that jobless workers can receive unemployment insurance to less than 26 weeks—a threshold that had served as a standard for all 50 states for more than half a century, until this year. Michigan, Missouri, and South Carolina cut their available weeks down to 20; Arkansas and Illinois cut down to 25; and Florida cut to between 12 and 23 weeks, depending on the state’s unemployment rate. Double-digit unemployment in Michigan, South Carolina, and Florida did not discourage lawmakers there from making the cuts.

... Indiana changed the formula it uses to calculate weekly benefit amounts so that the average unemployment check will drop from $283 to $220 a week.

More from the report:

Throughout the recession, states with inadequate unemployment insurance trust fund reserves have relied on loans from the federal government to pay state unemployment insurance benefits. This September, states will begin paying interest on these loans, and starting in 2012, the federal government will raise taxes on employers in borrowing states until loans are paid in full, as required by the law.

19--Markets major trend now down, Marketwatch

Excerpt: Many technicians consider breaking below the 200-day moving average to be the official end of a bull market. So, at least according to this definition, we’re now in a bear market.

Furthermore, even though the market is overdue for a snap-back rally — given that it has now declined for eight straight sessions — the distinct possibility exists that the market will continue falling for several more days anyway. That’s because many mechanical trend-following strategies focus on where the market closes relative to the 200-day moving average, which means that a lot more selling may yet hit the market.

Is there any way for a bull to wriggle out from underneath the full force of this bearish news? One way to at least ameliorate it, which I suggested two months ago when writing about this subject, is to argue that the 200-day moving average has lost much of the ability it once had to be a helpful market timing indicator. ( Read my June 10 column on the 200-day moving average’s historical record....

The bottom line? We definitely should care about the market breaking below the 200-day moving average; we just shouldn’t base a sell signal for our entire portfolio on only this one technical event

20--Profits soar as economy slumps, Bangkok Post

Excerpt: In July, corporate giants such as 3M, Caterpillar, Goodyear, Microsoft and Apple reported blockbuster results in the second quarter of 2011, though the stock market still slumped amid fears of an economic slowdown and a possible government default.

Of the companies in the S&P 500 list of large-cap firms which have reported their quarterly earnings to date, 72 percent have beaten analysts' forecasts, according to Standard & Poor's analyst Howard Silverblatt.

Moreover, if the current trend keeps up, the S&P 500 companies are poised to have their most profitable quarter ever, he said.

"Earnings are basically the only thing holding up the market at this point," Silverblatt said. "They're amazing numbers."

21--Meet the Right-Wing Hatemongers Who Inspired the Norway Killer; Why were America's Islamophobes able to avoid accountability for so long?, Max Blumenthal, Alternet via Information Clearinghouse

Excerpt: August 03, 2011 "Alternet" -- Few political terrorists in recent history took as much care to articulate their ideological influences and political views as Anders Hans Breivik did. The right-wing Norwegian Islamophobe who murdered 76 children and adults in Oslo and at a government-run youth camp spent months, if not years, preparing his 1,500 page manifesto.

Besides its length, one of the most remarkable aspects of the manifesto is the extent to which its European author quoted from the writings of figures from the American conservative movement. Though he referred heavily to his fellow Norwegian, the blogger Fjordman, it was Robert Spencer, the American Islamophobic pseudo-academic, who received the most references from Breivik -- 55 in all. Then there was Daniel Pipes, the Muslim-bashing American neoconservative who earned 18 citations from the terrorist. Other American anti-Muslim characters appear prominently in the manifesto, including the extremist blogger Pam Geller, who operates an Islamophobic organization in partnership with Spencer.

Breivik may have developed his destructive sensibility in the stark political environment of a European continent riveted by mass immigration from the Muslim world, but his conceptualization of the changes he was witnessing reflect the influence of a cadre of far-right bloggers and activists from across the Atlantic Ocean. He not only mimicked their terminology and emulated their language, he substantially adopted their political worldview. The profound impact of the American right's Islamophobic subculture on Breivik's thinking raises a question that has not been adequately explored: Where is the American version of Breivik and why has he not struck yet? Or has he?

Many of the American writers who influenced Breivik spent years churning out calls for the mass murder of Muslims, Palestinians and their left-wing Western supporters. But the sort of terrorism these US-based rightists incited for was not the style the Norwegian killer would eventually adopt. Instead of Breivik's renegade free-booting, they preferred the "shock and awe" brand of state terror perfected by Western armies against the brown hordes threatening to impose Sharia law on the people in Peoria. This kind of violence provides a righteous satisfaction so powerful it can be experienced from thousands of miles away.

22--Post debt ceiling crisis update, Pragmatic Capitalism

Excerpt: The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment.

However, a new realization has finally dawned on investors and the mainstream media. They now seem to realize that government spending cuts reduce growth, with no clarity on how that might translate into higher future private sector growth. That puts the macroeconomic picture in a bind. The believe we need deficit reduction to ward off a looming financial crisis where we somehow turn into Greece, but at the same time now realize that austerity means a weaker economy, at least for as far into the future as markets can discount. This has cast a general malaise that’s been most recently causing stocks and interest rates to fall.

With crude oil and product prices leveling off, presumably because of not so strong world demand, the outlook for inflation (as generally defined) has moderated, as confirmed by recent indicators. As Chairman Bernanke has stated, commodity prices don’t need to actually fall for inflation to come down, they only need to level off, providing they aren’t entirely passed through to the other components of inflation. And with wages and unit labor costs, the largest component of costs, flat to falling, it looks like the the higher commodity costs have been limited to a relative value shift. Yes, standards of living and real terms of trade have been reduced, but it doesn’t look like there’s been any actual inflation, as defined by a continuous increase in the price level....

The lingering question is how US aggregate demand can be this weak with the Federal deficit running at about 9% of GDP. That is, what are the demand leakages that the deficit has only partially offset. We have the usual pension fund contributions, and corporate reserves are up with retained earnings/cash reserves up. Additionally, we aren’t getting the usual private sector borrowing to spend on housing/cars as might be expected this far into a recovery, even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.

Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ‘shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990′s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980′s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

So muddling through seems here to stay for a while.

The Budget Control Act of 2011

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