Monday, August 8, 2011

Today's links

1--Keynote Lecture by James Galbraith, The 5th annual “Dijon” conference on Post Keynesian economics, Naked Capitalism

Excerpt:....In January of that year, as you recall, the new Administration announced the need for stimulus or a recovery program. Without it they calculated unemployment might rise as high as 9% by 2010 before beginning to decline again. With it, they forecast unemployment would be held to 8%, recovery would begin in mid-2009 and by early 2011, that is to say now, unemployment would be down to 7% on its way back to 5% by 2013. It’s 9% in the United States, as we speak.

The forecast was a political and an economic disaster, but in retrospect, it’s most interesting for what it tells us about those who made it. Plainly they did not understand, perhaps they did not wish to understand, what was going on. They adopted the assumption of a glide path back to 5% unemployment, which meant that the natural rate of unemployment — the most un-Keynesian and anti-Keynesian concept ever devised in modern economics was built into the mentality and the computer models that they were using. The only issue was the speed of adjustment and whether a little boost would help us get there a little faster. The stimulus package was not meant to provide a substantive response to the crisis, but just to increase that speed of adjustment by a small amount.

Plainly, in short, there was no real crisis in the minds of those who took office in 2009. There was just an unusually deep recession, a Great Recession it came to be called, and the recession would end. Chairman Bernanke of the Federal Reserve Board said from the beginning, the recession will end, the economy will recover. He did not say how he knew, but when it did he was sure things would return to the normal prosperity of the mid-2000s. It was the mindlessness of output gaps the consensus business cycle forecasting and of Okun’s law. The Minsky moment would surely pass....

Today, the failure behind the recovery forecast is conflated with the failure of the stimulus itself and the same thing is happening again. Those who failed most miserably to forewarn against the financial crisis have, as a consequence, regained their voices as scourges of deficits and public debt. There is a chorus of doom as those who once thought the new paradigm could go on forever are now inveighed against living beyond our means and foretell federal bankruptcy and the collapse of the dollar and the world monetary system amongst other scary fairy tales. This includes such luminaries as the leadership of the International Monetary Fund and of all things, the analytical division of Standard and Poor’s — an enterprise on which one might hope at least a small amount of modesty might have developed or devolved in the wake of recent events....

So it’s our task, it seems to me, against the odds, to build a new line of resistance. And I’ll wind up by saying that I think that line must have at least the following elements in it:

First, an understanding of the money accounting relationships, that pertain within societies and between them, so that we cannot be panicked by mere financial ratios into self-destructive social policies or condemn ourselves to lives of economic stagnation and human waste. And in particular I should add, since it’s important in Denmark at the moment, to the destruction of social welfare systems and pension systems which provided the foundation of a decent life for a large part of the population for decades.

Second, an effective analysis of the ongoing debt deflation, the banking debacle and the inadequate fiscal and illusory monetary policy responses so far. In America and in Europe, this is a crisis primarily of banks not of governments and it’s for us to call attention to this fact.

Third, a full analysis of the criminal activity that destroyed the banking sector, including its technological foundation, so as to quell the illusion that these markets can effectively be restored to anything like their form of 4 or 5 years ago. As part of this, obviously, it would be useful to have a renewed commitment to expose crime, to punish the guilty, and enforce the laws. Post Keynesian Economists for a More Effective FBI, I think is a splinter organization I would be happy to sponsor and solicit your membership in.

Fourth, an understanding of the way in which financial markets interact with the changing geophysics of energy, especially oil, with the commodity markets to choke off economic recovery unless the energy problem is addressed squarely. I think that’s something that we’re seeing happening now.

Fifth, a new strategic direction to redesign and rebuild our societies for the challenges of aging, infrastructure, energy, climate change and shared development which we all face. And to create the institutions required to make this happen. That requires, I think, from an intellectual point of view, a merger of the Keynesian, Post-Keynesian and the Institutionalists traditions which is, in fact, something that is already underway.

Sixth, to achieve these goals by mobilizing human brains and muscles to overcome unemployment and to assure a widely-shared, decent, and reasonably egalitarian society according to the most successful and enduring social models, by which I mean a commitment to the deepest policy principles that Keynes himself held and also an understanding that we should use history as a guide to what has worked and what does not.

And seventh, the reconstruction of the instruments of public power — the power to spend, the power to tax, the money power and the power to regulate — so as to effectively pursue these goals with democratic checks and balances to prevent the capture of new state institutions by predatory forces.

...Absolute distrust, leading to absolute liquidity preference is the incurable consequence, it seems to me, of financial fraud.

I say incurable. This is the diagnosis of an irreversible disease. The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable. It’s not just that restoring trust takes a long time. It’s that under the new technological order in this field, it can not be done. The technologies are designed to sow and foster distrust and that is the consequence of using them. The recent experience proves this, it seems to me. And therefore there can be no return to the way things were before. In other words, we are at the end of the illusion of a market place in the financial sphere.

2--Food Stamps and The Government’s Last Put, Phil's Stock World via zero hedge

Excerpt: Total food stamp recipients rose by 1.1 million in May. That represented a dramatic acceleration from the recent rate. Enough QE2 had trickled down from December to April to slow the growth rate of people entering the program to about 100,000 per month. The last time we saw an acceleration of this magnitude was in September 2008. That was at the beginning of the 2008 crash in the stock market and economy.

This rise in food stamp use confirms the evidence I have been tracking in the Professional Edition Treasury udpates showing a sharp drop in government withholding tax receipts in May suggesting the return of the recession that had been hidden by the government’s propping of the markets and economy. I had repeatedly warned Professional Edition subscribers that once the propping stopped, the markets would collapse, and that once government stimulus payments were withdrawn the economy would return to contraction. In recent weeks I have reported in the Treasury updates and have mentioned on our Radio Free Wall Street podcasts that it appeared that the economy had suddenly gone into free fall beginning in May. This data on the food stamp program tends to confirm that.

It also suggests that the US economy has been in a 4 year, uninterrupted decline with more and more people falling into poverty each month since May of 2007. Nearly 20 million new recipients have entered the program since then. That’s about 6% of the US population. Another way of looking at it is that 1.5% of the American people have been falling into poverty each year.

3--Italy is 'bound to default', says CEBR, Telegraph

Excerpt: Italy will likely default but Spain could scrape through, a leading think tank has warned, as the eurozone debt crisis continued its threat to claim its next two victims....

The Centre for Economics and Business Research (CEBR) said it had modelled good and bad scenarios for the two countries and Italy could not support its debt even if rates fall back unless the eurozone's third-largest economy sharply increases growth.

"Realistically, Italy is bound to default, but Spain may just get away without having to do so," said the London-based consultancy.

Even though Italy has managed to run tight budgets - and plans to eliminate its deficit by 2014 - with its massive debt it won't be able to escape if it can't boost its growth rate, it said.
It calculated Italy's debt would rise from 128pc of annual output to 150pc by 2017 if bond yields stay above the current 6pc and growth remains stagnant.

4--Our financial system has become a madhouse. We need radical change, The Guardian

Excerpt: There was fear this week – real fear. There was fear eliminating $2.5tn from the value of global shares in a mere five days. There was fear provoking the dumping of Italian government bonds at rock-bottom prices. And there was fear taking the yield on short-dated US treasury bills to below zero: investors were so anxious to park their cash somewhere safe that they were, in effect, paying the US government money to steward their savings – something not seen since the second world war.

Yet the credit ratings agency Standard & Poor's ended the week by casting a shadow over the creditworthiness of American government debt, unprecedentedly downgrading it from its AAA status, a monumental blow to the standing of the richest country on Earth and its political system. S&P's held its ground despite intense lobbying from the US treasury. Without tax increases, it said, the US could never recover its fiscal position – but tax increases, given the implacable opposition of congressional Republicans, have become impossible. The markets lurched downward....

What we have witnessed is a mass global flight from risk and an accompanying hoarding of cash on a huge scale. It was the worst week in the financial markets since the dark days of autumn 2008 at the height of the implosion of the western banking system – itself one of the worst periods since the early 1930s. But in important respects this week was worse. At least in 2008, governments could put their national balance sheets behind their respective banking systems to restore confidence. Now the fears are more deep-seated and far harder to counter.

The markets have lost confidence that western governments can successfully manage the legacy of vast private debt and broken-backed banks without imposing huge and nameless costs. They don't know what the costs will be – perhaps a series of chain defaults on government debt starting in Europe, perhaps worldwide debt deflation, or even helplessly printing money to pay off public and private debts, so generating unmanaged and volatile inflation. But they know the costs will be huge. And unpredictable....

"No major advanced economy is doing anything to promote growth and jobs," says George Magnus, a senior policy adviser to investment bank UBS....without growth there are only three ways out. The first is to increase public borrowing to compensate for the collapse of private borrowing. Private spending is bound to be depressed as individuals and companies lower their borrowing – so for a time exports (as long as other countries are buying) and growing public debts are the only reliable avenue to promote economic growth. But now there is a veto on growing public debt – due to the Tea Party movement in the US, the collapse in confidence in the euro and Britain's conservative government – and export demand from Asia is slowing.

The lessons from history are clear. Without publicly or privately generated growth there are only two other ways forward to pay down private debt after credit crunches: default or inflation, either containably managed or dangerously unmanaged.

What has unnerved the financial markets is that if the world cannot grow we are moving ineluctably towards these options. In the US, where the recent downward revisions to its economic growth statistics show how alarmingly weak its recovery has become, there has already been $300bn (£183bn) of private debt write-offs, according to McKinsey Global Institute's research. Now the Tea Party movement has vetoed any creative action by the federal government to stimulate growth, the pace of writing off consumer and mortgage debt can only accelerate. The impact on the American banking system, house prices and consumer confidence is bound to be serious....

As the IMF's chief economist, Olivier Blanchard, has suggested, if the options are public and private default, continuing bank weakness, economic stagnation (perhaps depression), or inflation, then the least bad option is to accept inflation...

5--German Government Thinks Italy Too Big For EFSF To Save -Spiegel, Nasdaq

FRANKFURT -(Dow Jones)- Germany's government thinks Italy is too big for Europe's rescue fund to save, Der Spiegel magazine reports in a preview of an article to be published Monday.

The government doubts whether even tripling the size of the rescue fund, known as the European Financial Stability Facility, would enable it to save Italy because the country's financing needs are so enormous, the magazine reports without naming the source of its information.

European Commission President Jose Manuel Barroso this week suggested increasing the size of the EFSF, which currently has a planned lending capacity of EUR440 billion ($622.9 billion), to help stem Europe's worsening debt crisis.

German government finance experts believe euro-zone states couldn't guarantee Italy'sEUR1.8 trillion of sovereign debt without markets considering Germany to be overstretched, Der Spiegel reports.

Germany's government therefore insists that Italy push through savings and reforms to help it exit the crisis, the magazine reports. It thinks the EFSF should only be used to rescue small and mid-size countries, the magazine reports.

6--The Struggle against Stupidity: European and U.S. Governments Continue Wrecking Their Economies, Mark Weisbrot, Monthly Review

Excerpt: Italy's public debt is $2.6 trillion, which is more than triple the entire economies of the other three countries combined. The European authorities -- sometimes referred to as "the troika" of the European Commission, European Union, and the IMF -- are not yet prepared for a "bailout" for this level of debt.

The other source of fear concerns the European banks, who have hundreds of billions of dollars lent to Italy and Spain. As the interest rates on these bonds rises and their value shrinks, these banks face problems of liquidity and potential losses. The European banks' problems also contributed to fears of a financial collapse.

So why did the ECB send such a frightening message to the markets yesterday? The simple answer is they are trying to force the Italian government to do more budget tightening. It's another dangerous game of chicken, which we have seen repeatedly in the eurozone....

The basic problem is that governments in both of these economies have got their macroeconomic policies wrong. In this regard Europe is considerably worse than the United States -- at least our Federal Reserve has taken some positive steps in monetary policy, keeping short-term interest rates near zero since December of 2008 and creating more than $2 trillion in money through quantitative easing. The ECB is much more right-wing, as was on full display yesterday; they also have short-term interest rates at 1.5 percent (having actually raised interest rates twice this year) and have been much more conservative than the Fed on monetary policy overall.

On fiscal policy, the European authorities are trying to squeeze the weaker eurozone governments to cut budget deficits even as they are in recession or barely growing, with more than 20 percent unemployment in Spain and 16 percent in Greece. It's not working, and it's not likely to ever work....

Now we have the sad spectacle of the United States heading down the eurozone road to stagnation, after our Congress, president, and most of the major media have reached agreement that reducing our public debt is the top national priority. This despite having more than 25 million unemployed, involuntarily working part time, or who have dropped out of the labor force. This is absurd, of course: the deficit at present is overwhelmingly a result of the recession and weak recovery. As most Americans now know, the whole "crisis" over the debt ceiling was completely manufactured. In fact, the U.S. doesn't really have a debt crisis at all; we are currently paying just 1.4 percent of GDP in interest payments, a low number by any historical or international comparison. Our main problem, as is Europe's, is employment.

7--US jobs crisis worsened in July, WSWS

Excerpt: The US Labor Department reported Friday that non-farm payrolls grew by 117,000 in July and the unemployment rate declined to 9.1 percent from 9.2 percent in June. While these figures were better than the projections of economists, the employment report actually revealed that the jobs crisis in America is growing worse.

The total payroll rise of 117,000, resulting from a net gain of 154,000 private-sector jobs and a loss of 37,000 government jobs, is well below the minimum monthly increase needed just to keep pace with the normal growth of the working-age population. Even with the report’s upward revision of job growth in May and June (56,000 higher than earlier estimates), the three-month average for job creation was 72,000, compared to the previous three-month average of 215,000.

The Labor Department’s figure for the number of unemployed people in July, 13.9 million, was 400,000 higher than in March.....

In a typical post-World War II econ
The 0.1 percent decline in the official jobless rate, moreover, was entirely due to the fact that 193,000 unemployed workers dropped out of the job market, not because of any increase in hiring. The number of people working in July actually declined by 38,000 from the figure for June.

The social scourge of long-term unemployment is creating a growing army of desperate and impoverished workers who have no prospects of finding a regular job. And the sweeping cuts in social spending pushed by the Obama administration and incorporated into the bipartisan deal passed this past week to raise the federal debt ceiling will further depress the economy, accelerate the growth of unemployment, and at the same time slash health care, housing aid and nutritional assistance just as millions more are unable to provide for their families on their own....

A separate report released Wednesday by the Labor Department further documented the deepening jobs crisis. The department said the unemployment rate rose in more than 90 percent of US cities in June...

Saying, “We’re going to get through this” and “Things will get better,” he counseled patience. “We know it’s going to take some time,” he declared.

He then proceeded to praise the budget-cutting deal to lift the debt ceiling and reiterated his pro-business program, stressing the need to restore “business confidence” and calling for a new tax incentive for companies that hire veterans.

8--The Difference Between Fox on 15th Street (a.k.a. The Washington Post) and a Real Newspaper, Dean Baker, CEPR

Excerpt: The Post featured a lengthy front page piece on the Republican debt ceiling strategy. Early in the article, it told readers that:

"Democrats called the GOP irresponsible for gambling with the economy and the nation’s flawless credit. Republicans countered that an epic clash over the debt limit was inevitable, given the outcome of the election and widespread anger with runaway government spending."

There was no "runaway government spending." The bulk of the increase in spending was for transfer payments like unemployment insurance and food stamps that always rise during a downturn. They rose more in this downturn than in most because it was steeper. A real newspaper would have put the words "runaway government spending" in quotation marks rather than implying that it was something that actually existed in the world.

Somewhat later, the article tells readers that:

"smaller government and lower taxes, not explosive federal spending, would be their [the "young gun" Republicans] route to growth and prosperity."

No one was advocating "explosive federal spending." This means that a real newspaper would have put these words also in quotation marks.

This is how you can tell the difference between the Washington Post and a real newspaper.

9--World races to beat back new week of market drama, AFP

Excerpt — World leaders and finance chiefs Sunday raced to check spiralling tension over the eurozone debt crisis and US credit rating downgrade as the clock ticked on the opening of the markets Monday.

Top officials from the Group of 20 major economies held an emergency conference call Sunday as leaders of the world's top powers conferred by phone and governors of the European Central Bank (ECB) prepared for talks before the opening of New Zealand market, the first to trade in Asia.

In a sign of the possible trouble to come, the Israeli market fell some six percent Sunday and other Middle East markets were lower, although they managed to trim some of their losses as investors reacted to Standard & Poor's unprecedented cut in the the US rating to AA+ from the top notch triple-A.

The news of the historic US ratings cut Friday came after the close of markets battered last week by their worst falls since 2008.

Fears of a global meltdown which some analysts see as potentially worse that the 2008 collapse sent vacationing leaders scrambling in a flurry of phone calls from London to Paris to Washington to stem the tide.

10--Immigration and Mass Incarceration in the Obama Era: The New Operation Wetback, Counterpunch

Excerpt: Conveniently forgetting the history of the civil right struggles that made his Presidency a possibility, Obama reminded those attending that he was bound to “uphold the laws on the books.”

With over 392,000 deportations in 2010, more than in any of the Bush years, many activists fear we are in the midst of a repeat of notorious episodes of the past such as the “Repatriation” campaign of the 1930s and the infamous Operation Wetback of 1954, both of which resulted in the deportation of hundreds of thousands of Latinos.

But several things are different this time around. A crucial distinction is that we are in the era of mass incarceration. Not only are the undocumented being deported, many are going to prison for years before being delivered across the border. While the writings of Michelle Alexander and others have highlighted the widespread targeting of young African-American males by the criminal justice system, few have noted that in the last decade the complexion of new faces behind bars has been dramatically changing. Since the turn of the century, the number of blacks in prisons has declined slightly, while the ranks of Latinos incarcerated has increased by nearly 50%, reaching just over 300,000 in 2009.

A second distinguishing feature of the current state of affairs is the presence of the private prison corporations. For the likes of the industry’s leading powers, Corrections Corporation of America (CCA) and the GEO Group, detaining immigrants has been the life blood for reviving their financial fortunes....

Sadly, the Obama presidency has consistently provided encouragement for the likes of CCA and GEO to grow the market for detainees. While failing to pass immigration reform or the Dream Act, the current administration has kept the core of the previous administration’s immigration policy measures intact. These include the Operation Endgame, a 2003 measure that promised to purge the nation of all “illegals” by 2012 and the more vibrant Secure Communities (S-Comm). Under S-Comm the Federal government authorizes local authorities to share fingerprints with ICE of all those they arrest. Though supposedly intended to capture only people with serious criminal backgrounds, in reality S-Comm has led to the detention and deportation of thousands of people with no previous convictions.

11--A Secret War in 120 Countries: The Pentagon's New Power Elite, Counterpunch

Excerpt: Somewhere on this planet an American commando is carrying out a mission. Now, say that 70 times and you're done... for the day. Without the knowledge of the American public, a secret force within the U.S. military is undertaking operations in a majority of the world's countries. This new Pentagon power elite is waging a global war whose size and scope has never been revealed, until now.

After a U.S. Navy SEAL put a bullet in Osama bin Laden's chest and another in his head, one of the most secretive black-ops units in the American military suddenly found its mission in the public spotlight. It was atypical. While it's well known that U.S. Special Operations forces are deployed in the war zones of Afghanistan and Iraq, and it's increasingly apparent that such units operate in murkier conflict zones like Yemen and Somalia, the full extent of their worldwide war has remained deeply in the shadows.

Last year, Karen DeYoung and Greg Jaffe of the Washington Post reported that U.S. Special Operations forces were deployed in 75 countries, up from 60 at the end of the Bush presidency. By the end of this year, U.S. Special Operations Command spokesman Colonel Tim Nye told me, that number will likely reach 120. "We do a lot of traveling -- a lot more than Afghanistan or Iraq," he said recently. This global presence -- in about 60% of the world's nations and far larger than previously acknowledged -- provides striking new evidence of a rising clandestine Pentagon power elite waging a secret war in all corners of the world....

He noted, for instance, that black operations like the bin Laden mission, with commandos conducting heliborne night raids, were now exceptionally common. A dozen or so are conducted every night, he said. Perhaps most illuminating, however, was an offhand remark about the size of SOCOM. Right now, he emphasized, U.S. Special Operations forces were approximately as large as Canada's entire active duty military. In fact, the force is larger than the active duty militaries of many of the nations where America's elite troops now operate each year, and it's only set to grow larger.

12--15 Most Heavily Taxed Countries In The World, The Big Picture

13--Economists, Market Watchers Increasingly Concerned About Recession, Shrug Off Downgrade, Wall Street Journal

Excerpt: Economists and market participants at an annual retreat were increasingly worried about another recession, though they mostly shrugged off the downgrade of U.S. debt by Standard & Poor’s.

David Kotok, chairman of money-management firm Cumberland Advisors, organizes an annual fishing trip in Maine that brings together a group of economists and market seers. This year, it looks like it might be the U.S. economy that gets skunked.

In response to an informal Dow Jones survey of 45 economists, portfolio managers and financial consultants in attendance, two thirds gave a better than 50% chance of recession in the next year. About 25% put the odds of recession at better than 75%.

The reaction to Standard & Poor’s U.S. debt downgrade? Pretty muted since it has been hinted at for some time. And some remarked on the irony of the downgrade, since S&P gave high ratings to the mortgage derivatives that helped precipitate the recession, and is now punishing the U.S. because of the deficit problems the recession triggered.

But economics and the market are secondary issues here, where the main focus has been on fishing. And wine.

Excerpt: Great graphics...Guess who pays the least?

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