Friday, August 12, 2011

Today's links

1--Irony Alert: If This is 72 Hours of Central Bankers Trying to Save the World, What Would Abject Capitulation Look Like? Naked Capitalism

Excerpt: ...The Euromarkets fell into a tizzy over rumors of a downgrade of France. Rating agency affirmations of the French AAA didn’t help. European bank stocks were hammered due to rumors about wobbles at SocGen, France’s second largest bank, and bank CDS spreads widened. Eurodollar interbank funding is drying up. US money market funds had been major suppliers of dollar funding to Eurobanks, and they have been pulling back. Chris Whalen also reported that US regulators are telling US banks to reduce credit exposures to Eurobanks. So much for the sort of central bank market-saving interventions that Bloomberg wants its readership to believe in. This regulatory intervention is like throwing gas on a smoldering fire.

Those market upheavals transmitted to the US markets, and banks here took it on the chin too. Ban of America fell 10.9%, Citi 10.5%, JP Morgan 5.6%, and our new watchlist candidate, Bank of New York, 7.8%.

We have the 5 year Treasury yield at an all time low of 0.9%, which our Jim Haygood describes as “awesomely pathological”. Even with the yuan at a 17 year high and gold at $1788, the dollar has not fallen out of bed, as some have anticipated. Even with yesterday’s decline, it is still well within recent trading ranges...

Update 5:30 AM: Holy shit. The perils of not having a real Bloomberg access. I have to depend on the kindness of friendly hedgies, in this case reader Scott. German CDS spreads have risen above UK CDS spreads and the Swissie has shot higher. The crisis has officially spread to the core.

2--Most Americans say U.S. on wrong track: poll, Reuters via naked capitalism

Excerpt: Economic fears are weighing heavily on Americans, with a large majority saying the United States is on the wrong track and nearly half believing the worst is yet to come, a Reuters/Ipsos poll said on Wednesday.

The poll reflected growing anxiety about the U.S. economy and frustration with Washington after a narrowly averted government default last week, a credit rating downgrade by Standard & Poor's, a stock market dive and a stubbornly high 9.1 percent jobless rate.

His approval rating dropped to 45 percent from 49 percent a month ago, according to the poll conducted from Thursday to Monday....

The Reuters/Ipsos poll found 73 percent of Americans believe the United States is "off on the wrong track," and just one in five, 21 percent, think the country is headed in the right direction.

The survey found that 47 percent believe "the worst is yet to come" in the U.S. economy, an increase of 13 percentage points from a year ago when this question was last raised.

This is the highest measure since March 2009, when concern peaked at 57 percent, at the height of the recession.

3--Recession Warning, and the Proper Policy Response, John P. Hussman, Ph.D., Hussman Funds

Excerpt: The economy is an equilibrium - consumer spending is stagnant not only because unemployment is high but also because debt burdens remain daunting. Businesses are reluctant to hire because they don't see the likelihood of sustained demand. This isn't a problem of tax uncertainty, regulations, or budget worries - it's a low-level equilibrium produced by consumers trying to deleverage and businesses reluctant to hire without the promise of demand. Many workers can't even move elsewhere to accept job openings because they are locked into their current homes. Very simply, barring the emergence of some new economic sector that produces a tremendous supply of desirable new goods and simultaneously produces enough employment to generate the income to buy those goods, we're unlikely to get around the employment problem until we address the debt issue directly....

The way that our policy makers address the recent weakness in the markets will tell a great deal about the prospects for a durable recovery. If the policy initiatives focus on subsidizing bad debt on the fiscal side, and distorting the financial markets on the monetary side, it would be best to use whatever short-term enthusiasm those proposals provoke as an opportunity to further reduce risk. The best policy responses are those that relieve some constraint on the economy that is binding. Another round of policies geared to creating an even larger sea of zero-interest liquidity, re-igniting asset bubbles, or further lowering already depressed Treasury yields, would be a signal of panic and incompetence from the Fed. If policy makers instead push to facilitate debt restructuring, coupled with pro-growth fiscal responses (e.g. R&D investment incentives, full funding of the National Institutes of Health, productive infrastructure investment, etc), yet another drawn-out cycle of distortion and crash might be avoided....

4--It’s the Political Economy, Stupid!, Peter Dorman, econospeak via Economist's View

Excerpt: Sometimes living in the world of ideas makes it harder to understand the real one. If you happen to be an economist, and the time is now, that is true in spades. Take Paul Krugman, for instance. After bemoaning the terrible policy choices of the last two years, he writes, “I’m still trying to make sense of this global intellectual failure.” It’s as if the core problem is that political leaders didn’t learn their macroeconomics well enough.
But Keynes was wrong about the power of “academic scribblers”. Idea-smiths provide language, narratives and tools for those in control, but the broad contours of policy depend on who the controllers happen to be. We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.

This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable....

The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy.

5--Stop Panicking About Our Long-Term Deficit problem. We don't have one, James Galbraith, Truthout

Excerpt: ...Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion. The concept of “sustainability” is often invoked, rarely defined, never criticized; things are deemed unsustainable by political consensus, backed by a chorus of repetition from the IMF, headline-seeking academics, think-tankers, and, of course, the ratings agencies.

But there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate, pitting two viewpoints that nevertheless converge on the practical issue....

So what is to be done? This is not a moment to describe policies that would, for example, create jobs, build infrastructure, or deal with energy or climate change. Nothing like that can happen now until ideas change. And the first change must be to challenge and reject all the nonsense about long-term budget deficits, national bankruptcy or insolvency, and even “fiscal responsibility” that we are hearing. The entire object of this propaganda campaign is to cripple government—including regulation and the courts—and to roll back Social Security, Medicare, and Medicaid. The defense of those successful, effective—and yes, sustainable—programs just became far more difficult, and perhaps impossible. But it needs to be carried on to the last ditch.

6--Rodrik: The Manufacturing Imperative, Dani Rodrik, Economist's View

Excerpt: The Manufacturing Imperative, by Dani Rodrik, Commentary, Project Syndicate: We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth. But countries ignore the health of their manufacturing industries at their peril.

High-tech services demand specialized skills and create few jobs, so their contribution to aggregate employment is bound to remain limited. Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits. For most countries, therefore, it remains a potent source of high-wage employment.

Indeed, the manufacturing sector is also where the world’s middle classes take shape and grow. Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious. Manufacturing may ultimately be central to the vigor of a nation’s democracy. ...

As economies develop and become richer, manufacturing – “making things” – inevitably becomes less important. But if this happens more rapidly than workers can acquire advanced skills, the result can be a dangerous imbalance between an economy’s productive structure and its workforce. We can see the consequences all over the world, in the form of economic underperformance, widening inequality, and divisive politics.

7--Why the President Doesn’t Present a Bold Plan to Create Jobs and Jumpstart the Economy, Robert Reich via economist's view

Excerpt: ...Even though the President’s two former top economic advisors (Larry Summers and Christy Roemer) have called for a major fiscal boost to the economy, the President has remained mum. Why?

I’m told White House political operatives are against a bold jobs plan. They believe the only jobs plan that could get through Congress would be so watered down as to have almost no impact by Election Day. They also worry the public wouldn’t understand how more government spending in the near term can be consistent with long-term deficit reduction. And they fear Republicans would use any such initiative to further bash Obama as a big spender.

So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia. ...

There’s still time for political operatives in the White House – and the person they work for – to change their minds. ... But for now the President is being badly advised. The magnitude of the current jobs and growth crisis demands a boldness and urgency that’s utterly lacking. As the President continues to wallow in the quagmire of long-term debt reduction, Congress is on summer recess and the rest of Washington is asleep.

The President should present a bold plan, summon lawmakers back to Washington to pass it, and, if they don’t, vow to fight for it right up through Election Day.

8--Recession Threatening U.S. After Household Spending’s Consecutive Declines, Bloomberg

Excerpt: Recession signals in the world’s largest economy are flashing red again.

Growth in the second quarter slowed to a pace that has typically been followed by a contraction within a year. Household spending fell in June for the third straight month; never in the past five decades has this happened outside of a slump. The Standard & Poor’s 500 Index plunged 16.8 percent in 11 days, performance that’s occurred only twice since at least 1970 without indicating a downturn.

“With so many red flags, the chances of a recession are rising,” said Jonathan Basile, a senior economist at Credit Suisse in New York. “A lot of the economic indicators are teetering. We’ve gone very quickly from a slowdown scare to a recession scare.”...

Policy Mistake’

“At a minimum, the conditions are ripe for a recession,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “When growth slows to less than 2 percent on a year-to-year basis, the economy is simply unable to withstand a major shock or policy mistake.”

One major source of weakness is consumer spending, which accounts for about 70 percent of the economy. Household purchases adjusted for inflation dropped in June for the third consecutive month -- the first such occurrence outside of a recession since 1959, according to economists at JPMorgan Chase & Co.

Household sentiment, as measured by the Thomson Reuters/University of Michigan index for July, has receded to a level seen during the last recession. The Bloomberg Consumer Comfort gauge already is in territory reflective of a slump.

“Consumers are dealing with a labor market that’s gotten weaker, a hit to their wealth through declines in the stock market and just a lot of bad news and uncertainty,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “It makes them want to be more cautious in their spending.”

9--Global Slowdown Is Hitting Trade Flows, Kathleen Madigan, Wall Street Journal

Excerpt: Back in the spring, the World Trade Organization forecasted world trade would grow 6.5% in 2011 — a decent pace given trade flows surged by a record 14.5% in 2010.

But hitting 6.5% could be a stretch. Global growth is slowing in the face of still high commodity and energy prices, social unrest, and financial markets in need of lithium.

A wider trade gap is hurting the U.S. recovery.

The trade deficit jumped to $53.07 billion in June and May’s gap was revised to $50.83 billion from $50.23 billion.

The deterioration means we may look back fondly at the dismal 1.3% growth rate reported last month for second quarter gross domestic product. According to economists at Barclays Capital, the wider trade deficit suggests real GDP grew only 0.6% last quarter.

Part of the widening, at least in June, reflected the return of the Japan supply chain. Automotive-related imports from Japan jumped 36% in June, and more increases are likely as U.S.-based factories of Japanese nameplates gear up for the new model season.

Trade flows into and out of the U.S. have weakened. Real exports are up 8.8% in the first half from the similar period of 2010 that saw exports jump 16.0%; import growth slowed to 8.7%, from 14.4% in first half of 2010.

The slowdown reflects the global slowdown, already evidenced by weakening purchasing managers’ indexes around the world.

Slackness in factory activity, however, exacerbates the risks of the volatile financial markets. Weaker revenues provide a thinner cash cushion and goods producers may run into credit troubles if demand does not pick up.

In addition, exporting nations will fight for market share by trying to cheapen their currencies. But as the Swiss have learned, controlling exchange rates is not an easy job.

That means trade wars and calls for trade barriers could also pop up–two things a jittery world economy does not need.

Emerging markets–where exports account for a great share of output–are especially concerned about U.S. consumer demand. The dip in jobless claims below the 400,000 mark suggests molasses-slow improvement in the labor markets. Layoff announcements, however, jumped in July, and claims could very well tick up in future weeks.

The debt ceiling embarrassment in Washington along with the wild swings in stock market are likely to weigh on U.S. consumer spending decisions, another tap of the brakes on global growth and trade.

10--Trade Gap Widens as Exports Slide, SUDEEP REDDY, Wall Street Journal

Excerpt: The U.S. trade deficit in June jumped to its widest point since fall 2008 as exports tumbled, indicating the nation's recovery was stalling even before the latest worries about a slowing global economy.

The trade gap widened 4.4% from a month earlier to about $53 billion, the Commerce Department said. Exports slid 2.3% to about $171 billion, marking the first decline in two consecutive months since early 2009. A drop in demand from U.S. consumers and businesses was among factors pushing imports down 0.8% to $224 billion.

The figures stoked concerns about the economy's weak trajectory heading into the market turmoil of recent weeks. Strong eExports have been a driver of the U.S. recovery over the past two years amid lackluster growth in consumer spending and persistent malaise in the housing sector.

"It appears that one of the last fully functioning engines of growth may be faltering," said IHS Global Insight economist Gregory Daco.

The downshift comes as governments around the world are expressing concern about movements in their currencies potentially weighing on their exports. The weak U.S. dollar since the financial crisis has helped make American goods cheaper in foreign markets.

Some Asian nations fear a slowdown in their robust export activity due to the weak dollar and slowing international demand. But imports from China rose almost 5% in June while U.S. exports to that country fell 1%, moving the trade gap to its widest point since last September.

The drop in exports was broad-based. Exports of industrial materials fell 4.8%, while food exports dropped 7.3% and computer exports dropped 9.8%. Somewhat lower oil prices helped drive the decline in imports.

The latest trade data led many economists to mark down their estimates for second-quarter economic growth to less than 1%. The government, in its initial estimate, said the economy expanded at an annual rate of only 1.3% in the three months ending in June.

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