Monday, August 29, 2011

Today's links

Today's Quote:

  "We cannot allow our economic life to be controlled by that small group of men whose chief outlook upon the social welfare is tinctured by the fact that they can make huge profits from the lending of money and the marketing of securities--an outlook which deserves the adjectives ‘selfish’ and ‘opportunist.’" Franklin Delano Roosevelt, "FDR Explains the Crisis: Why it feels like 1932", Pam Martens, Counterpunch

1--One Number Says it All, Stephen S. Roach, Projet Syndicate

Excerpt: The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.

There are two distinct phases to this period of unprecedented US consumer weakness. From the first quarter of 2008 through the second period of 2009, consumer demand fell for six consecutive quarters at a 2.2% annual rate. Not surprisingly, the contraction was most acute during the depths of the Great Crisis, when consumption plunged at a 4.5% rate in the third and fourth quarters of 2008.

As the US economy bottomed out in mid-2009, consumers entered a second phase – a very subdued recovery. Annualized real consumption growth over the subsequent eight-quarter period from the third quarter of 2009 through the second quarter of 2011 averaged 2.1%. That is the most anemic consumer recovery on record – fully 1.5 percentage points slower than the 12-year pre-crisis trend of 3.6% that prevailed between 1996 and 2007.

These figures are a good deal weaker than originally stated. As part of the annual reworking of the US National Income and Product Accounts that was released in July 2011, Commerce Department statisticians slashed their earlier estimates of consumer spending. The 14-quarter growth trend from early 2008 to mid-2011 was cut from 0.5% to 0.2%; the bulk of the downward revision was concentrated in the first six quarters of this period – for which the estimate of the annualized consumption decline was doubled, from 1.1% to 2.2%.

I have been tracking these so-called benchmark revisions for about 40 years. This is, by far, one of the most significant I have ever seen. We all knew it was tough for the American consumer – but this revision portrays the crisis-induced cutbacks and subsequent anemic recovery in a much dimmer light.

The reasons behind this are not hard to fathom. By exploiting a record credit bubble to borrow against an unprecedented property bubble, American consumers spent well beyond their means for many years. When both bubbles burst, over-extended US households had no choice but to cut back and rebuild their damaged balance sheets by paying down outsize debt burdens and rebuilding depleted savings.

Yet, on both counts, balance-sheet repair has only just begun. While household-sector debt was pruned to 115% of disposable personal income in early 2011 from the peak of 130% hit in 2007, it remains well in excess of the 75% average of the 1970-2000 period. And, while the personal saving rate rose to 5% of disposable income in the first half of 2011 from the rock-bottom 1.2% low hit in mid-2005, this is far short of the nearly 8% norm that prevailed during the last 30 years of the twentieth century.

With retrenchment and balance-sheet repair only in its early stages, the zombie-like behavior of American consumers should persist. The 2.1% consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.... other economy is capable of filling the void left by a protracted shortfall of US consumption. Europe and Japan are in no position to take up the slack, and consumer sectors in the world’s major developing economies – especially China – lack the scale and dynamism to take over. So enduring weakness in US consumption implies pressure on the growth of export-led developing economies. The good news is that will force them to embrace long-overdue rebalancing strategies aimed at stimulating domestic consumer demand.

What can be done? While measures adapted in the depths of the crisis – massive fiscal and monetary stimuli – were effective in placing a bottom under the free-fall, they have been ineffective in sparking meaningful recovery. That should hardly be surprising in an era of balance-sheet repair.

Instead, the US needs a menu of policies tailored to the needs and pressures bearing down on American consumers. Some possibilities: debt forgiveness to speed up the deleveraging process; creative saving policies that restore financial security to crisis-battered Americans; and, of course, jobs and the income they generate.

The US economy – as well as the global economy – cannot get back on its feet without the American consumer. It is time to look beyond ideology – on the left as well as on the right – and frame the policy debate with that key consideration in mind.

2--Recovering From a Balance-Sheet Recession, LAURA D'ANDREA TYSON, New York Times

Excerpt: To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand brought on by the 2008 financial crisis that burst the debt-financed housing and spending boom preceding it.

This boom displayed all of the features of a major financial crisis in the making — asset price inflation, rising leverage, a large current account deficit and slowing growth. And the recession that followed had all of the features of what Richard Koo called a “balance-sheet” recession — a sharp decline in output and employment caused by a collapse of demand resulting from vast wealth destruction and painful de-leveraging by the private sector.

The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning....

Household debt has come down to about 115 percent of disposable income, largely as a result of foreclosures, 15 percentage points below its peak of 130 percent in 2007 but significantly higher than its 1970-2000 average of 75 percent. Household saving has risen to about 5 percent of disposable income, far above the 2005 low of 1.2 percent but far short of the 1970-2000 average of 8 percent

Consumption is the major driver of aggregate demand in the United States economy, and since early 2008 it has grown at an average rate of 0.5 percent in real terms. Not since before World War II has consumption growth been this weak for such an extended period.

Despite misleading claims by Republican members of Congress and by Republican candidates on the presidential campaign trail that the size of government, regulation and excessive taxation have caused the jobs problem, business surveys repeatedly have identified weak demand as the primary constraint on job creation.

As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.” ...

In other recoveries during the last 50 years, public-sector employment increased. This time it is falling: during the last year the private sector added 1.8 million jobs while the public sector cut 550,000.

What should policy makers do to combat the large and lingering job losses that result from a financial crisis and balance-sheet recession? Mr. Koo, whose book on Japan’s experience should be required reading for members of Congress, showed that when the private sector is curtailing spending, fiscal stimulus to increase growth and reduce unemployment is the most effective way to reduce the private-sector debt overhang choking private spending.

When the Japanese government tried fiscal consolidation to slow the growth of government debt in response to International Monetary Fund advice in 1997, the results were economic contraction and an increase in the government deficit. In contrast, when the Japanese government increased government spending, the pace of recovery strengthened and the deficit as a share of gross domestic product declined....

The market understands that the most important driver of the fiscal deficit in the short to medium run is weak tax revenues, reflecting slow growth and high unemployment, and that additional fiscal measures to put people back to work are the most effective way to reduce the deficit.

Every one percentage point of growth adds about $2.5 trillion in government revenue. An extra percentage point of growth over the next five years would do more to reduce the deficit during that period than any of the spending cuts currently under discussion. And faster growth would make it easier for the private sector to reduce its debt burden....

Under these conditions, slow growth leads to a higher debt ratio, not vice versa...

In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabilize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending.

This would translate into stronger private-sector demand and more jobs. Many economists, including me, warned in 2008 that the economy would not recover until the housing market recovered, and the housing market won’t recover until the debt overhang from the housing bubble is reduced through programs that shift some of the burden to creditors from debtors.

Increases in public spending along with housing relief and expansionary monetary policy helped the economy recover from the Great Depression in the 1930s. The same combination of policies can help the United States recover from the Great Recession now.

3--Household Debt Restructuring in U.S. Would Stimulate Growth, Reinhart Says, Bloomberg

Excerpt: A restructuring of U.S. household debt, including debt forgiveness for low-income Americans, would be most effective in speeding economic growth, said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington.

“Until we deal head-on with the fact that some of those debts are not ever going to be repaid, we will continue to have this shadow” over growth, Reinhart said today in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

The U.S. recovery faltered in the first half of 2011, with gross domestic product rising at a 1.3 percent annual rate in the second quarter and 0.4 percent in the first three months. Reinhart co-wrote a book entitled “This Time is Different: Eight Centuries of Financial Folly” with Harvard University professor Kenneth Rogoff focusing on the “deep and lasting effect” of financial crises on output, employment, and asset prices.

U.S. home prices will probably continue to decline, she said. Recent data indicate that the pipeline of foreclosures in the market is still weighing on the housing recovery.

4--Merkel: Markets Won’t ‘Blackmail’ Euro Leaders, Bloomberg

Excerpt: German Chancellor Angela Merkel said investors are trying to “blackmail” governments into helping debt-strapped European countries, underscoring the need for all euro-area governments to reduce debt.

“After the states bailed out the banks, the financial markets are again trying to blackmail states and tell them, ‘You’ve made so much debt,’” Merkel said today at a rally of her Christian Democratic Union in the eastern city of Brandenburg, about 50 kilometers (30 miles) from Berlin.

The solution is to press “countries that are highly indebted to really do their homework and get their debt down,” she said. “A Europe with a common currency requires common duties.”

Merkel is underlining her stand on the euro region’s debt crisis in local election rallies in August before national lawmakers vote next month on a second aid package for Greece and an expansion of the powers of the European Union’s crisis fund.

She stood firm in rejecting euro bonds, joint debt issuance by euro countries, which is supported by Germany’s two main opposition parties, the Social Democrats and Greens.

5--Keynes/Bernanke, Paul Krugman, New York Times

Excerpt: John Maynard Keynes:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Ben Bernanke:

These are tempestuous times, but when the storm is long past the ocean will be flat again.

OK, not a literal quote, but pretty much what he said.

6--The Unrecovery, Acknowledged, Paul Krugman, New York Times

Excerpt: One positive thing in Bernanke’s speech — I’m trying to look on the bright side — is that for what seems to me the first time he has more or less acknowledged that we are not, in any real sense, experiencing a recovery:

Notwithstanding these more positive developments, however, it is clear that the recovery from the crisis has been much less robust than we had hoped.

From the latest comprehensive revisions to the national accounts as well as the most recent estimates of growth in the first half of this year, we have learned that the recession was even deeper and the recovery even weaker than we had thought; indeed, aggregate output in the United States still has not returned to the level that it attained before the crisis. Importantly, economic growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment, which has recently been fluctuating a bit above 9 percent.

(see chart)

Does that look like a solid if slow recovery? Of course not.

Ideally, the realization that the economy is not healing would spur the Fed to take the kind of action Bernanke recommended a decade ago when Japan was similarly in a long-term trap.

7--The Heart of the Matter, The Big Picture

Excerpt:...We’ve gone, 14 quarters from the start of the recession, from an index value of 100 to a current index value of 100.7, which is an average annualized growth rate of 0.2 percent. Anemic. Given that consumer spending represents some 70 percent of GDP, a wobbly consumer — note the flatline over the past two quarters — is problematic. And at the risk of turning blue in the face, I’d point out yet again that we know small businesses cite “Poor Sales” as their number one single biggest problem. So, to the extent very little (anything?) has been done to help the consumer, the mess in which we find ourselves should come as absolutely no surprise.

Corporations, which are flush with cash, are spending that cash on such things as mergers, acquisitions, share buybacks, and dividend hikes. While that’s all well and good for the investor class, it does virtually nothing for Joe Six Pack on Main St....

...As the MLR points out:

Labor share averaged 64.3 percent from 1947 to 2000. Labor share has declined over the past decade, falling to its lowest point in the third quarter of 2010, 57.8 percent. The change in labor share from one period to the next has become a major factor contributing to the compensation–productivity gap in the nonfarm business sector....

While Labor Share has recently plummeted to all-time lows since record keeping began, Median Household Income has stagnated for the past 12 years. In the last recession (2001), incomes had only begun to decline. I’m sure back then no one contemplated the possibility that the decline would last (certainly not for a decade), credit was still widely available and, as we know now, being freely tapped (see the PCE chart above for evidence of how normal consumer spending remained during that period). One decade later, Labor Share has collapsed, incomes have gone nowhere, and credit availability — to say nothing of consumers’ attitudes toward it — has all but vanished except for the most creditworthy...

To add insult to injury, Output — or Productivity — has far outstripped Compensation since ’70s, no doubt due in very large part to advances in technology. The gap is even wider in the manufacturing sector of the economy (see Chart 6 in the MLR study). Producing more for less and with less has become a hallmark of good corporate management at the expense, of course, of the American worker. It is a lynchpin of the great American mantra of “maximizing shareholder value.”...

Have a look at U.S. May Back Refinance Plan For Mortgages on the front page of the NY Times. Now this is a proposal that may work — allowing the millions of homeowners who currently do not qualify for a mortgage refinancing the opportunity to do so. There is an estimated $2.4 trillion in mortgages that are currently yielding over 4.5% (and rates are at 4%). This plan would potentially free up $85 billion in cash flow for mortgage households, and that is equivalent to a 1% pay hike. [...]

The bottom line is the lack of refinancing response to lower rates has been a huge transfer of wealth from homeowners and government (they have credit risk) to holders of agency MBS. An effective refinancing program would level the playing field and would be a very effective policy tool and accentuate the impact of the Fed’s ultra low rate policy in terms of the transmission mechanism for the mortgage market. This could end up being big in terms of releasing vital cash flow to the household sector at a time of still-soft labour market conditions. Who ends up getting hurt? In all likelihood, MBS holders (holders of higher coupon MBS) would be the victims, but for a good social cause, don’t you think?

8--More Liquidity Only Douses Growth Sparks, Wall Street Journal

Excerpt: Today's ultralow interest rates have helped boost profits, but not economic growth.

This is plainly evident in recent figures. Since the recession ended in mid-2009, U.S. corporate profits have jumped by about 43% to a record $1.45 trillion as of the first quarter, after taxes, inventory and accounting adjustments, according to the Commerce Department.

What hasn't recovered, however, is economic growth. Indeed, in real terms, gross domestic product hasn't even returned to its prerecession peak.

On Friday, Commerce data is likely to show GDP losing further ground. Second-quarter growth, originally reported at a measly 1.3%, is expected to be revised down to 1% in part because exports proved weaker than first thought. That follows GDP growth of just 0.4% in the first quarter, on a seasonally adjusted annualized basis.

In other words, in real terms the economy barely expanded in the first half of the year. Profits, too, now look set to weaken, as Friday's second-quarter figures are expected to show.

This has occurred even as the Federal Reserve has pushed its target lending rate to zero and embarked on unprecedented "quantitative easing" measures meant to stimulate the economy.

And, on Friday, Fed Chairman Ben Bernanke in a speech from Jackson Hole, Wyo. might outline even further steps to be taken.

Unfortunately, the U.S. is suffering from a lack of demand, not liquidity. As a result, ultraloose Fed policy has exacerbated the dichotomy between profit and growth.

By and large, companies aren't holding back on hiring and investment because of a lack of funds. Cash piles are at all-time highs and corporate balance sheets are in much better shape now than after the last recession in 2001.

So, as BofA Merrill Lynch notes, super-low interest rates have mainly spurred companies to refinance existing debt at lower rates, which boosts their bottom line. Roughly two-thirds of "junk"-bond issuance since 2009, for example, has been put to this use, according to Barclays Capital.

Trouble is, companies aren't exactly putting these freed-up funds to productive use. Their cash levels continue to rise while hiring remains anemic and investment is showing signs of slowing. In short, it isn't a lack of fuel that is holding back the recovery—it is a lack of willing drivers.

9--(From the archives) "Will U.S. Consumer Debt Reduction Cripple the Recovery?", McKinsey Global Institute

Excerpt: "Between 2000 and 2007 US households led a national borrowing binge nearly doubling their outstanding debt to $13.8 trillion. The amount of US household debt amassed by 2007 was unprecedented whether measured in nominal terms, as a share of GDP (98 per cent) or as a ratio of liabilities to personal disposable income (138 per cent) But as the global financial and economic crisis worsened at the end of last year, a shift occurred; US households for the first time since WW2 reduced their debt outstanding.... We show that the hit to consumption from household debt reduction, or "deleveraging" will depend on whether it is accompanied by personal income growth.

“Over the past decade US household spending has served as the main engine of US economic growth. From 2000 to 2007 US annual personal consumption grew by 44 per cent, from $6.9 trillion to $9.9 trillion — faster than either GDP or household income. Consumption accounted for 77 per cent of real US GDP growth during this period — high by comparison with both US and international experience. The US spendthrift ways have fueled global economic growth as well. The US has accounted for one-third of the total growth in global private consumption since 1990.... Powering the US spending spree through 2007 were three strong stimulants; a surge in household borrowing, a decline in saving, and a rapid appreciation of assets." (Martin N. Baily, Susan Lund and Charles Atkins, "Will U.S. Consumer Debt Reduction Cripple the Recovery?" McKinsey Global Institute.)

10--The Wages of Destroying Labor Bargaining Power: Nearly 30% of Job Losses Due to Management Cutting Pie in Favor of Capital, Robert Gordon, Naked Capitalism

Excerpt: ....The first hangover was the excess supply of housing....

This led to a glut of unsold houses and condos that put continuous downward pressure on home prices. Foreclosures added to the glut; each foreclosure raises the supply of vacant housing units by one unit while increasing the demand for housing units by zero, because the foreclosed family has by definition defaulted on its mortgage and cannot obtain credit for several years into the future. Many homeowners avoided foreclosure but were “underwater,” with houses now worth less than the face value of the mortgage and thus faced the hapless choice of draining resources to pay the mortgages or defaulting, with the consequence of a ruined credit rating.

The second hangover was the impact of excessive indebtedness.

Just as consumption could exceed income as debts were being run up, so the second hangover required consumption to be below income while debts were paid off. The ratio of total household indebtedness to personal disposable income rose from 90% in 1995 to 133% in 2007 and has since fallen just to 120%. Year after year of saving and underconsumption will continue as households continue to pay off debts....

In contrast to the overall consumption shortfall – which continues to be as negative as in early 2009 – the total investment shortfall is somewhat smaller now....

Total government spending’s contribution to the output gap was positive in 2008, neutral in 2009, and has become increasingly negative (i.e., contributing to the overall shortfall in total GDP) since early 2010. The small positive contribution of the two federal government components has been more than cancelled by declining state and local spending.


A change in labour market dynamics accounts for about 3 million of the over 10 million missing jobs in mid-2011. This shift can be traced to weakness of labour and growing assertiveness of management. But even with the labour-market institutions of 1955 through 1985, the weakness of aggregate demand in the recession and recovery would have cost roughly 7 million jobs instead of the 10 million jobs that are actually missing compared to normal economic conditions such as occurred in 2007.

The recession itself is usually and correctly traced to the collapse of the housing bubble and the post-Lehman financial panic. But the recovery has been unusually weak, completely unlike the economy’s rapid bounce-back in 1983-84, and this requires an explanation as well. The best place to start is the double hangover approach, which explains not just the collapse of residential structures investment but also the continued and growing weakness in consumer spending. Perhaps the most surprising result of this essay is that the spending component responsible for the largest share of the missing jobs is not residential investment but consumer spending on services.

This is not the place to talk about remedies.

The spending decomposition shows that fiscal policy has failed in that the government spending sector has made the output gap shortfall worse, not better.

The double hangover theory helps to explain why monetary policy is impotent, no matter how much “Quantitative Easing” is attempted.

Authors including Hall (2011) focus on the zero lower bound as the crux of the Fed’s problem and ignore the complementary problem of low interest-insensitivity of consumers who are trying to pay off old debt instead of taking on new debt.

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