Tuesday, December 27, 2011

Today's links

Excerpt: Europe faces another year of dismal economic performance in 2012 that will weigh on global growth, but emerging markets and the United States should at least keep the world economy moving in the right direction.

There are several reasons why next year may be nothing to look forward to, according to Reuters polls from the last few months.

Many of the world's biggest developed economies are heading into recession, global stock markets look set to recoup only a fraction of their heavy losses in 2011, oil prices will head lower, and asset managers are unsure where best to invest.

And these could be the best-case scenarios.

Most economists base their assumptions on the hope that the euro zone's sovereign debt crisis will not boil over into a new global economic crisis, having already dented growth in major exporters to Europe....


The severe uncertainty surrounding 2012 is perhaps best reflected by Reuters' asset allocation poll of more than 50 leading investment houses in the United States, Europe and Japan.

Investors raised their cash balance to the highest in a year in December as they prepared for a jittery 2012, although they also moved back into cheap equities, Reuters polls showed on Monday...

, the Chinese economy is now growing at its weakest pace since 2009. In an effort to support it the central bank cut reserve requirements at the end of last month for the first time in three years.

Economists polled by Reuters after this move, however, said the People's Bank of China will refrain from more aggressive stimulative policies unless growth falls sharply to below 8 percent.

Similarly, India has been suffering from a pronounced slowdown in growth and Reuters polls suggest its central bank will also slacken monetary policy by mid-2012 to counter this, despite stubbornly high inflation. It could be in for a difficult year.

"Looking ahead, the economy faces the lagged effects of monetary tightening," said Leif Eskesen, economist HSBC in Singapore.

Excerpt: A new study has concluded that the FDA severely underrated the risk of contaminants in seafood following the BP oil spill of 2010, according to Environmental Health Perspectives (via Alternet).

The report, conducted by non-governmental scientists, says that 53 percent of Gulf shrimp samples tested revealed "levels above concern" of carcinogenic polycyclic aromatic hydrocarbons (PAHs).

Some cases showed carcinogenic levels up to 10,000 times more than what is considered safe.

This leaves pregnant women, children and big seafood eaters at risk to develop issues stemming from the consumption of these chemicals. Prenatal exposure to PAHs has been shown to lower IQs and increase the risk of asthma, heart malformations and low birth weight.

Excerpt: The European Central Bank's (ECB) unprecedented provision of a €489bn (£407.5bn) in cheap loans will "buy valuable time" for eurozone banks but has not improved their credit outlook, a director of Standard & Poor's (S&P) has warned.

He said the action did not "change the fundamental picture but it does buy valuable time". He added: "The move in itself will not lead to any improvement in (banks') credit ratings."

Earlier this month S&P put 15 of the 17 eurozone countries and some of their biggest banks on credit downgrade watch. The agency is expected to deliver a verdict on the credit watch in January....

Bondmarkets again showed the signs of stress. The yield on Italian 10-year bonds rose to 6.8pc - dangerously close to the 7pc bail-out level. While UK gilts benefited, the yield on Spanish and French bonds were pushed up too.

Excerpt: Venezuela has launched its energy assistance program for the seventh consecutive year, which helps poor Americans to pay for their home heating oil during the winter, Press TV reports.

The aid, which is provided by Citgo, a branch of the Venezuelan state oil company, PDVSA, will be received by more than 400,000 poor Americans next year, a Press TV correspondent reported on Thursday. 

Citgo's president, Alejandro Granado, has said that rising energy costs continue to affect millions of Americans, impairing their quality of life. 

Granado added that his company does not want the US families to be forced to choose between keeping their homes heated, and paying for other basic needs like food or medicines. 

“United States is not all roses like people think there are lots of people under poverty, below their standards” Oil industry analyst, Elio Ohep says. 

The heating oil program began in 2005, following the aftermath of hurricanes Rita and Katrina. The PDVSA's subsidiary has so far invested over 400 million dollars in energy assistance for US citizens facing economic hardship. 

Excerpt: The wealth of today’s super-rich is bound up with the destruction, not the development, of the productive forces. The riches of these few depend on the impoverishment of hundreds of millions. In fact, the Financial Times reported last week that “the share of US national income that goes to workers as wages rather than to investors as profits and interest” has fallen to its lowest level since the end of World War II. The precipitous fall of the workers’ share of the national income below the post-war average translates into an annual collective wage loss in 2011 of $740 billion—approximately $5,000 per worker. That staggering amount has been funneled into the salaries and investment accounts of the super-rich.

Despite this fact, the indignant rich argue that it would make no economic sense to disturb their wealth. But every day, in the United States and throughout the world, the media they own and the politicians they bribe demand and implement cuts in wages and the slashing of budgets that fund essential social services.

The economic and social crisis in the United States and throughout the world cannot be addressed by reforms, such as a change in tax rates, which seek within the framework of capitalism a less irrational distribution of the national income. However justified such a measure would be, if only as an initial step toward more fundamental change, the lords of Wall Street and the corporate conglomerates will not accept any reform that threatens their domination of economic life and pursuit of limitless personal riches. Like all ruling classes whose interests are antagonistic to the needs of society as a whole, they will defend what they perceive to be their interests without restraint and without mercy. This is the social instinct that underlies the lowering of workers’ living standards, the systematic erosion of democratic rights, and the ever-more reckless resort to war as a means of securing the ruling elite’s global economic interests.

Excerpt: Fortunately, there has been a great deal of new research that sheds light on the effects of fiscal policy in settings where monetary policy does not respond aggressively. Some of it uses evidence from the crisis itself, but much does not; some focuses on a particular country, usually the United States, but some uses larger samples; and a considerable body of the work looks at evidence from different regions within a country, again usually the United States. One particularly appealing aspect of this last set of studies is that because monetary policy is conducted at the national level, it is inherently being held constant when one is looking at within-country variation.

Collectively, this research points very strongly (though, I should say, not unanimously) to the conclusion that when monetary policy does not respond, conventional fiscal stimulus is effective.3 And a careful examination of the evidence gives no support to the view that when monetary policy is constrained, fiscal contractions are expansionary (International Monetary Fund, 2010).  Even so, I find two types of evidence that predate the crisis even more compelling. The first comes from wars. The fact that the major increases in government purchases in the two world wars and the Korean War were associated with booms in economic activity, and that those booms occurred despite very large tax increases and extensive microeconomic interventions whose purpose was to restrict private demand, seems to me overwhelming evidence that fiscal stimulus matters.

The other type of evidence is more general evidence about the functioning of the macroeconomy. We know that monetary policy has powerful real effects, which means that aggregate demand matters. We know that current disposable income is important to consumption. And we know that cash flow and sales have strong effects on investment. It would take a strange combination of circumstances for those things to be true but for fiscal policy, which one would expect to work through those channels, not to be effective.

Given this wide range of evidence—not to mention the large body of pre-crisis work on the effects of fiscal policy that I have not even touched on—I think we should view the question of whether fiscal stimulus is effective as settled.

7--EZ credit update, macronomyblogspot

Excerpt: My good credit friend and I discussed the following in relation to the latest IMF involvement or the rescue funds:

"To repeat what we discussed in our last conversation, neither the IMF nor the rescue funds can sort the solvency problem out. France is about to be downgraded, bringing down the EFSF structure. So anyone who thinks that the EFSF and the ESM will run in parallel has it wrong. Of course the ESM will remain, but its firepower will be far less than the Euro 500 billions earmarked, not enough to rescue all the peripheral countries under pressure. Of course, the IMF may help sovereigns funding issues but, it will do in accordance with specific rules: liquidity issues will be faced, solvency one will not. While we do not foresee major problems right now for the core European countries, the environment could change very quickly."

As the Head of the Canadian Central Bank just declared, “developed economies have regularly increased their debt leverage over dozens of years. But this period is now over. If the deleveraging trend is now clear, the speed and size of the process are not. This process could last and be done in an orderly way, or be abrupt and disorderly.”

Simon Johnson, who served as chief economist at the International Monetary Fund in 2007 and 2008, and is now a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics, had an interesting column in Bloomberg relating to the IMF involvement in the European Sovereign debt crisis on the 19th of December - IMF Bazooka Is Between Meaningless and Dangerous:

"Today’s proposed bazookas are about providing enough financial firepower so that troubled European governments do not necessarily have to fund themselves in panicked private markets. The reasoning is that if an official backstop is at hand, investors’ fears would abate and governments would be able to sell bonds at reasonable interest rates again. 

This idea is just as dubious as Paulson’s original notion. Markets are so thoroughly rattled that if a financial backstop is put in place, it would need to be used -- probably to the tune of trillions of euros of European debt purchases from sovereigns and banks in coming months. Whether or not it is used, a plausible bazooka would need to be huge."

Simon Johnson also adding:
"Even if the IMF went all in for troubled Europe -- an idea with little support in emerging markets -- it wouldn’t make much difference. Italy’s outstanding public debt of 1.9 trillion euros is bigger than that of Greece, Ireland, Portugal and Spain combined. The country faces about 200 billion euros in bond maturities in 2012 and an additional 108 billion euros of bills, according to Bloomberg News. The euro area’s 2012 sovereign funding needs are estimated at more than $1 trillion next year alone, and any credible financing plan needs to fully cover 2012 and 2013 at a minimum. It remains unclear who is willing to fund European banks in this stress scenario. 

The idea that the IMF could tap emerging markets for additional capital to lend to Europe is met with polite public demurrals. Behind closed doors, it’s not so polite....

"Eighty years ago, most prominent officials and private financiers were confident that the gold standard should and would remain in place. Starting in 1931, the gold standard failed as a global financing system, with unpleasant consequences for many. 

As 2011 draws to a close, the age of the global bailout also seems to be fading. Perhaps the Europeans will find a way to scale up their own rescues using their own money. Perhaps they will manage to protect creditors fully, and convince investors to lend to Italy again. More realistically, the bazooka standard is about to collapse."...

In addition to being a political symbol, the Euro was supposed to offer two irresistible benefits to its members: (1) the Deutsche Mark’s low interest rates for everyone and (2) no more exchange rate volatility within the Eurozone.

Until 2008, the first benefit (lower interest rates) kept its promises. Italy’s yield spread against Germany went from 12% in 1982 to a mere 20bp in 2007. It actually worked so well for some countries that it led to huge housing bubbles, consumer credit bubbles and fiscal largesses, as deficits were easy to finance. Unfortunately, as we can see nowadays, these were all sources of phantom growth, i.e. growth that resulted from stealing from the future and not from increasing productivity. The debt crisis in the Eurozone is a direct result of this unchecked debt bubble.

The Euro’s second “benefit” (no more currency volatility) created another imbalance that will probably be even more painful to resolve than the first one. Since the last competitive devaluations of the early nineties, we have witnessed a huge divergence of Eurozone members’ unit labor costs

Interestingly, we can notice that the five countries whose unit labor costs grew the most are the PIIGS. This is probably not a coincidence. Low labor competitiveness hurts the economy, thus lowering tax revenues, while public spending is used to hide the underlying decline of the economy. This leads to a degradation of the fiscal situation.

In a nutshell, labor forces in many Eurozone countries are now getting paid in a currency that is vastly overvalued compared to their productivity (this can also be seen in the degradation of the trade balance of many European countries including France).

To restore to competitiveness of PIIGS (and to a lesser extent France and Belgium), labor costs will therefore have to decrease significantly....

The ECB could crash the Euro. Monetizing huge amounts of sovereign debt would contribute to this (in addition to solving the liquidity situation of PIIGS). However, Germany and other countries that are already competitive will oppose this. Additionally, it would not solve the structural problem of unit labor cost divergence, which would inevitably lead to new crises further down the road.

It is difficult to predict what path (or combination of paths) will be chosen by politicians. The one thing we strongly believe is that, whatever the path, real aggregate demand is going to crash a lot further in large parts of the Eurozone. Growth expectations remain way too optimistic.

This is why we consider that Europe’s P/Es of 8 are not cheap by any standards, and that the Euro is poised to fall against other currencies."

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