Wednesday, February 22, 2012

Today's links

1--Margins Improve at U.S. Companies as Wages Lag, Bloomberg

Excerpt: Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services.

The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.

“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.”

While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.

“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”

Of the 394 companies in the Standard & Poor’s 500 Index that have reported since Jan. 9, earnings for the quarter ended Dec. 31 increased 5.1 percent on average and beat analyst estimates by 3.2 percent. Some 70 percent of the companies have posted better-than-projected results.

Corporate profits in the U.S. reached a record $1.97 trillion in the third quarter of 2011, according to the most recent data from the Commerce Department. That’s up 1.7 percent in the third quarter from the previous three months and 7.5 percent higher than the same period in 2010.

2--Fed: U.S. Inequality Rose to Record in ’10, Bloomberg

Excerpt: Inequality of earnings in the U.S. rose to a postwar high even as transfers of wealth, such as unemployment benefits, reached a record in 2010, according to the Federal Reserve Bank of Minneapolis.

“The bottom 20 percent of the U.S. population has never done so poorly, relative to the median, during the whole postwar period,” Fabrizio Perri and Joe Steinberg wrote in a paper released today by the Minneapolis Fed. “Low-earning households have become, during the course of the Great Recession, more vulnerable due to large losses in wealth.”

Money earned by the bottom 20 percent of U.S. households fell by about 30 percent compared with the median during the recession as workers lost their jobs or decided to leave the labor market, according the Minneapolis Fed study.

After Paying Taxes

Households that were in the bottom 20 percent of earnings in both 2006 and 2008 experienced a $159 decrease in disposable income, or money available after paying income taxes, said the Minneapolis Fed’s Perri, a consultant, and Steinberg, a research analyst. Those that moved into the bottom quintile from a higher-earning category had $12,236 less to spend in 2008 than in 2006, the study found.

“Although government redistribution policies -- taxes, unemployment insurance and others -- have provided an important cushion against the effect of earnings declines on disposable income and consumption, they have not fully shielded households’ disposable income from these earnings fluctuations,” Perri and Steinberg said.

“This further suggests that the Great Recession could have indeed had major redistributive effects at the bottom of the distribution,” they said.

3--Anonymous Hacks Greek Ministry Website, Demands IMF Withdrawal, Threatens It Will Wipe Away All Citizen Debts, zero hedge

Excerpt: GreeceInternational Monetary Fund

If there is one war that Greece could not afford to join, that is with the global computer hacking collective known as Anonymous. Yet as of minutes ago, that is precisley what happened, after Anonymous, as part of what it now calls Operation Greece, took down the Greek Ministry of Justice ( While the pretext for the hacking appears to have been an arrest of the wrong people, is seems to have angered Anonymous to the point where they have left an extended message of demands on the Greek website, warning that unless the IMF withdraws from the country and the government resigns, all debts of Greek citizens will be wiped clean.

4--"It’s Obvious Where Profits Have Come From", economist's view

Excerpt: Menzie Chinn says "there is substantial space for rising wages":

Competitiveness, and the Bush Tax Cuts and Deficits, by Menzie Chinn: The Administration released the annual Economic Report of the President on Friday. Many topics were covered, but here I’ll remark upon a few issues, motivated by several graphs.

First is price markup over unit labor cost. The interesting trend since 2001 has been the rise in this variable.(chart)

From this graph, one would be hard pressed to find American business in terrible shape. Productivity has increased, labor compensation growth has been modest, so that it’s obvious where profits have come from. This also means (to me) that there is substantial space for rising wages to be absorbed without a commensurate wage-price spiral. ...

5--Partying Like It’s 1934, Paul Krugman, NY Times

Excerpt: A while back I read Lionel Robbins’s 1934 book The Great Depression; as I pointed out, it was a Very Serious Person’s book for its era. Its solution was a return to the gold standard — which would have made things worse — and free trade, which was basically irrelevant to the problem of insufficient demand.

So have the VSPs learned anything these past 78 years? No.

When I read headlines about the call by European leaders for action to stimulate growth, I wondered for just a second whether there was a crack in the austerian consensus. But noooo. The answer of the leaders to a severe shortage of demand — the private sector simply isn’t spending enough — is, wait for it, deregulation and trade liberalization.

This is not so much a bad idea as an irrelevant one. What would it do to reduce the burden of household debt? What would it do to narrow the destructive German surplus?

The beginning of any understanding of macroeconomics is the realization that what’s good from a micro point of view can often be irrelevant or even harmful from a macro point of view when the economy is depressed. But that hard-won insight has now been willfully forgotten.


6--Things Not to Love About the Mortgage Settlement, CEPR

Excerpt: 1) It is not clear what baseline is being used to determine how much is being paid. The banks are already doing some amount of modifications, principle reductions, and short sales. It is not clear how it will be determined that they are going beyond what they would have done anyhow as a result of the settlement. This means that it will be difficult to determine that the $17 billion in write-downs stipulated in the settlement have actually taken place.

2) The banks will be able to count write-downs of loans that they are servicing against this sum. These losses will come out of the pockets of the investors in mortgage backed securities, not the banks' pockets. This means that the defendant in a civil case is effectively being allowed to pay its penalty with someone else's money. This is at the least unusual.

3) It is far from clear that the foreclosure abuses that are the basis for the case have been put to an end. An audit of 400 recent foreclosures conducted in San Francisco County indicates that abuses are still pervasive. It is unclear that the servicers are prepared to change their practices and that the attorneys general will take further steps if they do not.

There are many other reasons for criticizing the settlement, but those are my big three. These points were not acknowledged in Nocera's column praising the settlement.

7--More on the Greek bailout, trimtabs

Excerpt: Greece was bailed out yesterday. Or so the headlines blare. In reality all that will be happening at some point in the near future is that the European Governments will give Greece enough money to pay back the European banks a portion of the money Greece owes those banks. In exchange Greece agrees to retrench its public sector and raise more money from everyone else. As if that will ever happen.

In other words this is nothing more than a public relations sham.

The secret to understanding what really is going on is to figure out who benefits from the movement of money. In this case it is the European banks. The European banks and their good buddies in the their governments are hoping to keep alive the game of make believe, particularly the part where Portugal, Spain and Italian government bonds owned by the banks are not worthless.

What makes a governments debt worthless? If a country has a negative cash flow, meaning it spend more than it takes in taxes, and it looks as if that negative cash flow will continue in perpetuity, that country’s debt is obviously worthless. That debt will never be repaid except via printing more paper. What would you call debt that will be never repaid, except worthless?

Almost all of Europe other than Germany has a negative cash flow. That means that almost all of Europe needs to borrow more than it is generating in tax revenue.

As for yesterday’s deal, there is no benefit to Greece. The only thing I can see what Greece gets out of this deal is that the Greek bankers and politicos are saving their butts at the expense of the rest of country.

8--Oil rallies 2.5% on Iran tensions, Greek deal, marketwatch

Excerpt: Futures settle at nine-month high, near $106 a barrel.

Crude-oil futures rallied 2.5% on Tuesday to settle at a nine-month high, pushing past $105 a barrel on fears of more supply disruptions from Iran’s latest move and as traders cheered Greece’s second bailout.

The supply concerns took hold after Iran announced Monday it cut off oil sales to the U.K and France. Earlier Tuesday, European authorities agreed on a Greek bailout package

The contract surged as settlement time approached, trading as high as $106.07 a barrel.

“This is just a big infusion of speculative capital,“ said Jim Ritterbusch, president of advisory firm Ritterbusch and Associates in Illinois.

9--EU Should Admit Greece is Bankrupt, Der Speigel

Excerpt: Greece is bankrupt and will need a 100 percent debt cut to get back on its feet. The bailout package about to be agreed by the euro finance ministers will help Greece's creditors more than the country itself. EU leaders should channel the aid into rebuilding the economy rather than rewarding financial speculators for their high-risk deals.

The mistake isn't the size, but the construction of the bailout package. It isn't geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.

How else can one explain the fact that around a quarter of the package won't even arrive in Athens but will flow directly to the country's international creditors? The holders of Greek government bonds are to get some €30 billion as an incentive to convert their old paper into new bonds. The aim is to keep alive the illusion that Greece isn't bankrupt -- after all, the creditors are voluntarily forgiving part of the debt. The financial sector is cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction.

That leaves €100 billion. But that too isn't geared to what Greece needs in order to get back on its feet. It's linked to an estimate of how much debt the Greek economy can bear without collapsing. International technocrats agree that with debts amounting to 120 percent of gross domestic product, the country can just about go on servicing its debt. That's the level at which the cow can go on supplying milk without dying of exhaustion. So 120 percent became the goal.

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