Tuesday, June 19, 2012

Today's links

Today's quote:   “When people are prepared to pay the German government for the privilege of holding its two-year paper, and are willing to lend America’s government funds for a decade for a nominal yield of less than 1.5 percent, they either expect years of stagnation and deflation or are terrified of imminent disaster. Whichever it is, something is very wrong with the world economy. That something is a combination of faltering growth and a rising risk of financial catastrophe.” The Economist

1--The Left, and People Who Know Arithmetic, Always Said the Stimulus Was Inadequate, CEPR

Dana Milbank devoted his column to the disenchantment of progressives with the current political situation. At one point he comments that:

"the still-lumbering economy has depressed President Obama’s supporters."

While this is no doubt true, it is worth mentioning that just about all progressives said at the time that the stimulus would be inadequate to restore the economy to a healthy growth path. The collapse of the housing bubble destroyed close to $1.2 trillion in annual demand from construction and consumption. At its peak in 2009 and 2010 the stimulus only replaced about $300 billion in annual spending.

It is discouraging to see so many people suffering unnecessarily, but this outcome is exactly what our analysis predicted at the time. Unfortunately, having a track record of being right is not generally a factor in determining which views carry weight in Washington policy debates.

2--Breaking ’08 Pledge, Leaked Trade Doc Shows Obama Wants to Help Corporations Avoid Regulations, Democracy Now

A draft agreement leaked Wednesday shows the Obama administration is pushing a secretive trade agreement that could vastly expand corporate power and directly contradict a 2008 campaign promise by President Obama. A U.S. proposal for the Trans-Pacific Partnership (TPP) trade pact between the United States and eight Pacific nations would allow foreign corporations operating in the U.S. to appeal key regulations to an international tribunal. The body would have the power to override U.S. law and issue penalties for failure to comply with its ruling. We speak to Lori Wallach, director of Public Citizen’s Global Trade Watch, a fair trade group that posted the leaked documents on its website. "This isn’t just a bad trade agreement," Wallach says. "This is a 'one-percenter' power tool that could rip up our basic needs and rights...

We turn now to a controversial trade pact between the United States and eight Pacific nations that until now has remained largely secret. It’s called the Trans-Pacific Partnership, or TPP. A chapter from the draft agreement leaked Wednesday outlines how it would allow foreign corporations operating in the United States to appeal key regulations to an international tribunal. The body would have the power to override U.S. law and issue penalties for failure to comply with its rulings.....

LORI WALLACH: Well, it’s been branded as a trade agreement, but really it is enforceable corporate global governance. The agreement requires that every signatory country conform all of its laws, regulations and administrative procedures to what are 26 chapters of very comprehensive rules, only two of which have anything to do with trade. The other 24 chapters set a whole array of corporate new privileges and rights and handcuff governments, limit regulation. So the chapter that leaked—and it’s actually on the website of Citizens Trade Campaign, it’s a national coalition for fair trade—that chapter is the chapter that sets up new rights and privileges for foreign investors, including their right to privately enforce this public treaty by suing our government, raiding our Treasury, over costs of complying with the same policies that all U.S. companies have to comply with. It’s really outrageous

3--Household net worth shrinks 35% from 2005, Housingwire

The housing bust cut the median household net worth to $66,740 as of 2010 from $102,844 in 2005, according to Census Bureau data released Monday.

"The overall decline in net worth reflects drops in housing values and stock market indices," said Census Bureau Economist Alfred Gottschalck.

Middle-class Americans of all age groups and education levels suffered the worst blow because so much of their net worth is tied to the equity in their home. National home prices remain 35% below the peak in 2006, according to the Standard & Poor's/Case-Shiller index.

Excluding equity, the median net worth actually increased to $15,000 in 2010 from $13,859 in 2009.

Some lost a much larger percentage of their worth than others.

Households between the ages of 35 and 44 saw net worth slashed by 59%, compared to a 37% decline for those younger than 35 and a 13% drop for those aged 65 years or older.

Those with a high school diploma saw net worth fall 39%. But even those with a bachelor's degree had a 32% decline.

In 2000, those who completed college had twice as much net worth as those who did not. In 2010, the gap was 3.5 times as large

4--IFR Comment: Time to activate the SMP in euro crisis?, IFR

Market attention is now turning to the point at which the ECB will reactivate the dormant SMP. Some suggest that the trigger for ECB action will be a break of 7.50% on the Spanish 10-year. The factors are a little more complicated than just picking out a yield trigger....

The bailout announced last weekend was once again country specific and did not deal with the wider demands (even from the ECB) for a wider safety net for financials.

On this basis it might take a 7.5% or even an 8.0% handle on the Spanish 10-year to galvanise a political crisis response but a yield level will not be a trigger in itself.

The ECB will eventually come in via SMP but it won’t be until there is a political plan in place and this is unlikely to be effective until there is a further sell-off on Spanish bonds.

One can only hope that concerns and pressure from G20 policy makers will make for a different outcome to the above script that has played out for Greece, Ireland and Portugal.

5--The threat of deflation, comstock partners,  pragmatic capitalism

We have long maintained that a debt bubble followed by a credit crisis leads to a deflationary recession or depression and a major secular bear market. Nevertheless, a lot of smart analysts who agree with us on the existence of a secular bear market argue that actions taken by the monetary and fiscal authorities lead to severe inflation rather than deflation. While their case is logical and well-reasoned, we disagree as we will explain in this report. We emphasize, however, that, in either case, the result is a major lengthy bear market.

When a debt bubble bursts, the need to pare down the debt to more normal levels (deleveraging) can be accomplished through either inflating the way out or paying it down. A third alternative—-declaring bankruptcy and writing the debt off—- is so drastic that it would happen only if and when the first two alternatives were to fail....

He first pointed out why he felt that deflation had to be avoided. He defined deflation as a general decline in prices caused by a collapse in aggregate demand so severe that producers must cut prices to find buyers. The effects of a deflationary episode are recession, rising unemployment and financial stress, resulting in nominal interest rates of close to zero. At that point, since the nominal rate cannot go below zero, the “real” rate becomes the expected rate of deflation. Therefore the real costs of borrowing becomes high enough to discourage spending, worsening the downturn. All of this puts stress on the nation’s financial system, increasing defaults, bankruptcies and bank failures....

Bernanke also added that fiscal policy could help through broad-based tax cuts and increased government spending. He said, “A money-financed tax-cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” The government could also issue debt to purchase private assets. If “the Fed then purchases an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets”.....

Although we understand and respect the view of those believing in an inflationary outcome, we disagree for the following reasons. Both private and government debt are far too high and must be deleveraged.  Federal debt soared from 32% of GDP in 1982 to 101% on March 31 of this year.   It was about 60% as late as 2000, and has since taken off.  Although the level of federal debt has received most of the media and Wall Street attention, the level of household debt, which is equally or even more relevant, bore greater responsibility for the credit crisis.  Household debt climbed from about 30% of GDP in 1955 to 98% in 2008, and has since fallen back to 84% as of March 31. (Please see chart below)  The 60-year average was 55%, and was at 66% as late as 200.....

The question facing us is whether a combination of monetary and fiscal policy can stop the negative feedback from happening and actually lead to severe inflation, as many think. Although we cannot be dogmatic about it, our answer is: probably not. Despite TARP, the early 2009 fiscal stimulus, near-zero interest rates, QE1, QE2, “Operation Twist” (the Treasury bond purchasing program) and a myriad of other actions taken by the Fed, Congress and the administration, the recovery has been extremely sluggish and now seems to be turning down once again. Once again the Street is abuzz with talk of more Fed easing. However, the easiest and most reliable measures have already been taken and any remaining weapons are unorthodox, untried and subject to unknown negative side effects.

The problem is that the Fed can take their horse to water, but they can’t make him drink. Since 2008 they have already tripled the monetary base, the item they control most directly, without a commensurate increase in money supply. The money supply divided by the base is called is called the money multiplier. Since 2008 the money (M2) multiplier has dropped from slightly under 9 to 3.7. The pattern is similar whether one uses M1 or MZM. Simply put, the huge increase in the base has induced a relatively small increase in the money supply. In turn, the increased money supply has not resulted in commensurate increase in GDP. The GDP divided by the money supply is called the velocity of money. Velocity has also dropped sharply in the last few years. Therefore, when taken together, all of the government efforts to stimulate the economy since late 2008 have resulted only in a tepid recovery that is showing signs of petering out.

In our view, it is the overwhelming force of the debt deleveraging that has overcome government efforts to inflate. We have pointed out that household debt has dropped to 84% of GDP from its peak of 98% in 2008. After rising for 284 consecutive quarters from the end of WW II to mid-2008, household debt has now declined for the last 16 quarters. This is an astounding number, indicating a great change in the economy. It still has a long way to go in order to reach the 66% level of 2000, let alone the 60-year average of 55%. Households, therefore, have to continue to increase savings and reduce spending for, perhaps, years to come to get their balance sheets in order. Since this reduces the demand for goods and services, businesses have little reason to hire new workers or increase capital expenditures. Since household spending accounts for 70% of the GDP, the negative effects are felt throughout the economy.

Under these circumstances, we believe that inflation cannot take hold in the real world. Businesses feel minimal pressure from rising wages and have no compelling need to raise prices. Even if they tried, consumers would not have enough income to pay the higher prices and would resist, forcing producers to rescind whatever price increases they try to put through.

Even now, there are straws in the wind indicating that the world may be headed for deflation. The economy is once again slowing down from a growth rate that was already mediocre. Recently we have seen lower-than-expected results or actual declines in GDP, job growth, retail sales, income growth, core capital goods orders, vehicle sales and initial unemployment claims. There is uncertainty on tax rates, a dysfunctional congress, a contentious election and the so-called “fiscal cliff”. Treasury bond rates are the lowest since at least the Eisenhower administration and in some cases on record. Commodities are declining worldwide. Globally, we are witnessing a recession and sovereign debt crisis in Europe, the increasing possibility of a hard landing in China, and weakness in Japan, India, Brazil and a number of other emerging nations.

In sum, we think that the global forces behind deleveraging have more firepower than the all of the world’s central banks and governments together, and that deflation is a much more likely outcome than major inflation. At the same time we recognize that a lot of smart people make a logical case for inflation. In either case, however, the outlook for the market is exceedingly bearish.

6--Housing doldrums, pragmatic capitalism

The U.S. banking system has recovered markedly since the crisis (Char t 12), as suggested by the results of the 2012 U.S. bank stress test. However, the recovery is still being hampered by the continuing malaise in the residential housing market. Banks in the United States have maintained the same level of exposure to residential real estate—around 40 per cent of their total loan books—since 2006.

The housing market has remained weak since December, and house prices are about 30 per cent below their pre-crisis peaks. About 10 per cent of housing-related loans are either delinquent (i.e., 30 days or more in arrears) or in some stage of foreclosure (Chart 13). In addition to non-performing housing loans, U.S. banks hold a sizable number of “real estate owned” (REO) properties, which are part of the U.S. shadow housing inventory.

7--A Global Perfect Storm, Nouriel Roubini, Project Syndicate

8--Obama’s cynical gesture to immigrant youth, WSWS

In the course of his 2008 election campaign, Obama fostered hopes among immigrant workers and youth of a more humane immigration policy. Once in office, however, his administration has driven immigration enforcement to new heights of brutality. By 2011, the Department of Homeland Security was deporting 400,000 immigrants a year, an all-time record. Since Obama entered the White House, his administration has deported an estimated 1.2 million immigrants.

In his statement Friday, Obama claimed that he changed the policy because, “It’s the right thing to do.” To encourage illusions that he was willing to fight for comprehensive reform, he called it “a temporary, stopgap measure that lets us focus our resources wisely while giving a degree of relief.” This couldn't be farther from the truth.

On immigration, as on countless other issues, Obama dropped his election promises and pursued a policy just as right-wing as that of the Bush administration, if not even more reactionary. In 2008, Obama won two-thirds of the Latino vote, but polls now show that 59 percent of Hispanic voters disapprove of the administration’s merciless deportation policy.

Thus, after three years of devoting massive federal resources to enforcing immigration laws and deporting undocumented workers, Obama has now dusted off his “moral” compass and declared his sympathy for undocumented immigrant youth. Where was this sympathy before June 15, 2012? The executive order Obama announced that day could have been issued on January 20, 2009, when he took office.

The order to temporarily halt certain types of deportation is one of a series of actions, like Obama’s supposed “evolving” position in support of gay marriage, in which the White House has made a conveniently timed embrace of a policy appealing to part of the electoral base of the Democratic Party in an effort to disguise its consistently reactionary and anti-working-class record.

For their part, the Republicans have pandered openly to racist and anti-immigrant bigotry. During the Republican primary campaign, Romney and his rivals denounced any lessening of the repression of immigrants and sought to outdo each other in demanding higher and longer fences along the US-Mexico border.

In fact, there are no significant or principled differences between the two big business parties on the question of immigration. Both uphold the persecution of immigrants and oppose any extension of democratic and citizenship rights. Both parties do the bidding of the financial aristocracy, which profits financially from the super-exploitation of immigrant workers and profits politically from dividing the working class along ethnic and language lines.

The Socialist Equality Party upholds the principle of the international unity of the working class. The working class is the only social force whose interests are not tied to the maintenance of national borders. We reject the “America First” chauvinism of the Democrats, Republicans and trade unions. We call for full democratic rights for all undocumented workers, including citizenship for those who want it. Workers must have the right to live and work in whatever country they choose, without discrimination or persecution.

9--Dear Mr. Dimon, Is Your Bank Getting Corporate Welfare? Bloomberg

When JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon testifies in the U.S. House today, he will present himself as a champion of free-market capitalism in opposition to an overweening government. His position would be more convincing if his bank weren’t such a beneficiary of corporate welfare.

To be precise, JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fund and our own analysis of bank balance sheets. The money helps the bank pay big salaries and bonuses. More important, it distorts markets, fueling crises such as the recent subprime-lending disaster and the sovereign-debt debacle that is now threatening to destroy the euro and sink the global economy.

How can all this be? Let’s take it step by step.

In recent decades, governments and central banks around the world have developed a consistent pattern of behavior when trouble strikes banks that are large or interconnected enough to threaten the broader economy: They step in to ensure that all the bank’s creditors, not just depositors, are paid in full. Although typically necessary to prevent permanent economic damage, such bailouts encourage a reckless confidence among creditors. They assume the government will always make them whole, so they become willing to lend at lower rates, particularly to systemically important banks.

Implicit Subsidy

With each new banking crisis, the value of the implicit subsidy grows. In a recent paper, two economists -- Kenichi Ueda of the IMF and Beatrice Weder Di Mauro of the University of Mainz -- estimated that as of 2009 the expectation of government support was shaving about 0.8 percentage point off large banks’ borrowing costs. That’s up from 0.6 percentage point in 2007, before the financial crisis prompted a global round of bank bailouts.

To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country’s largest banks, including JPMorgan, Bank of America Corp. and Citigroup Inc. The result: about $76 billion a year. The number is roughly equivalent to the banks’ total profits over the past 12 months, or more than the federal government spends every year on education.

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