Tuesday, August 7, 2012

Today's links

1--The euro bailouts and the crisis of democracy in Europe, WSWS

The new French president, François Hollande, is continuing the anti-working class policies of his predecessor, Nicolas Sarkozy, offering no opposition to mass layoffs in the auto industry. In Greece, Syriza has assumed the role of loyal opposition, while the government coalition of the conservative New Democracy, social democratic PASOK and Democratic Left is imposing even more brutal austerity measures.

Monti gave his interview after a week in which anti-worker austerity measures were intensified throughout Europe. The Greek government has decided on further cuts of €11.5 billion, which will deepen the suffering of already devastated workers and pensioners. The Spanish government has increased its previous deficit-reduction target by 60 percent and now aims to cut the massive sum of €102 billion from the budget, throwing the country back to the poverty of the Franco era.

The European Central Bank has decided to support countries—through the purchase of government bonds—only if they have previously made an application to the European emergency aid fund and submitted to EU-dictated austerity measures.

This is provoking widespread opposition. In Spain, hundreds of thousands took to the streets against the government's austerity measures. The trade unions are finding it increasingly difficult to keep this anger under control. Neither in Spain nor Greece, nor in any other European country, are the workers willing to accept the destruction of all their gains without a fight.

Under these circumstances, Monti’s comment underscores the basic class agenda of the European bourgeoisie: to press ahead with the policies of the banks, whatever the outcome of elections or the size of street protests and strikes against austerity measures.

Monti knows well that the social counterrevolution demanded by the international financial markets is incompatible with democratic methods. He leads a government of technocrats that has no democratic legitimacy. Monti—an economics professor, advisor to Goldman Sachs and member of several conservative think tanks (Bruegel, Bilderberg Conference, Trilateral Commission)—is a trusted representative of international finance capital. At its behest, he succeeded the Berlusconi government last November without the holding of an election because Berlusconi had failed to cut the budget quickly and deeply enough.

Since then, the Monti government has systematically attacked the social gains and rights won by Italian workers since the fall of the fascist dictatorship of Mussolini at the end of World War II. It has reduced pensions, increased consumption taxes and eliminated legal protections against dismissal and other social rights.

Political conclusions must be drawn from Monti's statement that the break-up of Europe can be prevented only if governments repudiate democratic procedures. The working class cannot defend its rights and social gains within the reactionary framework of the European Union.

The views of Monti’s immediate opponents on European financial policy—German politicians who have criticized his remarks as an attempt to “weaken democratic legitimation,” in the words of Foreign Minister Guido Westerwelle—are equally hypocritical and reactionary. Berlin has consistently sought to impose devastating cuts, notably on the Greek government, in total defiance of popular opinion in Greece and other European countries. It has, moreover, led the campaign to establish a de facto EU dictatorship over the fiscal policies of euro zone governments.

This underscores that the EU, as a whole, is an instrument for the subjugation of Europe to the dictatorship of competing cliques of finance capital. It can be neither reformed nor pushed to change course by protests and negotiations.

2--.The low-wage, no-raise economy, WSWS

There is ample reason to doubt whether the jobs report accurately describes the real situation in the labor market. A separate report by the Labor Department, based on its survey of households, found a decline of 195,000 jobs in July. Moreover, the BLS figure of a rise in 163,000 jobs was based on raw data showing a decline of 1.2 million jobs, which was seasonally adjusted to yield an increase. This may well be overstated because the historical pattern for July is heavily influenced by the traditional auto industry changeover period, which did not take place this year.

More significant than the exact number of jobs created or lost in July is the quality of those jobs. The vast majority of the new jobs created in the course of 2012 have been part-time or low-paying or both. Full-time jobs have actually declined by 750,000 since March.

At the same time, wage rises are virtually nonexistent. Since March 2010, when official employment figures hit bottom, non-supervisory workers have seen a weekly raise of just 3 cents an hour, when inflation is taken into account. This is the product of two processes: the inability of workers to press for wage increases when they have no job security, and the disproportionately low wages being paid to those who have obtained new jobs during the past two years.

According to a report issued recently by the Economic Policy Institute (EPI), 28.3 percent of all workers are receiving poverty-level wages today, and that figure is projected to be virtually unchanged, at 28 percent, in the year 2020. Based on employer surveys of where jobs will be created in the next eight years, the EPI found that an amazing 25 percent would not require even a high school education, even though barely 8 percent of the work force falls into that category....

Neither President Obama nor his Republican challenger Mitt Romney have offered any policy for creating jobs, except the inevitable tax cuts for corporations and business...
Obama’s rose-colored presentation of the report and his barely disguised indifference to the plight of the working class conceal a calculated policy of high unemployment that is being pursued by his administration and the Federal Reserve, in service to corporate America. The US ruling elite is carrying out an historic and permanent lowering of wages, job conditions and working class living standards.

The stagnation and outright decline in real wages is not a calamity as far as the Democratic and Republican politicians are concerned, but rather a positive good. They welcome the deteriorating living standards of working people because it has produced record profits for American corporations despite the ongoing economic slump. Indeed, US gross domestic product has returned to the level before the 2008 financial crash, but with five million fewer workers employed.

3--Growing signs of global slump, WSWS

The impact of the continuing crisis of the euro zone is spreading outwards through the global economy, bringing signs of a gathering world slump....

Today the current account surplus is a third of what it was in 2007. However, a new imbalance has emerged, with the economy heavily dependent on investment, which is now running at around 50 percent of gross domestic product, and consumption spending at just 35 percent.

The Chinese economy and Asian economies more broadly are being heavily impacted not only by the slow growth in the US but also by the crisis in Europe. “The problems in Asia that are causing the slowdown come predominantly from outside the region,” Rob Subbaraman, chief economist for Asia at Nomura in Hong Kong, told Reuters. “Europe is bigger than the US as an export market for most Asian countries and it’s a bigger investor in the region.”....

The fall in economic activity to levels not seen since the recession that followed the eruption of the financial crisis in 2008 is significant in itself. But the situation is even more serious given the fact that all the measures aimed at providing economic stimulus since then, including the trillions of dollars handed out to the banks, have failed to provide any lasting solution. In no country do the ruling financial and political elites have any policies capable of bringing about an economic upturn. On the contrary, they are all focused on intensifying their attacks on the social position of the working class.

4--As food prices rise, Brazil begins to face inflationary pressures while growth stagnates, sober look

Brazil continues to be on the forefront of the global inflationary wave that will be sweeping developing economies as rising food prices make their way through the system...chart

GS: - Inflation, as measured by the composite IGP-DI Index, accelerated to (a higher-than-expected) 1.52% mom in July, up from 0.69% in June. The July IGP-DI print was higher than 1.46% Bloomberg consensus and our 1.40% forecast. The acceleration of inflation in July from June was driven chiefly by the acceleration of wholesale agricultural prices to a very high 5.3% from 1.0% in June.

We've gotten some e-mails on the topic basically asking: who cares? The answer is that anyone who cares about global economic growth should pay close attention to this. Brazil is the world's 6th largest economy. Inflation will reduce the central bank's ability to ease monetary policy, significantly limiting the nation's growth potential. And Brazil's growth is already slowing materially
  5--Guest Contribution: "The Making of America’s Imbalances", econbrowser

Who financed the household borrowing binge of the 2000s? China and other emerging markets played virtually no direct role in the financing flows behind the American credit bubble. In brief, the U.S. financial sector provided the financing for mortgage-hungry America (until it collapsed with the crisis). But where did Wall Street find the savings to fuel to fire?

In the 2000s, the American financial system fed the credit hunger of the American economy mainly by issuing debt liabilities in international financial markets; but it was the foreign private sector, not foreign governments, that provided most of the fuel for the fire. Foreign official inflows went almost exclusively into Treasury securities while private investors bought bonds and other instruments issued by U.S. financial. In other words, those who are looking for international drivers of the American credit bubble, should not look to Beijing and Riyadh, but to international private capital markets. The capital inflow bonanza of the 2000s that enabled the American credit bubble (Chinn and Frieden 2011) was primarily a private sector inflow, as shown in the charts below. Beijing may have financed the war in Iraq at low cost while Wall Street, foreign banks and private investors fueled the housing bubble.

Last but not least, in the paper we point to a potentially important distinction that was lost in previous analyses of household savings behavior. When we delve deeper into the role of capital gains for savings and borrowing decisions, we uncover a close statistical relationship between gains in equity (but not housing) wealth and active savings decisions (i.e., acquisition of financial assets) by American households. Borrowing behavior, by contrast, depends much more closely on fluctuations in housing wealth, both directly because of higher values of the housing stock and indirectly through mortgage equity withdrawals. We think that this result challenges the (conventional) wisdom that non-leveraged equity market bubbles pose a lesser problem for macroeconomic balance than credit-fueled housing bubbles. Our results indicate that equity market bubbles too trigger substantial changes in the financial behavior of households. The economic and financial repercussions of those could be costly to reverse at a later stage.

6--"Lock 'em up",  Elliot Spitzer (2 min video)

7--Standard Chartered bank accused of scheming with Iran to hide transactions, Guardian

British bank named in scathing report by regulators which claims SCB helped Iranian clients skirt US financial sanctions.

8--Taxes: Who pays?, WSJ chart

9--Gold QE, ft.com
The calls for QE3 continue to rage.

But as FT Alphaville has discussed at length, QE3 in its conventional guise — freshly minted base money in exchange for US government bonds — might not really be an option due to the squeeze it causes in the US Treasury market. More…

The calls for QE3 continue to rage.

But as FT Alphaville has discussed at length, QE3 in its conventional guise — freshly minted base money in exchange for US government bonds — might not really be an option due to the squeeze it causes in the US Treasury market.

Indeed, Fed purchases are the equivalent of hoarding the system’s supply of safe assets on the Fed’s own balance sheet, and in so doing preventing private investors — especially money market investors – from investing in the assets on favourable terms.

While this is mostly the point of QE — the idea, after all, is to stimulate risk appetite and cause investors to change their portfolios — a continued lack of risk appetite means the money created, rather than flowing into risky securities as hoped, is only crowding out the last remaining safe securities in the market instead. The consequences are negative rates and principal destruction — a lethal combination that is arguably far more dangerous and deflationary than no QE at all.

Indeed, unless QE3 is accompanied with more Treasury bond issuance, and a larger national debt — and we know there’s no political appetite for that — there’s a very good chance that such liquidity measures could do more harm than good.

10--QE3, Diminishing Equity Returns & Superior Bond Returns, pragmatic capitalism

According to Credit Suisse Macro Tactics, the next round of Quantitative Easing (QE) will likely benefit bonds investors more than the previous QE’s.

“Our analysis suggests that each new round of QE brings diminishing benefits for equity returns, and that allocating a significant part of a portfolio to bonds tends to improve the portfolio’s risk-return profile.”

The research pointed out that bonds tend to rally in anticipation of QE, while equities rally after QE Is actually implemented (see figure 1 below).

According to Credit Suisse the superior returns of equities compared to bonds have decreased with each monetary policy action by the Fed.

“The outperformance of equities during the QE1 period was remarkable: producing cumulative returns of 47% vs slightly negative returns for bonds, there was little benefit to be gained by diversifying into bonds and the optimal portfolio was 100% stocks. This outstanding performance is explained to a large extent by the fact that equities were trading at exceptionally distressed levels at the inception of QE1 (S&P 500 was below 800 in March 2009, compared with 1375 currently).”

11--U.S. Consumers Cut Back on Credit-Card Debt, WSJ

U.S. consumer credit expanded at the slowest pace in eight months in June amid signs of slow economic growth.

Consumer credit rose by a seasonally adjusted $6.46 billion, to $2.577 trillion, a Federal Reserve report showed Tuesday. Economists surveyed by Dow Jones Newswires had forecast a $10 billion expansion in credit during June compared with the prior month. In May, consumer credit grew a revised $16.70 billion, down from an initial estimate of a $17.12 billion gain.

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