Tuesday, February 12, 2013

Today's links

1---Currency Wars, Big Picture

In our modern world there are more than two currencies. Four of them make up the bulk of the world’s reserves. The US does not hold much reserve in foreign currency; instead, the US dollar is the dominant reserve choice of the others. US dollars amount to about 60% of the world’s reserves and the euro about 25%. The yen and the pound are each about 4%. Add in a little gold, and you have tallied most of the world’s reserves. The rest of the countries are nice places to visit, but their currencies are bit players in terms of global impact.

Since November, one of the major (G4) currencies, Japan, has dramatically changed policy. Furthermore, Japan has directed its change in a way that causes another G4 currency, the euro, to strengthen. This action and ensuing reaction has triggered energetic discussion of a possible currency war.

Will we see one? Maybe. Are the currency moves we are seeing volatile and abrupt enough to ignite one? Yes.

The reason we’re on the brink of a currency war is that the central banks of the G4 have taken their policy interest rates to near zero. By doing so, they have collectively reduced the ability of market forces to adjust interest rates in response to the policy changes.

2---Supply and Demand Always Works in Equities – Missing Fed-Created Demand Has Hurt, Trimtabs

....starting in March 2009, was that there was a new source of money impacting supply and demand in the market’s — the Fed creating new money with which to buy assets, including equities. More dollars chasing the same number of shares creates an ever rising stock market, everything else being equal.

There is an old saying, “Never Fight the Fed.” But usually all the Fed did in the past was raise or lower interest rates. That is why I had said early last year on these videos that with interest rates as low as they could be, new Fed money creation would do nothing for the stock market. Well I obviously was wrong.

Remember, historically demand for shares ultimately came from individual investors. And investors got the new money to invest from what was left over from current income. Well in 2009 that all changed. Income growth net of inflation has been barely positive and investors had been net sellers of stock, up until the start of this year.

So instead of individuals providing the money for stocks, the Fed is printing $4 billion of fake money daily, some of which is adding to the demand for equities.

3----Fed's Yellen: "A Painfully Slow Recovery for America's Workers", cal risk

However, discretionary fiscal policy hasn't been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as exhibit 3 indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits. ...

A second tailwind in most recoveries is housing. Residential investment creates jobs in construction and related industries. Before the Great Recession, housing investment added an average of 1/2 percentage point to real GDP growth in the two years after each of the previous four recessions, considerably more than its contribution to growth at other times....

Another important tailwind in most economic recoveries is one that tends to be taken for granted--the faith most of us have, based on history and personal experience, that recessions are temporary and that the economy will soon get back to normal. Even during recessions, households' expectations for income growth tend to be reasonably stable, which provides support for overall spending. In the most recent recession, however, surveys suggest that consumers sharply revised down their prospects for future income growth and have only partially adjusted up their expectations since then
4---Is Congress really going to miss its free lunch on infrastructure?, WA Post

It comes as we may be approaching the end of a five year period in which investing in the nation’s physical infrastructure has been something close to a free lunch. With interest rates near all-time lows and millions of construction workers unemployed, the last few years have been a time that it would have been a historical bargain for the United States to do upgrades to roads, bridges, and airports that will eventually need to take place anyway. It has been a political breakdown—in particular conservatives’ view of almost any non-defense federal spending as wasteful—standing in the way.

This graph shows total private fixed investment relative to the nation’s potential GDP, going back to 1949. (That’s how much the private sector is spending on both houses and commercial installations). After averaging 15.5 percent from 1949 to 2007, private investment fell as low as 10.6 percent in the economic collapse starting in 2008 (it was 12.2 percent at the end of 2012).
Private fixed investment as a percentage of potential GDP. When it gets back to historical norms, the free lunch on infrastructure investment will be over.
Private fixed investment as a percentage of potential GDP. When it gets back to historical norms, the free lunch on infrastructure investment will be over.
In other words, for the last few years private construction activity has been far below its historic norms. And so long as the private sector isn’t building houses and office buildings and factories, the government can build without crowding out private investment.

5---Per Capita Government Spending by President, economists view

This graph in this post showing real per capita growth in government expenditures under recent presidents got more attention than I expected (e.g.), probably because for many people the growth under Obama was unexpectedly low. Here's the updated version of the graph (as before, this came to me via email):

6---Why Has Employment Remained Stubbornly Low?', economists view

Remember the debate about whether the slow recovery was due to lack of demand, regulation, or taxes?:
Aggregate Demand and State-Level Employment, by Atif Mian and Amir Sufi, FRBSF Economic Letter: What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors. ...
7----The EZ in one chart, fsaraceno

I replicated his figure including some European countries, and with slightly different data. I took OECD series on cyclically adjusted public expenditure, net of interest payment. This is commonly taken as a rough measure of discretionary government expenditure. I also re-based it to 2008, as most stimulus plans were voted and implemented in 2009. Here is what it gives:

8---What do they know that we don't? zero hedge

Friday evening when no one was supposed to pay attention, Google announced that Executive Chairman Eric Schmidt would sell 3.2 million of his Google shares in 2013, 42% of the 7.6 million shares he owned at the end of last year—after having already sold 1.8 million shares in 2012. But why would he sell 5 million shares, about 53% of his holdings, with Google stock trading near its all-time high?

“Part of his long-term strategy for individual asset diversification and liquidity,” Google mollified us, according to the Wall Street Journal. Soothing words. Nothing but “a routine diversification of assets.”

Routine? He didn’t sell any in 2008 as the market was crashing. He didn’t sell at the bottom in early 2009. And he didn’t sell during the rest of 2009 as Google shares were soaring, nor in 2010, as they continued to soar. In 2011, he eased out of about 300,000 shares, a mere rounding error in his holdings. But in 2012, he opened the valves, and in 2013, he’d open the floodgates. So it’s not “routine.”

9---A Bad Idea Returns: The Balanced-Budget Amendment, New Yorker

10---Obama pushes austerity in the guise of defending the “middle class”, wsws

In the days leading up to Tuesday night’s State of the Union address, the Obama administration has combined calls for austerity measures to slash social spending with demagogic attacks on congressional Republicans for advocating even larger cuts in domestic social programs.

Obama’s speech comes as back-room discussions continue between the White House and congressional leaders of both parties, driven by two imminent deadlines: the March 1 “sequester,” when $85 billion in across-the-board spending cuts take effect, and the March 27 expiration of authorization for spending by all federal government departments.

The sequester is a consequence of the 2011 Budget Control Act, a bipartisan deal between Obama and congressional Republicans, while the March 27 cutoff comes as a result of the expiration of another bipartisan agreement, the six-month “continuing resolution” passed last October to avoid a shutdown of the federal government during the 2012 election campaign.

If the sequester takes effect, budget cuts will hit both defense spending and a wide range of domestic social programs. The military cuts would have only a marginal effect in the vast Pentagon budget, which dwarfs the combined military spending of the next 15 countries in the world. The domestic cuts largely spare the major entitlement programs, Social Security, Medicare and Medicaid, but will devastate smaller programs like Head Start education for pre-kindergarten children.

11---"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." John Maynard Keynes

12---Sequester in the Time of ZLB, econobrowser

Pretty clearly, we are in a liquidity trap. Nominal rates are unlikely to budge in the face of plausible government spending changes. Consequently, taken together, spending cuts of $85 billion for this fiscal year will result in something like $200 billion reduction by four quarters after spending is implemented (I’m assuming the bulk of the cuts are reductions in spending on goods and services). Going forward, assuming $110 billion cuts year after year per the Budget Control Act, GDP will be reduced by over $250 billion per year relative to baseline...

From Plumer/Wonkblog: "The key feature of the cuts is that they would affect all agencies and programs equally — federal officials would not be able to pick and choose which programs get protected and which get the ax." And from Beutler/TPM:
“If we go past this date, there’s no way to implement the sequester without significant furloughs of hundreds of thousands of federal employees,” said [OMB Controller of Office of Federal Financial Management Danny] Werfel. That’s in large part because there’s no ways for departments and agencies to move money around to protect top-tier services and programs.
“What happens is, OMB, we take this amount, this $85 billion that we have to cut and apply it to every account in government,” he added. “Every account has to be cut by a certain percentage. It’s not like the agencies can move money amongst accounts. But it’s even worse than that; even at the sub-account, there’s something called Program Project and Activity which exists within each account. And the way the sequester law is written is that even underneath the account — even at the Program Project and Activity — they all need to be cut at that same percentage.”

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