Wednesday, February 20, 2013

Today's links

1---The impact of sequester on the economy, econobrowser

2--Good News for a change, Trimtabs-

Here’s some good news, I think. After tax wages and salaries are still growing faster than I had been expecting. We are now seven weeks into the new year and wage and salary growth is not slowing by much. After tax income, year over year, grew by $200 billion over the past 90 days through February 12, 2013, two and a half times the $80 billion after tax income growth during the third quarter of last year. I had been expecting that year over year wage and salary growth – the best real time indicator of the US economy — would be slumping by now. My reasoning for a slump is based on higher employment taxes this year and the fact that some of the late 2012 income surge had to be 2013 income taken early.

But the slump is not happening. While wage and salary year over year growth is down from 10% in January, wages and salaries have still been growing by over 7% year over year for the last couple of weeks. That 7%+ growth is well above inflation and well above anything I had thought possible. I even checked with my favorite senior government economist and he also has no idea as to why wages and salaries are still growing so robustly.

The only possible reason both of us can come up with is that many non-public businesses, expecting higher 2013 taxes, stripped their companies of excess cash at year end. That extra cash is being recycled throughout the economy, boosting overall activity and even hiring. My preliminary guess is that over 200,000 jobs will be added this month, better than anyone expects

3---Abe Says No Need for Foreign Bond Buys Under New BOJ Chief, Bloomberg

(Why is it okay fro China to loan up on USTs but not Japan?)

4----Loanowners put too much faith in house price appreciation, oc housing

The Fed will conduct a new wealth survey in 2013, but don’t look for a rational rebalancing. The same pressures that drove families to save less before the recession are still in place: low income growth, low interest rates, and high costs for health care, energy, and education. Families have been borrowing less since 2007, but the rate of the decline has slowed. As soon as banks start lending again, Weller says, people will put their money back into housing. “The trends look like they’re on autopilot,” he says. “They don’t suggest that people properly manage their risk.”...

In a 2012 paper for the National Bureau of Economic Research, economist Edward Wolff concluded that from 2007 to 2010, the median American household lost 47 percent of its wealth. Average wealth—a number that includes the richest Americans—declined only 18 percent. Houses make up a smaller share of the wealth of a rich family. The wealthy also benefit from better financial advice, Weller says.

5---Housing recovery "Watch Map" (Cool), CNBC

6---Housing Starts Off but Permits Grow; PPI Tame, CNBC

U.S. residential construction fell in January but a jump in permits for future home building to a 4-1/2 year high offered hope the housing market recovery remains on track.
Another report on Wednesday showed wholesale prices rose for the first time in four months in January as rising food costs offset weak gasoline prices. However, sluggish economic growth should keep price pressures muted.
Housing starts dropped 8.5 percent last month to a 890,000-unit annual rate, pulled down by a sharp drop in the volatile multi-family unit category, the Commerce Department said.

7--The New Libya, counterpunch

Libyans have won the right to live in fear, as they have won the freedom to be ruled by countless armed despots each engaged in torture, abductions, and persecution of minorities. In spite of what seems like an unstoppable momentum towards greater strife and social disintegration, romantic imperialists in the West still insist on speaking in the most unwarranted terms of the “street revolution,” that has “brought freedom and hope to millions of people here” (Globe and Mail, 15/2/2013). In the warm glow of fires that consume others, some among us find reason for a warming self-congratulation. Symbolic of the depth of Western respect for Libya’s “new freedom” is this very statement, from the government of Canada itself, warning Canadian travelers: “Do not criticize the country, its leadership or religion. Harsh penalties may be imposed.” The few remaining pro-”revolution” propagandists in the West are not only unwilling to simply state that what they support is globalized regime change and a new colonizing wave that would make non-Western self-determination and sovereignty principles something to be wrecked and thrown aside, they are equally immune to irony. After all, blessed Benghazi, which was to be “saved” at all costs, saved against all else, by Western military intervention is now the same city from which Western interests flee in order to save themselves (Reuters, 24/1/2013, 31/1/2013,5/2/2013; The Star, 24/1/2013):...

Once independent, wealthy, and powerfully defiant, today Libyan resources are almost being given away to foreign powers that “mentored” Libya’s revolution. Foreign investors in Libya’s oil sector are being given years of tax exemption, as if they need it; specifically aimed at encouraging Gulf state investors, Libya grants the investor 65% from a project’s value;...

Then there is the IMF, in its newly acquired role of dictating to Libya, another reality permitted by the “street revolution” (Arabian Business, 6/2/2013). After all, as the IMF’s Christine Lagarde herself has recently said, the “Arab Spring” must be followed by a “Private Sector Spring” (IMF, 9/1/2013).

8---France's fiscal tightening is inhibiting growth, sober look

9---US household formation has stabilized, sober look

According to the US Census Bureau, about 3.5 million households have been created over the past couple of years. As a comparison, only 755K were created in the previous two years (08-10) - with the recession hampering household formation.
 
With pent up demand diminishing after 2013 however, housing price appreciation should revert back to the growth in household incomes (as discussed here). That means that going forward price increases on average should moderate.
 
10---Austrian economics very much has the psychology of a cult. , NYT
 
Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot. And as with all cults, the failure of prophecy — in this case, the prophecy of soaring inflation from deficits and monetary expansion — only strengthens the determination of the faithful to uphold the faith.
It would be sort of funny if it weren’t for the fact that this cult has large influence within the GOP.
 
11---Fed asks for super powers to bail out financial system "next time", NYT
 
The federal government has generally responded to the financial crisis by expanding the power of regulators, most of all the Federal Reserve. But in an interesting speech this month, William C. Dudley, president of the Federal Reserve Bank of New York, argued that Congress has not gone far enough.
Mr. Dudley’s concern is about a little-noticed piece of the 2010 Dodd-Frank Act that actually reduced the central bank’s authority in one crucial area: its ability to provide emergency funding to strapped financial firms.
The Fed arrested the 2008 financial crisis by using this authority to create a series of unprecedented programs that offered emergency financing not just to American banks – its traditional flock – but also to foreign banks, and not just to banks but to other kinds of financial companies as well, and indeed to other kinds of companies entirely.
Congress responded to this performance by making it difficult to repeat. Dodd-Frank imposed new restrictions on the Fed’s ability to make emergency loans, or to keep money flowing, outside the banking industry.
One basic reason was that Congress had never really intended to give the Fed such broad power in the first place. Rather remarkably, the authority that the Fed used to save the financial system in 2008 was granted by Congress in 1991 with almost no debate or public notice, a story I first told in The Washington Post in 2009. It was quietly slipped into a broader bill by former Senator Christopher Dodd of Connecticut, at the behest of Wall Street companies including Goldman Sachs. When it was first used almost two decades later, legislators like Representative Barney Frank confessed that they didn’t know they had voted for it....

Furthermore, everyone agreed that the 1991 law didn’t make much sense. It expanded the Fed’s safety net without expanding its regulatory authority. Banks are backstopped and, at least in theory, carefully regulated. Backstopping the rest of the financial system without regulation was an invitation to excess. There’s a reasonable argument that that contributed to the crisis.
But rather than expanding regulation, Congress decided to pull in the net.
This decision commanded broad support. Bailing out financial firms is not a popular spectator sport, and there is a general consensus in Washington that public policy should focus on minimizing the damage when firms fail.
“Many – myself included – have drawn from the financial crisis the conclusion that government safety nets should be drawn tightly so that only a very few, very tightly regulated firms get as little liquidity support as possible,” Karen Shaw Petrou, a close watcher of financial regulation who drew my attention to Mr. Dudley’s speech, wrote to clients of her firm, Federal Financial Analytics.
A more inclusive policy, she continued, “will open the safety net, wide, wide open to all sorts of actors who, smiling sweetly, will rob us blind.”
Mr. Dudley takes the opposite view. He argued in his recent speech that it would make no sense to draw a line between banks and other kinds of financial firms if both were playing essentially the same role in the broader economy.
Both should be regulated, and both should be backstopped...

Mr. Dudley favors many of these efforts, but his broader point is that they all are insufficient. There is no substitute for the role the Fed now plays in the banking system, as a lender of last resort – and not just the emergency authority granted to the Fed in 1991, but authority to serve as a permanent backstop....

The only choice, he argued, was between planning carefully for the next crisis, or repeating the Fed’s ad-hoc any-tools-available response in 2008.
Mr. Dudley appears to be in complete agreement with that view.
“The sheer size of banking functions undertaken outside commercial banking entities – even now, after the crisis – suggests that this issue must not be ignored,” he said. “Pretending the problem doesn’t exist, or dealing with it only ex post through emergency facilities, cannot be consistent with our financial stability objectives.”

12---With Cutbacks Days Away, Obama Tries to Pressure G.O.P, NYT

13----Three Reactions to the New Simpson-Bowles Deficit Reduction Plan, Jared Bernstein

14---Forecasters keep thinking there’s a recovery just around the corner. They’re always wrong, WA Post

Breakdowns in the financial system mean that low-interest rate policies from the Fed don’t have their usual punch. An overhang of household debt means that consumers hold their wallets more than usual. Federal fiscal stimulus to offset those effects is now long-over, the political system too paralyzed to do more, and state governments have been pulling back over the last three years.

There’s an important broader point here, however. Economic forecasters tend to look at past experience and extrapolate; in the past, when there has been a recession, the very forces that caused the recession become unwound, sowing the seeds for expansion. People stop buying cars and houses during a recession, and then when times improve, there is a burst of activity.

But the financial-crisis-induced recession of 2008-2009 was so deep that it had deep-seated effects that go beyond those explained by those traditional relationships. It messed up the workings of the financial system, and banks are still trying to figure out what the new one looks like. It may have sparked a permanent (or semi-permanent) shift in how consumers and businesses think about their desired levels of savings.

15---This Rally Is in Its Infancy (Uh huh) Yahoo Finance

Quantitative easing is working. It has kick-started a recovery in housing and autos, traditionally the two key leading sectors of recovery. It has also led to extremely buoyant conditions in credit markets, a boon to medium-sized businesses. What few investors have realized is that the Bernanke game plan is meeting with tangible success. This explains the market’s extraordinary resilience. But whereas QE1 and QE2 were crisis-fighting policies, QE3 was designed as a proactive, outcome-based program. The desired outcome? An unemployment rate of less than 6.5% (versus today’s 7.8%).

This Is Not a Bubble
Only a much faster rate of economic growth can drive unemployment down to that level. The sequencing is really quite simple. Keep rates across the whole maturity spectrum low enough for long enough and capital markets are lifted above a critical threshold. What is that critical threshold? The point at which financial conditions become so benign that they awaken good old animal spirits in the real economy.

While some dismiss Fed policy as creating the next bubble in credit markets, this is a misuse of the word bubble. A bubble describes an excess that eventually self-destructs. This, in contrast, is a healthy tonic for a very fragile economy. It is the only pathway out of a long-lasting liquidity trap. Just ask the Japanese about whether liquidity traps cure themselves. They don’t. It takes a policy shock. This is exactly what the Fed is delivering. The precondition for a better economy is a powerful and long-lasting rally in stocks and credit, thus driving down the cost of capital for American business.

More to Come
We are reaching a turning point where robust capital markets finally inject optimism into corporate decision marking. Recent activity in M&A is reflective of this. And it suggests that we are on the cusp of a new cycle in private capital spending. All of this points to an improvement in labor markets, better growth in personal income and a sustained improvement in final demand.

The really good news is that Bernanke knows all too well that monetary policy must remain highly accommodative until the economy is without any question on a firm footing. After all, it was the premature withdrawal of monetary stimulus in 1932 that turned a recession into the Great Depression. We are a long way from the next tightening cycle, particularly given a very large output gap and the contractionary impulses that are about to come from higher taxes and smaller public sector outlays.
Rarely do central bankers keep such forceful monetary stimulus in place well into an economic expansion. But this is the unusual dynamic at work today. It is nirvana for stocks, which is why the 128% advance off the 2009 lows should be viewed as little more than a return to baseline. The next big secular rally has just begun.

16---'Greece becoming third world country - economically and democratically', RT

17---Greek police fire tear gas on anti-austerity protesters (PHOTOS), RT

18--Greek jobless rate double that of Eurozone: Over 60% of young workers unemployed, RT

19---The Greek Trap, Real News

20---NDAA: Pre-emptive prosecution coming to a town near you, al jazeera

21---German industry, government planning for resource wars, wsws

In response to a direct question posed by the business daily Handelsblatt—“Will we see resource wars?”—Paskert answered in the affirmative, citing historical precedent. “History shows,” he said, “that many conflicts have their origin in the fight for resources… The supply of raw materials is the basis for added value and the well-being of a country, and therefore has geo-political significance.”

 Handelsblatt openly presented the central issue. In a lengthy editorial on the Paskert interview, it wrote that industry would like to see “more government—and military—involvement in securing raw materials.” The editorial was published under the revealing headline “Expedition Raw Materials: Germany's new course.”

In political circles, Handelsblatt explained, this demand by industry is finding a hearing. For the government, “the control of raw materials is a ‘strategic issue’ for German foreign policy.” One can imagine “that existing raw material partnerships are not sufficient. ‘Security and military instruments’ are also required.”

According to Handelsblatt, the chancellor wants to appoint a coordinator who will “better dovetail the interests of strategic industries with defence and security technology, contributing to the securing of raw material supplies.” Strategic partners of Germany, such as Saudi Arabia, should be supported with weapons technology before Germany is forced in a crisis to send its own soldiers. And the armed forces should be “better prepared for their new role as guardians of strategic interests.”
Handelsblatt cited the 2011 Defence Policy Guidelines, which declare that the “security of and access to natural resources” is the “most important security and military policy interest.”

This focus is not entirely new. In the mid-1990s, the Defence Policy Guidelines defined the main tasks of the Bundeswehr (German armed forces) as the “maintenance of free world trade and access to strategic raw materials.” This orientation paved the way for the transformation of the German military from a territorial defence force into an international intervention force.

In official propaganda, the military missions in the Balkans, Afghanistan and elsewhere were justified on humanitarian grounds or as part of the “war on terror.” The government and big business now believe, however, that the time has come to bring public opinion into line with the real aims of such operations.....

The call by German big business for resource wars recalls the darkest chapters of German history. German war aims in World War I—extensive annexations in France, the Benelux countries and Africa—were based on the requirements and plans of the “leading minds of business, politics and the military,” as the historian Fritz Fischer wrote in 1961 in his groundbreaking book Germany’s Aims in the First World War .
The same business circles then supported Hitler because his plans for world conquest and demand for “Lebensraum” in the East corresponded to their expansionist urge for raw materials and markets, and because he destroyed the organized labour movement.

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