How does the Fed drive the world economy?
The dollar is the channel through which the impact of the Fed's policy is transmitted to the rest of the world. Transmission mechanisms are very wide and instantaneous. About 90 percent of international trade and financial transactions are conducted in dollars; some economies are fully dollarized through currency boards or dollar pegs, the dollar accounts for 62 percent of world currency reserves, and the overwhelmingly dollar-based foreign exchange market has an estimated daily turnover of $4 trillion.
Pushing Export-Driven Free Riders
That is the framework where the Fed operates as a de facto coordinator of international economic policies. Conceptually, this policy coordination process is grounded on the idea that countries at different points in the global business cycle should conduct restrictive or expansionary economic policies depending on their fiscal and balance-of-payments positions.
For example, countries running budget and trade surpluses (or very low budget and trade deficits) should stimulate their domestic demand because they may also have sluggish growth and low inflation. Conversely, countries with high budget and trade deficits should increase taxes, cut government spending and raise interest rates because they may be experiencing an overheating economy and rising inflation.
The question is: While running the U.S. economy, how can the Fed influence that the four largest world economies - U.S., China, Japan and Germany (45 percent of global GDP) - follow these broad policy coordination criteria?
2--Bianco: Puncturing Conventional Wisdom, Big Picture (3 min video)
Fiscal cliff did not hold back growth which wound up as 1.5% for 2012.
3--As U.S. Growth Lags, Some Press the Fed to Do Still More, NYT
Yet annualized inflation fell to 1.3 percent in December, and asset prices reflect an expectation that the pace will remain well below 2 percent in the next decade.
“By their own framework, they’re not doing enough,” said Justin Wolfers, an economist at the University of Michigan. “They said that they were going to expand the economy and keep inflation around 2 percent, and they just haven’t done it.”
The rest of the government is making that task more difficult. Federal spending cuts, tax increases and the prospect of further cuts March 1 are hurting growth. The Fed chairman, Ben S. Bernanke, has warned repeatedly that monetary policy cannot offset such fiscal austerity.
The Fed’s holdings of mortgage bonds and Treasuries also are growing so large that it could begin to distort pricing in those markets, and some transactions could be disrupted by a dearth of safe assets. Some Fed officials are concerned that asset prices for farmland, junk bonds and other risky assets are being pushed to unsustainable levels. As a result, Mr. Bernanke has said, the Fed is doing less than it otherwise would.
“We have to pay very close attention to the costs and the risks and the efficacy of these nonstandard policies as well as the potential economic benefits,” Mr. Bernanke said last month, in response to a question about the low pace of inflation. “Economics tells you when something is more costly, you do a little bit less of it
4---Why has US Oil Consumption Steadily Fallen since 2004?, oil price
Figure 1. Comparison of Actual US Oil Consumption, with that that would have been expected if prior growth trend held
Given the timing of the drop off in oil consumption, we would expect that most of the drop off would be the result of “demand destruction” as the result of high oil prices
5---Reflections on the Current Belief That Housing Will Come Roaring Back, naked capitalism
"if one adds existing homes for sale, single family homes for rent and homes held off the market for other reasons, there remain over 10 million vacant housing units or something well over 7% of the single family housing stock."
More Homes Than you Think are for Sale
Underneath the number are more fundamental issues that are going to take a while to resolve. First, there remains a large “potential supply” of single family homes for sale. According to BCA Research, if one adds existing homes for sale, single family homes for rent and homes held off the market for other reasons, there remain over 10 million vacant housing units or something well over 7% of the single family housing stock. Foreclosures have slowed down but still run around 1.5 million at an annual rate and delinquent mortgages have fallen but remain around 7% of all mortgages outstanding
There is another “shadow supply”. Somewhere between 25 and 30% of all house sales in 2011 were cash sales to speculators rather than to potential “final residents”. In all likelihood in the Western states hardest hit by the collapse of house prices the percentage of sales to speculators was even higher. These looked like great investments to generate rental cash flow but some of the original buyers now want out, like the Och-Ziff hedge fund which was one of the early bulk buyers. According to Reuters it proved more difficult than originally thought to manage dispersed single family rental properties and the pick-up in prices provided a reasonable capital gain on exit. But this is hardly a permanent solution to the single family housing market since there needs to be a genuine, long-term buyer at the end of the chain....
We think that housing will get better and gradually increase its contribution to economic growth. But after the bounce from a deep bottom we also think that recovery will be slow and will remain more focused to rental units than has traditionally been the case. In the most distressed markets the easy money in buying distressed property has likely already been made and the complexity of renting it out has only now begun to be appreciated.
6---No-down mortgages are back, Marketwatch
Some affluent buyers are getting the keys to their new home without putting a penny down.
It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.
7---Low-down and "all cash" rule in Calif housing market, Dr Housing Bubble
As I dig through the monthly data on home sales, one trend continues to intrigue me when it comes to California housing. Call it the broke versus the big cash buyer. For example, over 23.2 percent of Southern California home buyers used FHA insured loans last month. These loans are no longer good deals even though they require only a paltry 3.5 percent down payment. Yet they are popular for those chasing the middle class dream in a state where it is becoming much more difficult to follow a middle class lifestyle. On the other side of the spectrum, we have the all cash buyers. A record 33.8 percent of all sales last month came from those with all cash in SoCal. In total, over 56 percent of SoCal buyers are diving in with 30x leverage loans or are investors going in with all cash....
Nearly 4 million Californians are on food assistance, over 10 percent of the population. It also highlights how diverse the state truly is and how some areas are locked away in fortress like bubbles. The big push has come from constrains on the market and are heavily driven by low inventory. Remember again that over half the market is being fought for by low down payment buyers and all cash investors. It is ironic that you have both spectrums competing here, those with very little down payments and those that are willing to put down an all cash offer to buy a home....
If we look at the above data, over 2.7 million loans have been modified since 2008. Nearly half are current, but 31.6 percent are in the distress pipeline again.
The median home price in Southern California hit $323,000 last month, a jump of 19.6 percent in one year. Does this pace really seem sustainable
8---Japan Finance Minister Models Policy After 1930s Stimulus, Bloomberg
Japanese Finance Minister Taro Aso said the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the Bank of Japan (8301) to underwrite government debt to fund deficit spending...
As finance minister in 1932, Takahashi increased fiscal spending by 34 percent, doubled bond issuance and instructed the BOJ to underwrite government debt, according to a report by the Japan Center for Economic Research. While the effort helped end deflation and boost growth, Takahashi made enemies in the military when he later attempted to rein in spending. He was assassinated in 1936.
Takahashi “brilliantly rescued Japan from the Great Depression through reflationary policies,” Federal Reserve Chairman Ben S. Bernanke said in a speech in 2003. His policy package increased the fiscal deficit, depreciated the currency and expanded the money stock, with robust growth and mild inflation for the five years from 1933, according to a research paper co-authored by Masato Shizume, an economist working for the BOJ.
“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives” and the economy, as has happened in the past, BOJ Governor Masaaki Shirakawa said in 2011. The central bank took the step in the 1930s because thedebt market was “very immature,” Shirakawa said.
9---What is Keynesian Economics? umwblogs
The General Theory focuses on refuting the classical conclusions that employment is determined by the price of labor, and proposes that employment is actually determined by spending, or aggregate demand. Keynes argues that under-full employment equilibria exist, unlike the classical claim that if the economy is not at full employment, it will reach full employment eventually....
Keynes’ “propensity to consume” (or MPC) plays an important role in his theory. Given the propensity to consume and level of employment, Keynes argues an equilibrium exists where aggregate demand equals aggregate supply. Consumption is largely dependent on income, because as income increases people are willing and able to consume more. Furthermore, increased investment leads to increased income. He introduces the concept of an “expenditure multiplier” to explain this phenomenon. Keynes argues that consumption will always be less than income, but never be negative. Consumption and income will always move in the same direction, and a change in income will create a change in consumption and investment where 1/(1-mpc)= k. An increase in investment results in an increase in income; because of people’s propensity to consume, they will not save all their money. Instead they will spend some fraction of it, putting part of the increased income back into the economy. In this way a small increase in investment has a larger cumulative effect on income. The increased income leads to more consumption, which will raise GDP. Overall, Keynes argues that changes in spending (investment and/or consumption) cause more than proportionate changes in GDP. This Keynesian multiplier effect is 1/(1-mpc) in the simplest models.
Keynes says that the interest rate does not change an individual’s propensity to consume, but rather makes it more expensive for individuals to borrow. The Classicals said that interest was determined through the interaction between the supply and demand of saving, but Keynes refuted this saying that interest rates are determined by the supply and demand for money. He argued that savings and investment were much more inelastic than originally hypothesized by the classicals. The interest rate, Keynes says, is determined by people‘s money demand, or “liquidity preference.” It is a measure of the willingness of individuals to part with their liquid assets.....
The Classicals said that increased saving would decrease consumption, but interest rates would also decrease and investment would adjust so that the total aggregate spending would be the same. Keynes said that spending does affect GDP. Increased spending leads to increased production, which increases aggregate demand, which affects GDP. He says that people are pessimistic about the future and hold on to their money; as a result it does not flow into financial markets. Because hoarding exists, the interest rate does not affect investment enough to offset consumer saving, therefore aggregate demand can fall and GDP is not always at full potential.
Keynes argues that in order to revert back to full employment the government must use expansionary monetary and fiscal policy in order to stimulate the economy and increase employment, because it won’t happen by the private sector. The government needs to spend money to jump start the economy. Keynesian and modern revisions of Keynesian thought continue to influence macro-economic policy today.
10--More than 40% of Americans are one crisis and less than 90 days from poverty, Daily Kos
11---U.S. Mutual Funds Reaping Record Deposits as Markets Rise, Bloomberg
12---JPMorgan Joins Rental Rush For Wealthy Clients: Mortgages, Bloomberg
Back for a second bite of the apple???
13---US military expands its drug war in Latin America, yahoo news
14---FHA insurance premium hikes will impact high wage earners most, oc housing
FHA said it will require most buyers to pay insurance premiums for the life of their loan. A policy that was put in place in 2001 allowed borrowers to cancel premium payments once their debt fell below 78% of the principal balance. One exception will be for borrowers who put more than 10% down at the time of purchase.This is a deal-killer for me. We are at record low interest rates, so in all likelihood, mortgage rates will go higher from here. Although it may be possible to refinance later to eliminate the insurance premium, it may not be advantageous if refinancing carries a much higher interest rate. It’s very possible some of these borrowers may be paying that onerous FHA insurance premium for as long as they own their properties or up to 30 years.
15--Boomer Bust, CNBC
16---The Vietnam War Memorial in Vietnam Would Be 20 to 50 Times Larger Than Ours, global research
......, let’s consider the number of Vietnamese killed, to include soldiers and civilians, regardless of their political allegiance or lack thereof. No one knows for sure how many Vietnamese died over this period; the “low” estimate is roughly one million Vietnamese, while the “high” estimate is in the vicinity of three million. Even using the low estimate, that’s more than ten thousand dead per month, for 93 months.
How can we bring meaning to such mind-numbing statistics? To imagine the impact of this war on the Vietnamese people, Americans have to think not of one tragic wall containing 58,000 names, but of twenty (or perhaps even fifty) tragic walls, adding up to millions of names, a high percentage of them being noncombatants, innocent men, women and children.
To confront the truth, we must abandon the confection. The truth is that, rather than confronting our nation’s inner heart of darkness during and after Vietnam, the military and our government collectively whitewashed the past.
America’s true “Vietnam Syndrome” was not an allergy to using military power after Vietnam but an allergy to facing the destruction our nation caused there. And that allergy has only exacerbated our national predilection for military adventurism, warrior glorification, and endless war.
It’s time our nation found the courage to face those twenty (or fifty) walls of Vietnamese dead. It’s time we faced them with the same sorrow and same regret we reserve for our own wall of dead. Only after we do so can our nation stop glorifying war. Only after we do so can our nation fully heal
17---The Market's Blowout Woos Investors From Sidelines, WSJ
18---Munich Security Conference endorses US call for expansion of neo-colonial wars, WSWS
Biden described the brutal wars against Iraq, Afghanistan and Libya as great successes and models for future enterprises. The United States, he said, was “cognizant of an evolving threat posed by [Al Qaeda] affiliates like AQAP in Yemen, al-Shabaab in Somalia, AQI in Iraq and Syria and AQIM in North Africa.”
On Iran, the vice president maintained Washington’s belligerent tone, implicitly threatening military attack if Tehran did not accept US and European demands for a sharp curtailment of its nuclear enrichment program. “There is still time, there is still space for diplomacy, backed by pressure, to succeed,” he declared. The obverse, clearly, is that the US is prepared to use military force at some point in the not-too-distant future.
Biden made a point of reiterating that the Obama administration’s policy is to do whatever is necessary to prevent Iran from developing a nuclear weapon—something Tehran denies it is seeking to achieve—rather than isolate and weaken a nuclear-armed Iran. “Our policy is not containment,” he declared...
Representatives of the European powers made clear that they were only too willing to participate in the re-colonialisation of the Middle East and North Africa in cooperation with the US