Wednesday, April 17, 2013

Today's links

1---Reinhardt and Rogoff proven wrong, naked capitalism

Dean Baker describes the high human cost of the Reinhardt and Rogoff snake oil:
This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R’s work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R’s work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.
But as Max Planck said, “Science advances one funeral at a time.” The same is certain to be true of economics and policy orthodoxies. Despite the IMF having said austerity is a crock, the Troika continues to tighten the noose around the necks of periphery countries, even as economic indicators in Germany continue to weaken. Obama is too deeply invested in making deficit cutting and putting Social Security and Medicare on a path to destruction to reverse course. The one benefit of this decisive debunking of the Reinhardt and Rogoff paper is it will be impossible for him to defend his actions as merely following the advice of experts. The experts have been shown to be wildly wrong, and any decision to follow their faulty analysis now rests squarely on Obama and his fellow travelers.

2---Vice Chairman of Chinese Accounting Association Warns Chinese Local Debt Could Create Bigger Crisis than US Housing Implosion, naked capitalism

On the one hand, Bloomberg today tells us retail demand for stocks is as hot as ever:
“Over the last few weeks, every down move has been met with buyers that have come in,” Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp., said by telephone. His firm has $2.08 trillion in client assets. “People on the sidelines are waiting for a pullback to get into the market that they’ve missed for the past six months. We’re seeing more of that today.”
On the other, we have someone well-placed in China telling the world that its local debt is a train wreck waiting to happen, a classic Minksy Ponzi unit, but the timing of the unraveling is uncertain. And the source is an authority and not the sort one would expect to make remarks like that casually.

3---Shiller: Recent Increases in Home Prices Don’t Guarantee Sustained Rally, moneynews

The strong price appreciation for homes in recent months says little about their future path, according to Yale economist Robert Shiller.

In January, the S&P/Case-Shiller home price index, which he co-invented, surged 8.1 percent from a year earlier, the biggest increase since June 2006.

“Home prices have risen over the last year, and with those gains there has been a renewed sense of optimism,” Shiller writes in The New York Times. “But do these price increases mean that homes are now good investments for the long haul? Unfortunately, no.”

One-year home price increases, after accounting for inflation, have historically meant little for price movement over the next 10 years, Shiller explains.

“Thus, the upturn last year is irrelevant to long-run forecasting,” he states. “Booms are typically followed by busts, usually in far less than 10 years. In a decade, an entire housing boom, if there is one in inflation-corrected terms, is likely to have been reversed and completely washed away.”

In addition, inflation-adjusted home prices generally don’t move much, Shiller writes. In the 100 years through 1990, real home prices on average gained only 0.2 percent a year.

“Most people live in their home for many years,” Shiller notes. “They don’t need to view it as an investment at all, but if they do, they surely need a long forecasting horizon.”
4---GOLDMAN: The US Consumer Has Suffered A Setback, business insider

5--A Study That Set the Tone for Austerity Is Challenged, NYT

But now, Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst, in trying to replicate the Reinhart-Rogoff results, are challenging the conclusions for a different reason. They say they found some simple miscalculations or data exclusions that sharply altered the ultimate results. According to their rerunning of the figures, “the average real G.D.P. growth rate for countries carrying a public debt-to-G.D.P. ratio of over 90 percent is actually 2.2 percent, not –0.1 percent,” they write. In other words, heavy debts were not associated with the malaise that Professors Reinhart and Rogoff — and much of the world’s economic elite — thought that they were.

The new paper, released this week, has set off a storm within the economics profession, with some commentators even arguing that it undermines the austerity policies that have proved so prevalent in the last few years.

“How much unemployment was caused by Reinhart and Rogoff’s arithmetic mistake?” asked Dean Baker of the left-leaning Center for Economic and Policy Research, for instance.

6---Gitmo hunger strike: Timeline, RT

7---El-Erian's Summary: "Virtually Every Market Is Trading At Very Artificial Levels", zero hedge

In order for central banks to achieve their ultimate economic objective - which is growth and jobs - they have to push investors into taking more risk than is justified," is the somewhat chilling warning that PIMCO's Mohamed El-Erian gives in this excellent interview with the WSJ. "Central banks are operating through the wealth effect and animal spirits," El-Erian says peeling back the truth onion, as they prop up asset prices to "artificial levels, in virtually every market." Worries over the central bankers of the world withdrawing easy money policies too early are "unwarranted," he notes, adding that he suspects, "they will most likely stay too long and they will consciously make that mistake." Critically, though, he sends a message that appears to fit with many of our recent discussions (most recently here) that "if these levels aren’t validated by the fundamentals, then investors will get hurt."

8---New Report on Torture, Extraordinary Rendition, antiwar

“The sweeping, 577-page report says that while brutality has occurred in every American war, there never before had been ‘the kind of considered and detailed discussions that occurred after 9/11 directly involving a president and his top advisers on the wisdom, propriety and legality of inflicting pain and torment on some detainees in our custody,’” The New York Times reports.

9---IMF Renews Push Against Austerity, WSJ

Seeking to keep a fragile global recovery on track, the International Monetary Fund on Tuesday called on countries that can afford it—including the U.S. and Britain—to slow the pace of their austerity measures.
The fund warned that "overly strong" belt-tightening in the U.S. will slow growth this year. Across-the-board government spending cuts, known as the sequester, were the "wrong way" to shrink the budget deficit, it said in its semiannual report on economic growth.
Those cuts should be replaced by more targeted reductions that would take effect further down the road—after the economy gains more strength, the report said...

The outcome matters to the U.S. because its economy is closely linked to Europe's and could be hurt if the euro zone's financial turmoil escalates. The White House is seeking to swap the sequester with more backloaded spending cuts and tax increases at home, while pressing European policy makers to slow the pace of their austerity programs and generate stronger growth....

New figures this week showed that China's economy had slowed unexpectedly in the first three months of the year, sparking concerns that a recovery that began in the second half of last year could be running out of steam.
U.S. consumers are showing fresh caution by pulling back on spending, new data showed Friday, raising worries that the economy could be headed for yet another spring slowdown.
Meanwhile, growth in the euro area is hovering close to zero and the IMF forecast that the region's economy would shrink again in 2013. The U.K. is also at risk of falling into a "triple-dip" recession as its austerity drive continues to bite.
The IMF still believes that the U.S., Japan and Europe need to bring their budget deficits under control over the longer-term, saying they are not sustainable.
But it also says countries such as the U.K, with low borrowing costs, should adjust the timing and pace of their efforts to avoid killing growth.
The IMF's latest World Economic Outlook report shows how much its policy prescriptions have shifted in recent years.

10---Record Buybacks Creating Massive Float Shrink, Trimtabs

there is lots more bullish stuff happening on top of that, also as a result of the Fed’s zero interest rate policy. Over the past seven weeks since the start of February companies have been reducing the total number of shares outstanding by $120. The are two ways the number of shares shrink, buybacks and cash takeovers. No surprise, then there has been a record number of buybacks announced since the start of February. There have also been a bumper crop of new cash takeovers. The number of shares grows when companies and or insiders sell new shares. Bottom line, since the start of February the trading float of shares has shrunk by $120 billion. That translates into an annual rate of over $900 billion and that would compare with $248 billion in total float shrink for all of 2012.

Here’s why this is such a big deal. In essence over the last seven weeks companies have given shareholders $120 billion in cash in exchange for shares. Compare that $120 billion with just $50 billion of new money going into all equity mutual and exchange traded funds so far for all of 2013.

Remember, 80% of US stocks are held by institutions. Institutions typically have a constant rate of cash holdings, whether 1% or 5%. When the number of share held by institutions shrinks by $100 billion, or around 80% of $120 billion, that means those institutions have more money with which to buy the fewer shares available in the equity markets. Therefore, the price of the remaining shares should go up.

11---It's not too much of a stretch to submit that the non-distressed properties might not have seen as much HPA without the REO inventory prices soaring, zero hedge

Jed reflects the impression of many people in and outside the housing markets; that the rise in residential home prices augers a true recovery in real estate prices and not merely a decline in distressed sales at relatively low price points.  I use the plural deliberately because we are talking about hundreds of large markets around the US when we look at the aggregate, average price indices that the Big Media uses to describe monthly price change in the American real estate market.  

If we look at some of the data from RealtyTrac (, however, and go down to the local level, the importance of the changes in spread between distressed and normal sales seemingly takes on greater importance.  For example, in Phoenix, non-distressed properties saw prices rise 22%, while REO sales prices were up 30%. Atlanta was an even better example: non-distressed properties had a 16% annual increase compared to 34% for REOs. It's not too much of a stretch to submit that the non-distressed properties might not have seen as much HPA without the REO inventory prices soaring. We can't exactly prove that yet, but it's equally hard to disprove.
The only way that the Federal Open Market can claim that QE is working to boost housing is to pretend that credit is growing instead of shrinking, that tenants are becoming home buyers, and the continued, indeed rising flow of NPLs into the secondary market is all part of a normal economic recovery.  We all know that none of these things are true.  But such is the big lie coming from the confidence peddlers at the Federal Reserve Board.   (Thanks to Rick Sharga for insights on RealtyTrac data)

12---Fed’s Plosser: Now Is A Good Time To Revisit Tightening Plan, WSJ

Mr. Plosser believes now is a good time for the Fed to revisit its exit strategy, given that it’s been nearly two years since it’s been given formal consideration. While much of what he believed then still holds now, the official notes much has happened since then, most notably a massive expansion in an already historical swollen Fed balance sheet. For that reason, it would be good for the central bank to clarify the manner in which it will ultimately withdraw the stimulus it is still pumping into the economy.

13---U.S. Stocks Decline as Earnings Miss Analyst Estimates, Bloomberg

14---How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?, CEPR

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.
There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting....

This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.

In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff. But it was the initial R&R papers that created the framework for most of the subsequent policy debate. And HAP has shown that the key finding that debt slows growth was driven overwhelmingly by the exclusion of 4 years of data from New Zealand.
If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere. It should also cause reporters to be a bit slower to accept such sweeping claims at face value.

15---More on Rogoff Reinhart, CEPR

The federal government owns literally tens of trillions of dollars of assets. The most obvious form of these assets is land, but it can also sell off fishing rights, use of the airwaves, and even patent and copyright monopolies. If we actually believe that high debt ratios impose some severe burden on future growth then nothing stops the federal government from selling off $5 trillion in assets and reducing its debt-to-GDP ratio by 30 percentage points.
Note there is no entry in a debt-to-GDP ratio for assets, just liabilities. So if we believe the R&R story, then we can increase the growth rate through this sort of asset sale.
Just to be clear, I think this is absurd. If we are doomed to slow growth because we have a debt-to-GDP ratio of 100 percent of GDP, it can't make any sense that we free ourselves from this burden by selling huge amounts of coastline or whatever other assets can get us up to $5 trillion. I mention this possibility to point out the silliness of the R&R view, not because I think that a massive asset sale would be good policy.

16--Holy Coding Error, Batman, NYT

The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policy makers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear. One was Alesina/Ardagna on the macroeconomic effects of austerity, which immediately became exhibit A for those who wanted to believe in expansionary austerity. Unfortunately, even aside from the paper’s failure to distinguish between episodes in which monetary policy was available and those in which it wasn’t, it turned out that their approach to measuring austerity was all wrong; when the IMF used a measure that tracked actual policy, it turned out that contractionary policy was contractionary.

The other paper, which has had immense influence — largely because in the VSP world it is taken to have established a definitive result — was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone “knew” that terrible things happen when debt passes 90 percent of GDP.

17---Gold price fall points to global deflation, global economy "stuck in a rut"...wsws

The rapid fall in the price of gold over the past few days—its biggest plunge in more than 30 years—is an indication that deflationary tendencies are strengthening throughout the world economy.
As one commentator on the Australian Business Spectator web site put it: “Are we witnessing a global slump unfolding before our eyes?”...

The fall in the gold price, despite the flood of money into financial markets indicates that other, more powerful, forces are at work. An examination of the operation of quantitative easing indicates the underlying causes.
The official reason for the historically unprecedented measures being undertaken by the world’s central banks—the injection of trillions of dollars into the monetary system through the purchases of government bonds—is that such emergency action is needed to revive the economy. But the inflow of money is not going beyond the confines of the banks and finance houses.
Rather than financing new investment projects, thereby stimulating demand and production, the money supplied by the central banks has largely been used for speculation in equity and commodity markets.

The upswing in these markets has taken place against the background of deepening recessionary and deflationary tendencies in the world economy as a whole, as even a brief review makes clear.
In the United States, joblessness remains chronically high, with the average duration of unemployment reaching 37 weeks in March. In Europe, unemployment in Spain, Greece and other countries has reached more than 25 percent. Youth joblessness is more than 50 percent. The economy of the eurozone as a whole contracted last year and will stagnate or even contract further in 2013.
Moreover, the real Chinese growth figures may be well below the official numbers. In the past, energy consumption in China has risen faster than gross domestic product. Last year, however, as the economy supposedly expanded by 7.8 percent, energy usage grew by only 5.5 percent.
As Pettis commented, actual growth may have been 7.2 percent for 2011 and 5.5 percent for 2012 with “other economists … suggesting even lower numbers, closer to zero.”

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