Thursday, April 18, 2013

Today's links

1---Young Student Loan Borrowers Retreat from Housing and Auto Markets, FRBNY

2----The Crumbling Case for Austerity Economics, New Yorker

Blanchard, the chief economist of the International Monetary Fund, casting aside the hair shirt that usually comes with his job and warning Mrs. T’s successors in the Conservative Party leadership that, by sticking with austerity policies in the face of prolonged economic weakness, they are “playing with fire.” Blanchard, an M.I.T. professor who has been at the I.M.F. since 2008, also took the U.S. government to task, warning that its embrace of tax increases and spending cuts was premature.

If the I.M.F.’s policy U-turn wasn’t enough to dismay the remaining supporters of austerity policies, there also came news of a deadly assault from left field. In a new research paper that was featured prominently in Wednesday’s editions of The New York Times and the Financial Times, three economists from the University of Massachusetts at Amherst document glaring faults and omissions in the widely cited research of Carmen Reinhart and Ken Rogoff, which claimed to demonstrate that countries which run up big debts suffer a drastic penalty in terms of economic growth. Reinhart and Rogoff, the authors of the 2010 best-seller “This Time is Different: Eight Centuries of Financial Folly,” omitted relevant data, weighted their calculations in an unusual manner, and made an elementary coding blunder. Each of these errors slanted their results in favor of the thesis that debt harms growth....

When Reinhart and Rogoff published their research, one of its apparent strengths was that it relied on straightforward arithmetic rather than fancy econometrics, the results of which are often hard to evaluate. Rather than carrying out cross-country and time-series regressions, which is the usual approach, they simply lumped each country in their sample into different categories, depending on how much public debt they had relative to their gross domestic product: zero to thirty per cent; thirty to sixty per cent; sixty to ninety per cent; and above ninety per cent. Then the authors did some arithmetic, which seemingly showed that once countries crossed the debt threshold of ninety per cent of G.D.P. they stopped growing....

George Osborne and other supporters of austerity policies seized upon Reinhart and Rogoff’s conclusions to argue that countries with rapidly rising debt burdens, such as Britain and the United States, had no choice but to introduce austerity policies. Were they misinterpreting Reinhart and Rogoff? I don’t think so. In an April, 2010, piece in the Financial Times, the two authors wrote, “The sooner politicians reconcile themselves to accepting [fiscal] adjustment, the lower the risks of truly paralysing debt problems down the road.”

3---With Debt Study’s Errors Confirmed, Debate on Conclusion Goes On, NYT

In an e-mailed statement, Professors Reinhart and Rogoff admit their mistakes but argue that they do not change the ultimate lessons of the paper, originally published in The American Economic Review. “We are grateful to Herndon et al. for the careful attention to our original ‘Growth in a Time of Debt’ AER paper and for pointing out an important correction,” they write. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.”

Both the University of Massachusetts and the Harvard authors now find that countries whose debt loads are 90 percent or more of their annual economic output tend to experience slower growth than countries whose debt loads are lighter — though the effect is much smaller than previously thought.
The debate now centers on how to interpret those muddier results — and how the incorrect results influenced public policy in the post-crisis years.

The debate over interpreting the new results has centered on the thorny question of causation. Does low growth cause high debts, or do high debts cause low growth? Can the Reinhart-Rogoff data set shine any light on that question? For their part, Professors Reinhart and Rogoff do not make a causal case in their paper, though they have in subsequent public comments

4---The mix in California real estate – Did the median price go up by 28 percent in one year?, Dr Housing Bubble

Non-distressed sales
An interesting chart that I recently saw broke out the number of non-distressed sales for California between 2005 and 2013:
CA-FEB-ORGANIC-SALES
Source:  mhanson.com

5---More Evidence That The Economic Peak Is In, Lance Roberts, zero hedge

CONCLUSION

Evidence continues to mount that we have seen the peak of activity for the current economic cycle.  The implications of such an occurrence are broad and suggests that the Fed's liquidity driven interventions, and zero interest rate policy, may have well seen the end of their effectiveness. 

The problem for the financial markets is twofold.  First, expanding economic activity is what drives revenue growth and expanding profit margins.   The chart below shows that the annual rate of change in operating earnings peaked in 2010 along with economic activity. 

S&P500-OperatingEarnings-2009-041613

Secondly, the financial markets have risen under the belief that the Fed will continue to "do whatever is necessary" to support the markets and the economy.  However, to date, we have seen little evidence of "other policy tools" since the financial crisis began.  In fact, outside of the Fed's intervention programs, there has been little evidence of an organic economic recovery.  Therfore, if the Fed, as I suspect, is closer to the bottom of their monetary magic toolbox  than currently believed - it would put the economy, and the financial markets, into potential jeopardy.  

I concluded last time by stating:

"Regardless of your personal views about the economy, the political environment or the markets - what is important is to separate emotion from investing. While the Fed's continued liquidity injections have sharply boosted asset prices in recent months - the bond market, as shown in the chart below, has continued to show a preference of safety over risk. With rates plunging in recent weeks the indictment from the bond market concurs with the longer term data that the economy remains at risk.

6---Chinese Auditor Warns "Out Of Control" Chinese Debt Could Spark Bigger Crisis Than US Housing Crash, zero hedge

7--China debt-to-GDP, macrobusiness

8---Is the Fed printing money?, Mish

started thinking more about definitions while reading the Hoisington Quarterly Review and Outlook for First Quarter 2013 by Lacy H. Hunt and Van R. Hoisington.
“The Federal Reserve is printing money”. No statement could be less truthful. The Federal Reserve (Fed) is not, and has not been, “printing money” as defined as an acceleration in M2 or money supply. Just check the facts. For the first quarter of 2013 the Fed purchased $277.5 billion in securities (net) as their security portfolio expanded from $2.660 trillion to $2.937 trillion. A review of post-war economic history would lead to a logical assumption that the money supply (M2) would respond upward to this massive infusion of reserves into the banking system. The reality is just the opposite. The last week of December, 2012 showed M2 at $10.505 trillion, but at the end of March, 2013 it totaled only $10.450 trillion which was an unexpected decline of $55 billion. Printing money? No.
My Opinion

Personally, I think the Fed is printing. Indeed Bernanke is on record stating that he is printing....

Rather than debate the meaning of "printing" let's look at the facts Lacy Hunt points out.

  • M2 is falling
  • Velocity is at a six decade low
  • No signs suggest credit creation is turning more productive
  • Debt Constrains Growth
  • Commodities are down 20% in the last two years
9---Thatcher’s funeral: Pomp in the service of political reaction, wsws

Adjectives to describe yesterday’s funeral of former Conservative prime minister Margaret Thatcher are not hard to find: nauseating, obscene, provocative.
She was, after all, the most hated political figure in recent British history—an admirer of the Pinochet dictatorship in Chile and the racist apartheid regime in South Africa, who wrought destruction on working class communities throughout the UK....

Present were former US secretaries of state George Shultz and James Baker, former US vice president Dick Cheney and former US secretary of state Henry Kissinger. Newt Gingrich and “Tea Party” leader Michele Bachmann were also in attendance.
Israel’s Benjamin Netanyahu was joined by F.W. de Klerk, the last apartheid-era South African president, Australia’s John Howard, Canada’s Stephen Harper and, from Poland, Lech Walesa and Prime Minister Donald Tusk.

The presence of former Labour prime ministers Tony Blair and Gordon Brown completed the rogue’s gallery. Both are the political heirs of Thatcher and approved her funeral arrangements.
The aim may have been to demonstrate the unchallenged ascendancy of the right-wing economic nostrums from which those gathered have all benefited. However, the shrill and intimidatory tone adopted by the media and the bombast and hyperbole accompanying the funeral testify to the weakness, not the strength of the ruling elite.
No amount of official pageantry can conceal the fact that Thatcher is being buried amid the collapse of the entire political project with which she is associated.

In the final analysis, “Thatcherism” represented the desperate and rapacious efforts of the British bourgeoisie to stem its declining global position. But the means through which it sought to do so—imperialist wars, and an assault on the social position of the working class combined with rampant financial speculation, wholly unconnected to any genuinely economically productive activity—were themselves the reflection of its ongoing putrefaction.

The near collapse of this entire economic edifice in 2008 has produced only an extension of the same reactionary and bankrupt agenda. The process of self-enrichment of the few has continued, paid for through savage austerity measures for the many.

As Thatcher was laid to rest, the Conservative/Liberal Democrat coalition began the initial rolling out in four London boroughs of a national cap on welfare benefits that will make 80,000 people homeless in the capital alone. Figures released the same day showed that official UK employment rose by 70,000 in the last quarter to 2.56 million, while the number of unemployed 16- to 24-year-olds increased by 20,000 to 979,000....

The extreme disjoint between the official presentation of Thatcher and the hatred and contempt in which she is held by working people is an ideological expression of a polarisation in class relations that is unsustainable. It points clearly to political storms that lie ahead.

10---IMF slashes world growth outlook, wsws

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