Saturday, April 20, 2013

Today's links

Today's quote: Aimé Césaire:
And then one fine day the bourgeoisie is awakened by a terrific boomerang effect: the gestapos are busy, the prisons fill up, the torturers standing around the racks invent, refine, discuss.
People are surprised, they become indignant. They say: "How strange! But never mind - it's Nazism, it will pass!" And they wait, and they hope; and they hide the truth from themselves, that it is barbarism, the supreme barbarism, the crowning barbarism that sums up the daily barbarisms; that it is Nazism, yes, but that before they were its victims, they were its accomplices; that they tolerated that Nazism before it was inflicted on them, that they absolved it, shut their eyes to it, legitimized it, because, until then, it had been applied only to non-European peoples; that they have cultivated that Nazism, that they are responsible for it, and that before engulfing the whole edifice of Western, Christian civilization in its reddened waters, it oozes, seeps and trickles from every crack.
2--More on the R-R debacle, Bruegal

The 90% threshold, the austerity narrative, and the twitter backlash
Paul Krugman writes that the intellectual edifice of austerity economics rests largely on two academic papers that have now been debunked. One was Alesina/Ardagna (see our previous review here) on expansionary fiscal contractions. The other paper, which has had immense influence, 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.

Mike Konczal writes that from the beginning there have been complaints that RR weren't releasing the data for their results (e.g. Dean Baker). Konczal knew of several people trying to replicate the results who were bumping into walls left and right - it couldn't be done. After trying to replicate the RR results and failing, Thomas Herndon, Michael Ash, Robert Pollin (HAP) reached out to RR and they were willing to share their data spreadsheet. This allowed Herndon et al. to see how RR's data was constructed.

Data issues in “Growth in a time of debt”
Mike Konczal writes that HAP find that three main issues stand out. First, RR selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias their results, and without them you don't get their controversial result about low growth for countries with a debt to GDP ratio higher than 90%.  ...

Reinhart and Rogoff writes that the charge of selective omissions is the one they object to in the strongest terms. The “gaps” are explained by the fact there were still gaps in our public data debt set at the time of this paper, a data set no one else had ever been able to construct before and which we now have filled in much more completely.

The conceptual issues in “Growth in a time of debt”
Coppola writes that the Rortybomb blog delivered the killer punch to RR. Econometric analysis by Arindrajit Dube demonstrated that even with good data, the economic analysis was flawed and the conclusions unjustifiable. High public debt cannot reliably be shown to cause low growth. But low growth can reasonably reliably be shown to cause high public debt. Ritwik Priya writes that it is worth pointing out that the main reason RR come up with the 90% figure is because their intervals are of 30% i.e. they split the data into buckets of 0-30%, 30-60% and so on. This is purely a modeling choice artifact, and the actual tipping point, assuming any exists, may be 80% or 110% or 93.7%.

3---Meet the 28-Year-Old Grad Student Who Just Shook the Global Austerity Movement, NYM

What Herndon had discovered was that by making a sloppy computing error, Reinhart and Rogoff had forgotten to include a critical piece of data about countries with high debt-to-GDP ratios that would have affected their overall calculations. They had also excluded data from Canada, New Zealand, and Australia — all countries that experienced solid growth during periods of high debt and would thus undercut their thesis that high debt forestalls growth.
Herndon was stunned. As a graduate student, he'd just found serious problems in a famous economic study — the academic equivalent of a D-league basketball player dunking on LeBron James. "They say seeing is believing, but I almost didn’t believe my eyes," he says. "I had to ask my girlfriend — who's a Ph.D. student in sociology — to double-check it. And she said, 'I don't think you're seeing things, Thomas.'"
The mistakes Herndon found were so big, in fact, that even Herndon's professors didn't believe him at first. As Reuters reported earlier:
"At first, I didn't believe him. I thought, 'OK he's a student, he's got to be wrong. These are eminent economists and he's a graduate student,'" [UMass Amherst professor Robert] Pollin said. "So we pushed him and pushed him and pushed him, and after about a month of pushing him I said, 'Goddamn it, he's right.'"
After consulting his professors, Herndon signed two of them — Pollin and department chair Michael Ash — on as co-authors, and the three of them quickly put together a paper outlining their findings. The paper cut to the core of a debate that has been dividing economists and politicians for decades. Fans of austerity believe that governments should cut spending in order to grow their economies, while anti-austerians believe that government spending in times of economic duress can create growth and reduce unemployment, even if it increases debt in the short term. What Herndon et al. were claiming, in essence, was that the pro-austerity movement was relying on bogus information....

Herndon says he isn't implying that Reinhart and Rogoff intentionally skewed their data to support a pro-austerity finding, and simply reported the errors.
"I don’t want to sound the alarm and call for anyone’s jobs," he says. "I didn’t do this to be punitive or malicious."
With Reinhart and Rogoff's once-authoritative work now under serious question, there's no question that the austerity movement has been dealt a major blow

4---Before the Economic Collapse, A Call to Action, global research

let’s explode a critical myth: there is no recovery (at least for the 99%). Last month’s unemployment numbers revealed the fraud of the unemployment rate.  Even though the country produced less than 90,000 new jobs, when over 120,000 are needed to keep up with growth, the unemployment rate declined. Why? Because hundreds of thousands are giving up on work each month and they don’t get counted.
At present, over 100 million working age Americans do not have a job that is 41.5%.  And, for some groups, African Americans and youth in particular, this is a persistent jobs crisis that ensures low incomes and little wealth for the future. And, workers who do have jobs are paid way too little, about half of the value of what they actually produce. There will be no recovery until these fundamentals change.
The combination of poor federal economic policy – which is getting more off-track – and a corrupt economy is bringing on the next crash.
 
 
Post-electoral violence continues. Washington’s long arm orchestrates it. Doing so colludes with internal dark forces.
Maduro pulled no punches. He pointed fingers the right way, saying:
“The United States embassy has financed all the acts of violence in this country.” Earlier he expelled two US military attaches involved. He accused another embassy employee of plotting to sabotage Venezuela’s electrical grid.
“I will use a hard hand against fascism and intolerance,” he added. “I declare it. If they want to overthrow me, come and get me. Here I am with the people and the armed forces.”
6--US Intel chief says Iran not building nukes, info clearinghouse

7--R-R again. "Don't pander", Krugman, NYT

What happened with R-R was that they came out with a sloppy paper that played to the spirit of the times. The sloppiness was immediately obvious from the way they highlighted slow US growth in the late 1940s as an illustration of the price of debt overhang, somehow missing the point about postwar demobilization. It took only a few days for critics to point out the correlation versus causation issue too.
Now, that was the point where R-R should have said, OK, we’ve been careless here, we need to rethink this, and backed off. But the paper was also a huge immediate hit with the austerians, and they got sucked in.

Notice, however, that the problem with the original wasn’t that it failed to convey the nuances. The problem was that it was just plain wrong — wrong about America after the war, wrong about what a debt-growth correlation means. (It turns out that there was other wrongness too, but that was enough).
So the moral of the story should not be, “Don’t take strong positions”. It should instead be “Don’t take a strong position that some people want to hear if the position isn’t supported by theory and evidence”. Or maybe, even more briefly, “Don’t pander”.

8---R-R, "myth not math", smirking chimp

Math as Mantra -- and Absolution
But why did it catch on?
The alien-hunting Agent Mulder on The X-Files had a poster which read, "I Want to Believe." In the policy world, numbers can take on a magical aura. They can make ideologically-driven decisions look like the unbiased conclusions of wise technocrats. Your conscience need trouble you no longer, however harsh your deeds. It's no longer your fault.
The numbers told you to do it.

Reinhart and Rogoff offered the policy world a magic number which absolved them of responsibility or sin. A typical reaction came from Peter Orszag, who was President Obama's Director of the Office of Management at the time. "I don't think it's too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff," said Orszag in 2011. "I didn't realize we were in a Reinhart-Rogoff situation until 2010."...

If you believe in Reinhart and Rogoff's magic number, you'll come to believe that Social Security is unsustainable. You'll think that its legal protections are merely an inconvenience. You'll eventually conclude that the government must welsh on its debt to the Social Security Trust Fund -- and to all of its future beneficiaries -- to prevent a catastrophe.
You'll oppose lifting the payroll tax cap to shore up Social Security, even though it fixes most actuarial problems, because that doesn't address the Reinhart/Rogoff number. Neither does a financial transaction tax.
You'll oppose increasing benefits and raising taxes for everyone, too, even though voters across the political spectrum say they're willing to pay more in return for better benefits. But that doesn't move the 90 percent "red line" either.
You'll have very little patience for arguing with economic writers you perceive as left-wing and "ideological." You'll think to yourself, 'Hasn't this guy read Reinhart and Rogoff?' And you'll turn away. Among the "147 people" you know, the people you really know, you'd get a lot of support and praise for hanging tough against these diatribes from uninformed outsiders.
...
Herndon et al. have conclusively disproved Reinhart and Rogoff's findings.
There's nothing left.
One could argue that the senior administration official's argument was only partly based on Reinhart and Rogoff. But the official was fixated on lower debt as a percentage of GDP. That's pure Reinhart/Rogoff. And we now know they gave the world bad information. It's clear that their inaccurate paper fueled and amplified a debt panic among leaders and advisors in both parties, and helped turn the tide in favor of austerity.

This new revelation undercuts the last remaining technical argument in favor of the chained-CPI benefit cut (which also includes a middle-class tax hike.) The White House and this president now face a test of character: Will they change their position in the face of new information?
We now know that Reinhart and Rogoff offered myth, not math. And today the whole world's in a "Reinhart-Rogoff situation" as it suffers the financial after-effects of their negligent numerology.

9---The Boston Bombings in Context: How the FBI Fosters, Funds and Equips American Terrorists, global research

In 2005, federal prosecutors charged Michael Reynolds, a 47 year old drifter living with his elderly mother, of attempting to wage jihad on the US by blowing up fuel facilities. In reality, his plan for jihad was little more than a series of conversations he had on a Yahoo! Chat room with a US judge posing as a militant. He was arrested after agreeing to meet with an FBI informant who had promised him $40,000 for his cause, and two months later the FBI quietly announced he was likely mentally ill. He was eventually convicted and is curently serving 25 years in jail.

10---CIA, drones and Raymond Davis, wsws

During that period, the CIA broke various promises it had made to the Pakistani authorities, including the promise to clear drone targets with them, and dramatically ramped up the rate of killings. Meanwhile, Pakistan captured CIA operative Raymond Davis (whom the Obama administration falsely claimed was a “diplomat”) after a January 2011 incident in Lahore, in which Davis shot and killed two Pakistani civilians and an American SUV ran over and killed a third before fleeing the scene.

What Davis was doing in Pakistan has never been fully explained. A February 2011 report in the Karachi-based Express Tribune, an affiliate of the International Herald Tribune, cited a senior official in the Punjab police who claimed “that Davis was masterminding terrorist activities in Lahore and other parts of Punjab.”

Davis had “close links” with the Tehreek-e-Taliban (TTP), the official said. “Davis was instrumental in recruiting young people from Punjab for the Taliban to fuel the bloody insurgency.”

After the US secured Davis’ release in March 2011, the CIA bombed a tribal council meeting in the village of Datta Khel in North Waziristan, killing dozens of people. Mazzetti cites unnamed “American officials” who “suspected that the massive strike was the CIA venting its anger about the Davis episode.” (See, CIA killer Raymond Davis released by Pakistani authorities .)

11---Keynes on "austerity", Brad Delong

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures--fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers' tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for "austerity."
John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s:
It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the Mammon of Unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.

We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.
I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...
I do not understand it either. But many people do indeed think so. And I do not understand why such people think as they do.

12--G-Sax: A consumption setback, Lance Roberts, prag cap

At some point, despite the ongoing interventions by the Federal Reserve, the stock market will revert to the underlying fundamental story which has been slowly deteriorating over time.
The difference between my view and that of Jan Hatzius, and most other economists, is that the current slowdown is not just a “soft patch” but the end of the expansionary cycle that began in 2009.   That belief is simply based on the fact that economies do not grow indefinitely but cycle between expansions and contractions.  In the current economic environment, where the consumer is caught in a balance sheet deleveraging cycle, economic contractions occur more frequently than they do under more normal economic conditions.   This is not an indictment of fiscal, or monetary, policies but simply a statement about the cycles of an economy.

The question that remains to be answered is simply how long can the Fed’s artificial intervention programs continue to elevate asset prices?  Unfortunately, no one really knows the answer.  However, we do know that the during “normal” economic contractions the markets correct on average by roughly 30%.  Since the current elevation in asset prices has not been due to improving fundamentals but rather artificial inflation – it is likely the next correction in the markets, and the economy, will be anything but normal.

13---Gloomy Consumers May Suffer from Media Overload, WSJ

14---Derivatives fuel violent gold swings, IFR

Various factors, including comments from ECB chief Mario Draghi and macroeconomic developments, are thought to have sparked the selloff in the precious metal. But traders have no doubt that the violent swings – which saw the CBOE’s gold volatility index spike to 34.48 on Monday compared with its year-to-date average of 14.25 – were exacerbated by huge flows from investors dumping synthetic products or covering long positions, and dealers hedging exotic derivatives.

“The gold market is very complex with a lot of cross-flows, but the activity in derivatives – including vanilla flows, hedging of exotic products and mining companies potentially looking to hedge their exposures – has been an important factor in explaining the move down in the spot gold price,” said Stephane Mattatia, head of flow engineering at Societe Generale.
Trading desks have been swamped with orders from hedge funds, retail investors and private banks seeking to hedge their exposure to the metal, causing puts on gold to become more expensive than calls across the curve.

The options market has also exerted downward pressure on gold. “The binary nature of the gold options market means there are long periods of quiet followed by sudden, increasingly violent moves,” said Jerome Bussiere, global head of precious metals derivatives at HSBC.
In particular, hedge funds with long gold positions bought puts from dealers in very large size to shield themselves from losses as the market plummeted. Dealers then had to sell gold to hedge their position, creating a vicious, downward spiral.
“When the market moves, it moves more because of these speculative players,” said Bussiere.

 
 

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