Saturday, April 27, 2013

Today's links


1---Report on US economic growth points to continuing stagnation, wsws
  
The US economy grew at an annualized rate of 2.5 percent in the first three months of 2013, according to an initial estimate released Friday by the Commerce Department’s Bureau of Economic Analysis. This rate, far lower than economists’ projections of 3.0 percent to 3.2 percent, reflects a continuation of the stagnation since the financial crash of 2008 that has left unemployment at near-Depression levels and fueled the growth of poverty, homelessness and social inequality.

A growth rate of 2.5 percent in the country’s gross domestic product (GDP) is too weak to significantly impact the jobs crisis. US employers added only 88,000 new jobs in March, according to the employment report released on April 5 by the Labor Department. The official jobless rate declined to 7.6 percent only because a staggering 496,000 people gave up looking for work and dropped out of the labor market.
...
The $85 billion in across-the-board US sequester cuts this fiscal year took effect only at the beginning of March. Those cuts, combined with the ending January 1 of a two-year reduction in the payroll tax, are already having a negative effect on workers’ income. The Commerce Department report noted that real disposable personal income fell by 5.3 percent in the first quarter of this year, the biggest drop since the third quarter of 2009.

Meanwhile, corporate profits continue to soar, buoyed by wage-cutting and the Federal Reserve Board’s infusion into the financial markets of $85 billion a month in virtually free credit. In the current round of first quarter corporate profit reports, more than two-thirds of firms have surpassed the earnings projections of Wall Street economists.

The gap between the financial elite and everyone else, which, according to a report released this week by the Pew Research Center, saw the wealth of the bottom 93 percent fall during the so-called “recovery” while that of the top 7 percent jumped 28 percent, will only grow wider....

A major factor in holding back growth was a further cutback in spending at all levels of government—federal, state and local. Non-defense federal spending fell by 2.0 percent and defense spending contracted by 11.5 percent. State and local government spending fell by 1.2 percent. Overall, government spending fell at an annual rate of 8.4 percent, after decreasing by 14.8 percent in the previous quarter.

A rise in the US trade deficit cut another 0.5 percentage points from the GDP figure.
The GDP report follows a raft of poor economic data. As Bloomberg News put it on Friday, “On the whole, the information we have been gathering about the health of the economy has been overwhelmingly negative.”

On Wednesday, the Commerce Department reported that durable goods orders fell sharply in March. Orders for such goods—those meant to last three years or more—dropped by 5.7 percent after a downwardly revised gain of 4.3 percent in February. This was the biggest fall in seven months.

The flash Purchasing Managers Index (PMI) for the US, released this week, showed a fall to 52 in April, down from 54.6 in March and the lowest figure since last November. The PMI is a key indicator of industrial output.
(Fewer loans, fewer jobs)
The Wall Street Journal reported Friday, citing Federal Reserve data, that US companies are pulling back on borrowing, resulting in a 9 percent decline in outstanding loans by the biggest banks in the first two weeks of April, as compared to the end of March. Speaking of the sudden drying up of loans, the chairman and CEO of BB&T bank, Kelly King, said, “We didn’t expect the wall we hit.”

2---The great Spanish nation can end its crucifixion at will by leaving EMU, Telegraph

3---Change in Real Wages since Q1 2000

Source: NYT
The G.D.P. report released Friday states the total government part of G.D.P. – federal, state and local – came to $3.0306 trillion in the first quarter of this year. That is 0.01 percent below the $3.0309 trillion recorded four years earlier.
Those are nominal figures, not adjusted for inflation (as are the figures in the chart below). On a real basis, the decline was 6.5 percent.


Governments as a group had 648,000 fewer employees in March than they had three years earlier. Some of that decline – 87,000 jobs – reflects temporary employment for the 2010 census, but the rest reflects real cutbacks. Most of that decline has been in local government jobs, and most of the fall in local government jobs has come in schools.
Source: Bureau of Labor Statistics, via Haver Analytics
In the G.D.P. numbers, state and local spending is up a little over the last three years, measured in nominal terms. The decline came from federal spending.
Aides to Ronald Reagan used to talk about “starving the beast.” In the Obama years, it is happening

6---The Government’s Mortgage Fix Is Failing, Realty Check

7--American austerity, NYT

There is some tendency among economic commentators to think that austerity policies in a deeply depressed economy are mainly a European thing; you even find a fair number of people imagining that the United States is still engaged in fiscal stimulus. But the truth is that federal stimulus is years behind us, while state and local governments have cut back, so the overall story is one of fiscal contraction that’s smaller than in Europe, but not by that much.

To see what’s going on, you need to do two things. First, you should include state and local; second, you shouldn’t divide by GDP, because a depressed GDP can cause the spending/GDP ratio to rise even if spending falls. So it’s useful to look at the ratio of overall government expenditure to potential GDP — what the economy would be producing if it were at full employment; CBO provides standard estimates of this number. And here’s what we see:
Spending is down to what it was before the recession, and also significantly lower than it was under Reagan. Bear in mind that in the years since the recession began we’ve seen a significant number of boomers reach retirement age, which would ordinarily have led to rising spending, not to mention the effects of rising health care costs. Bear in mind also that the private sector is still deleveraging, which means that government should be spending more to help sustain the economy. So this is actually a picture of very bad policy.

8--More on austerity, NYT

1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment

9--Enormous DHS Bullet Usage Defies Common Sense, antiwar

10---Syria: U.S. manipulating chemical weapons evidence, like it did with Iraq, antiwar

12---GDP according to the experts, WSJ

The most remarkable story of the first quarter GDP report is, however, consumer spending. Despite the expiration of the payroll tax at the end of 2012, real consumer spending rose a strong 3.2% — the fastest quarterly increase since the fourth quarter of 2010. Driven by rising demand for motor vehicles, durables were up another strong 8.1% (after +13.6% and +8.9% in the previous two quarters). Moreover, consumption of services picked up 3.1%, which in turn is the strongest increase since the second quarter 2005. The acceleration in services is a very important development, as this category accounts for almost 50% of consumer spending. We think that this development reflects positive spillovers from the housing recovery to certain service industries–Harm Bandholz, Unicredit
 
While the consumption figures were better than expected, real disposable income saw its biggest drop since 2009 while the savings rate fell to the lowest since the end of 2007. That is not a positive. –Dan Greenhaus, BTIG LLC
 
The consensus always looked a bit on the hopeful side, given evidence of sustained weakness in government spending. And so it proved, with the fourth quarter’s massive 22.1% plunge in the defense component followed by an 11.5% drop in the first quarter. Non-defense and state/local spending dipped too. –Ian Shepherdson, Pantheon Macroeconomic Advisors
 
The expiry of the payroll tax cut contributed to a 5.3% annualized slump in real disposable incomes and government spending contracted by a further 4.1%, led by an 11.5% drop in defense spending. Remember, that drop in defense spending comes on the heels of a 22.1% slump in the final quarter of last year. The decline in government expenditure over the past two quarters is the biggest six-month contraction since the Korean war ended and it has taken the level back to where it was in mid-2007,–Paul Ashworth, Capital Economics
 
The effects of the sequester are only starting to be implemented and will become magnified in the coming quarters. The cuts in the first quarter were largely unrelated to the sequester; as such, the public sector is poised to further drag on growth in the quarters ahead. With the outlook for business investment still unclear, exports constrained by weakness outside the U.S., and government spending set to decline, can consumers carry the load to keep the economy moving forward over the next few quarters? That remains an open question. –Jim Baird, Plante Moran Financial Advisors..
 
There is no clear indication that underlying demand has either strengthened nor slowed in the recovery cycle to date. However, with significant fiscal tightening in the pipeline, we expect a modestly softer picture in the remainder of the year, sufficient to keep the majority of monetary policymakers happy to maintain the current stance of accommodation. –Peter Newland, Barclays Capital
 
Trade was a substantial negative, subtracting 0.5 percentage point from growth in the first quarter. Exports rose 2.9 percent at an annual rate for the quarter, after falling 2.8 percent in the fourth quarter. But imports rose even more strongly, increasing 5.4 percent at an annual rate in the first quarter–higher imports subtract from GDP. With the global economy still soft given the ongoing recession in Europe and disappointing growth in Asia, imports are increasing more quickly than exports, weighing on growth. –Augustine Faucher, PNC
 
 

 
The party pooper was the government. Real federal spending contracted by 8.4% on top of a 14.8% plunge in the fourth quarter. Economists at J.P. Morgan pointed out the back-to-back drops in defense outlays were the weakest two-quarter run since the end of the Korean War.
Add in a drop in state-and-local spending and the government sector cut 0.8 percentage point from first-quarter GDP growth.

If anyone was partying last quarter, it was consumers. Real household spending grew by 3.2%, the fastest clip since the fourth quarter of 2010.

The festivities came at a price, however. Higher taxes and costlier energy caused a large 5.3% drop in disposable income. To increase spending, consumers had to save less. The saving rate declined to 2.6%, the weakest quarterly rate since the end of 2007.

The strategy is unsustainable. True, the gains in home values and equity prices are making many consumers feel richer and they may feel they can stash less money away. But the aging population and long-run fiscal problems argue U.S. households have to save more, not less. Absent a sustained jump in hiring, consumers will have to adjust their spending this quarter.

That’s not to suggest a shopper retrenchment: According to Friday’s Reuters/University of Michigan final-April sentiment index, consumers feel better about the economy this month. So they will likely increase spending but not at a 3%-plus robust clip.

14---Is Abenomics working?, prag cap

We’re getting deeper and deeper into the experiment now known as “Abenomics” in Japan.  Ultimately, the plan is designed to defeat the decades of deflationary pressures in the Japanese economy.  They’ve announced a massive fiscal plan, an official 2% inflation “target” a doubling of the BOJ’s balance sheet and as a result the Yen has declined 30% in a matter of months and the Japanese stock market has surged over 60%.  By the looks of the market reaction you’d think that something had not just changed, but that we’d be looking at a new economy entirely.

But the latest CPI report shows that the deflation is actually WORSENING.   The Statistics Bureau in Japan reported that Japan’s National Core CPI fell to -0.5% in march, down from -0.3%.  This was worse than expectations of -0.4%.  The headline rate fell to -0.9% versus expectations of -0.8%.

The latest reading is the worst reading since 2010.  In fact, it’s the worst reading this year and down almost 1% from when the aggressive Japanese easing was first announced.  In other words, if Abenomics is inflating prices it certainly isn’t working in the real economy and appears to only be “working” where gamblers are placing bets that it will eventually show itself….
Chart via Orcam Investment Research:
japan_inflation


15---Iraq's descent into chaos, wsws

Since December, Iraqi Sunnis, including those with ties to forces active in Syria, have been protesting discrimination, arbitrary arrests, detention and the execution of oppositionists by the Shi’ite-led coalition government of Nouri Al-Maliki. They are particularly opposed to the sweeping anti-terrorism law they claim targets them for being members of Al Qaeda or of the Ba’ath Party of former President Saddam Hussein. They have called for Maliki’s resignation.

Hundreds of thousands have been locked up for years, many without charges, in prisons run by sectarian militias. More than 1,400 people face execution.

The government’s reliance on dictatorial methods is bound up with the rising level of unemployment and seething discontent over the lack of electricity, water, sanitation and the failure to rebuild the infrastructure destroyed by US sanctions and war. This is despite the fact that oil production grew by 24 percent last year, with Iraq overtaking Iran to become the biggest member, after Saudi Arabia, in the Organization of Petroleum Exporting Countries.....

Incapable of resolving the vast socio-economic problems besetting Iraq, the neo-colonial regime in Baghdad, installed by Washington and supported by Iran, is focused on dividing and oppressing the Iraqi working class. Maliki has concentrated power in his own hands, holding the defence and interior posts, and used the anti-terrorist laws against his Sunni rivals, whipping up sectarian tensions to divide the working class.

A key factor is the on-going sectarian war for regime change in Syria that has pitted Sunni Islamist militias against the government of President Bashar al-Assad, a member of the Alawite sect, an offshoot of Shi’ism. This has been sponsored, financed and supplied by Iran’s Sunni Gulf rivals, and also Turkey, at Washington’s behest.
They also fear that Maliki, whose installation as prime minister was sanctioned by Washington, is too close to Tehran. They are acutely conscious of the seething discontent among their own increasingly embittered populations, many of whom are Shi’ite, who have not shared in the ruling families’ oil- and gas-based wealth.

16--Archive: Richard Koo, prag cap

Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.

Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.

The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.”

17---Koo: Currency Markets Are Misinterpreting the Impact of QE, prag cap

18---Chart of the Day: Corporate Profits vs the S&P 500, prag cap

(Large deficits lead to corp profits, not QE)
 First, look at Europe where QE has also been implemented and stock markets like Greece, Italy and Spain have been decimated.  Then look at a country like the USA where QE has been implemented and yet stocks soar.  Then ask yourself what the big difference is between these countries?  The answer: austerity versus massive deficit spending.

It might be easy to scoff at such an observation, but the reality of the picture is that corporate profits have been largely driven by the deficit in this cycle.  As net investment collapsed the traditional driver of profits was overtaken by government spending (see figure 1).  This makes sense if you’re familiar with Kalecki and his profits equation.  It makes even more sense if you’d been working under Richard Koo’s balance sheet recession theory in recent years.  The impact of government deficit spending in such an environment has been massive.  All those people screaming about the ill effects of deficit spending and hyperinflation in recent years missed the very explainable and fundamental driver of the profits momentum.
 
19---More Koo, prag cap
 
The decline in private-sector credit in the US and the UK is attributable to both the unwillingness of banks to lend and theunwillingness of the private sector to borrow. The two factors are rooted in balance sheet problems and are indications that bothcountries remain in balance sheet recessions.
 
 
When a bubble collapses, the value of assets drops, leaving only the corresponding liabilities on the balance sheets of businesses and households. To fix their “underwater” balance sheets, companies and individuals do whatever they can to paydown debt and avoid borrowing new money even though interest rates have fallen to zero. Banks, for their part, are notinterested in lending to overly indebted companies or individuals, and often have their own balance sheet problems. With noborrowers or lenders, the deposit-growth process described above stops functioning altogether.
 
US banks now appear slightly more willing to lend money, although that is not the case in the UK. In neither country, however,are there any signs of greater willingness to borrow among businesses and households.”
 
He goes on to argue that QE2 only generated a portfolio rebalancing effect.  But Koo, rightly argues that this is only justified if the assets rise in accordance with their real underlying fundamentals:
“While this may demonstrate the portfolio rebalancing effect of QE2, the real problems are yet to come. Asset prices, after all,are supposed to be determined by the future cash flows generated by the asset. More specifically, the fair value of an asset—ieits discounted cash flow (DCF) value—is defined as the sum of the asset’s future cash flows discounted by an appropriateinterest rate.
A bubble is defined as a situation in which asset prices rise to levels far in excess of their DCF values.
In the immediate aftermath of a burst bubble, investors tend to pay extremely close attention to DCF analysis. That is hardlysurprising, since they lost money because they ignored DCF values and chased prices higher.”

20--Did QE2 work?, prag cap

We’re now nearing the end of QE2 and some concrete conclusions can be made.   I’ll save my overall analysis of the program until after its conclusion, but I think the impact of QE2 can be pretty much summed up with the following chart:
Economic growth peaked with QE2′s inception
Real GDP peaked as soon as QE2 began.. Now, this shouldn’t be shocking to anyone who has been reading pragcap over the duration of this program.  From its onset I said QE2 would do nothing for the real economy.  In fact, operationally, it could do nothing.  But its impacts actually appear to have been damaging to bottom line growth.  How so?  QE2 helped contribute to a massive surge in speculation in commodity prices.
 
You see, QE2 didn’t monetize anything.  It didn’t cause the money supply to explode.  It didn’t really do anything except cause a great deal of confusion and generate an enormous amount of speculation in financial markets that now appears to be contributing to turmoil and strife around the globe.  Operationally, it is no different than what the Fed does at the short end when they implement monetary policy.  The important distinction, however, is that this policy was implemented incorrectly.  Instead of targeting price they targeted size.  And the results in the bond market speak for themselves.  Rates have meandered up and down and up and down without a care in the world for the Fed’s $600B purchase program.  In other words, the program had no impact on rates. 
 
21---Richard Koo: Charts, Business Insider
 
Fed pumping doesn't work. These liquidity injections don't make it into the money supply.
 

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