Sunday, June 2, 2013

Today's links

1---What’s Happening In Turkey?, TPM

2---Richest 20 percent get half the overall savings from U.S. tax breaks, CBO says, WA Post

3---Inequality Rising — All Thanks To Government Policies, National Memo

A revealing new examination of the top 1 percent in a variety of countries brings into focus how the American government’s tax, union bargaining, inheritance and other rules widen the growing divide between those at the top and everyone else....

The authors begin with a point I have been making since before my book Perfectly Legal in 2003: Under current government rules, an ever-greater share of economic resources must flow to the top over time because those rules subtly redistribute upwards. As the authors put it in their paper:
There was a fall in the top 1 percent share in 2008‐2009, but a rebound in 2010. This would be consistent with the experience of the previous economic downturn: Top income shares fell in 2001‐2002, but quickly recovered and returned to the previous trend in 2003‐2007.
This trend is also seen in Britain, but not so much in countries that have higher tax rates on top incomes, rules that allow workers to bargain through unions, and other policies that America had in the New Deal era that ended with Reagan. As the authors write:
To us, the fact that high‐income countries with similar technological and productivity developments have gone through different patterns of income inequality at the very top supports the view that institutional and policy differences play a key role in these transformations. Purely technological stories based solely upon supply and demand of skills can hardly explain such diverging patterns.

4---Leverage Versus Debt, naked capitalism

It occurs to me that the evaporation of interest rates across the major developed economies, which represents the disappearance of the cost of capital, may be the consequence of the “meta money” leverage becoming so dominant. This new form of debt-like transaction in the meta money markets, in which interest rates are largely redundant, is having an effect on what is happening to interest rates in the more customary forms of debt.

The situation is certainly very strange, even bizarre. The threat in the developed world, especially in Japan, seems to be deflation. Central banks are printing money with furious intensity, which seems to imply a shortage of money.

Yet when we look at the world of meta money, there is definitely no shortage of capital, indeed quite the opposite. Derivatives are twice the capital stock of the world. Admittedly this is not “money” in the conventional way, it is gambles that net out to much smaller amounts. But it is a type of transaction, and money in the end is only transactions.

They are meant to be parallel universes, “real” markets at one level and “meta money” markets at another. But as we saw in 2008 when the meta money nearly destroyed the US banking system, they are not parallel, they intersect. Meta money is increasingly affecting what is happening in the more familiar capital markets: bonds, bank debt, equities. That is the price of the recklessness of allowing these crazy markets to emerge.

Banking crises are not new, but usually it is bankers working within government stipulated rules to exploit everyone else, and that exploitation has wreaked damage on the overall system.

5---  Two Measures of Inflation: Core PCE at Its All-Time Low, dshort

The BEA's Personal Consumption Expenditures Chain-type Price Index for April shows core inflation well below the Federal Reserve's 2% long-term target at 1.05%, the lowest Core PCE ever recorded; the previous all-time low was 1.06% in March 1963, fifty years ago. The Core Consumer Price Index release earlier this month, also data through April, is significantly higher at 1.72%. The Fed is on record as using PCE as its primary inflation gauge

6---Syria claims sarin seizure at rebel hideout as Russia ‘blocks’ UN's Qusair resolution, RT

7---The US consumer is not okay, Stephen Roach, project syndicate

Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.
 
With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment.
 
To appreciate fully the unique character of this consumer-demand shortfall, trends over the past 21 quarters need to be broken down into two distinct sub-periods. First, there was a 2.2% annualized decline from the first quarter of 2008 through the second quarter of 2009. This was crisis-driven carnage, highlighted by a 4.5% annualized collapse in the final two quarters of 2008.
 
Second, this six-quarter plunge was followed, from mid-2009 through early 2013, by 15 quarters of annualized consumption growth averaging just 2% – an upturn that pales in comparison with what would have been expected based on past consumer-spending cycles.

8---- Weak income growth holding back consumer spending, sober look
 
As discussed previously, economists maintain that in spite of the slowdown in manufacturing, the US consumer should provide the necessary lift to improve growth. According to the theory, with consumer confidence improving, the spending should follow. But that's not exactly what happened. While consumer spending is up on the previous year, the growth in spending has moderated to the lowest level in three years.
Source: US Department of Commerce

The explanation is simple: incomes are just not growing very fast (chart below).
Source: US Department of Commerce

The spike in personal income at the end of last year is "tax planning" - shifting of income into 2012 in anticipation of higher taxes in 2013 (taking capital gains, receiving special dividend income, receiving some of 2013 pay in 2012, etc.). Outside of that, income growth has moderated.
 
9---PCE core inflation the lowest on record, sober look
US inflation measures continue to decline. Government data showed that both the headline and the "core" PCE (excluding food and energy) indicators fell last month. Moreover, the core index hit the lowest level since this data has been collected, starting in 1960. And the core PCE inflation measure is the one most closely watched by the Fed.
Source: BEA

Some are pointing out that with this indicator at 1.05% there is a real risk of deflation. 
 
10---Loan to deposit conundrum, marketshadows
 
 The loan-to-deposit ratio for the top commercial banks has been falling – i.e. loans relative to deposits are down. This is because deposits are up. Banks are still lending. ...
 Bloomberg (accurately): “total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused.”
 
11---JPMorgan Leads U.S. Banks Lending Least Deposits in 5 Years, Bloomberg
 
The biggest U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. are lending the smallest portion of their deposits in five years as cash floods in from savers and a slow economy damps demand from borrowers.
 
The average loan-to-deposit ratio for the top eight commercial banks fell to 84 percent in the fourth quarter from 87 percent a year earlier and 101 percent in 2007, according to data compiled by Credit Suisse Group AG. Lending as a proportion of deposits dropped at five of the banks and was unchanged at two, the data show....
 
Consumers and companies are reluctant to take on risk until they see more signs that business is improving, even as the Federal Reserve maintains near-record low interest rates designed to fuel growth. Putting more of the unused money to work could boost profit and help turn around the U.S. economy, whose 0.1 percent annualized drop in the fourth quarter was its worst showing since 2009. ...
 
Falling ratios don’t mean banks have shut the lending spigots. Measured in dollars, total loans rose in the fourth quarter for the biggest eight lenders to $3.9 trillion.

Unused Fuel

At the same time, total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused. Hypothetically, JPMorgan could make more than $260 billion in additional loans and still not exceed the 84 percent average loan-to-deposit ratio of its peers, based on its current level of deposits.
The funds piled up at banks even as the economy sputtered, with annualized growth topping 3 percent during only three quarters since the middle of 2009.
“People are worried right now,” said Paul Ashworth, chief U.S. economist at Capital Economics Ltd. in Toronto. “No one wants to borrow money, everyone wants to hoard it.”
 
“You’ve got to see sustainable economic activity before lending picks up,” said Paul Miller, an analyst who follows the industry at FBR Capital Markets Corp. Until then, banks will be stuck with idle cash, Miller said. “There’s no place for them to put it.”
 ...
 
New regulations also impede lending,
 
12---The Bernanke Disaster, Michael Hudson, Silver Bear
 
Bernanke’s favored policy is to get banks lending again - not for the government to spend more on deficit spending on infrastructure, social services or other full employment projects. The government spending that   Bernanke has endorsed is pure bailouts to the banks, insurance companies, real estate packagers and other Wall Street institutions so that they can support asset prices and thereby save the economy’s financial balance sheet, not its employment and living standards.
 
More debt thus is not the problem, in Chairman Bernanke’s view. It is the solution.....

Flooding the capital markets with credit to bid up asset prices thus holds down the yield of the assets of pension funds, pushing them into deficit. ...

The Congressional Research Service has calculated that from 1979 to 2003 the income from wealth (rent, dividends, interest and capital gains) for the top 1 percent of the population soared from 37.8 per cent to 57.5 per cent. This revenue has been expropriated from American employees pushed onto debt treadmills in the face of stagnating wages
 
s a trickle-down apologist for high finance, Prof. Bernanke has drawn systematically wrong conclusions as to the causes of the Great Depression. The ideological prejudice behind his view is of course what got him his job in the first place, for as numerous observers have quipped, a precondition for being hired as Fed Chairman is that one does not understand how the financial system actually works. Instead of recognizing that deepening debt, low wages and the siphoning up of wealth to the top of the economic pyramid were primary causes of the Depression, Prof. Bernanke attributes the main problem simply to a lack of liquidity, causing low prices......
 
The wealthier people become, the lower a proportion of their income they consume - and the more they save.
This falling propensity to consume is what worried Keynes about the future. He imagined that as economies saved more as their income levels rose, they would spend less on goods and services. So output and employment would not be able to keep pace - unless the government stepped in to make up the gap.

Consumer spending is indeed falling, but not because economies are experiencing a higher net saving rate. The U.S. saving rate has fallen to zero - because despite the fact that gross savings remain high (about 18 percent), most is lent out to become other peoples’ debts. The effect is thus a wash on an economy-wide basis. (18 percent saving less 18 percent debt = zero net saving.)

The problem is that workers and consumers have gone deeper and deeper into debt, saving less and less. This is just the opposite of what Keynes forecast. Only the wealthiest 10 percent or so of the population save more and more - mainly in the form of loans to the "bottom 90 percent.” Saving less, however, goes hand in hand with consuming less, because of the revenue that the financial sector drains out of the "real” economy’s circular flow (wage-earners spending their income to buy the goods they produce) as debt service. The financial sector is wrapped around the production-and-consumption economy. So an inability to consume is part and parcel of the debt problem. The basis of monetary policy throughout the world today therefore should be how to save economies from shrinking as a result of their exponentially growing debt overhead.

Bernanke finds "declines in aggregate demand” to be the dominant factor in the Great Depression (p. ix, as cited by Steve Keen). This is true in any economic downturn. In his reading, however, debt seems not to have anything to do with falling spending on what labor produces. Taking a banker’s-eye view, he finds the most serious problem to be the demand for stocks and real estate.   Bernanke promises not to let falling asset demand (and hence, falling asset prices) happen again. His antidote is to flood the economy with credit as he is now doing, emulating Alan Greenspan’s Bubble policy.

13---Washington 'Spends' More on Tax Breaks Than on Medicare, Defense, or Social Security, atlantic

14---Cracks in Jap bond market auger violent global selloff of shares, msn money

The bottom line, I believe, is that Japanese authorities have "lost the bond market" (i.e., rates are much higher than authorities want, despite their best efforts) and the Fed has as well, but, perversely, Japan may be further along in the process, even though its powers that be started much later to really get serious about QE-powered monetary debasement.....

As for our stock market, folks are still concluding that Goldilocks was not a fairy tale and is, in fact, exactly what the Fed has engineered -- i.e., economic activity that is not too hot, nor too cold, with interest rates rising ever so gently. The same delusions that allow one to think that also indicate that rising interest rates are actually bullish because they theoretically mean the economy is getting better. Historically, pre-Greenspan, that was the case most of the time. But now, since we live in a world with make-believe interest rates picked by the Fed, assets are much more likely to be mispriced -- something stock bulls fail to comprehend.


Thus, our stock market feels bulletproof, as we are the leaders in the Goldilocks propaganda. The recent carnage in fixed incomes in Japan, the violent equity selloff there and the bond market decline here have done almost nothing to dent the enthusiasm of that camp in America.


Save the last dance for QE
However, following the crack in Japanese bonds, my friend the Lord of the Dark Matter said, "I would expect in the coming days (and given the violence of this selloff, it is days, not weeks) that central bankers will reaffirm their commitment to liquidity and that they are 'all in.' They will make their intentions both clear and unambiguous. If the markets don't stabilize after that, then it is '1987 time' for equities."

I totally agree. Eventually, even the really slow learners should be able to understand that the central banks are trapped and that their only choice is between depression and easy money.

. The past 10 days have seen some very important action in several markets that is worth delving into in detail.

First, I want to talk about the crack in the Japanese bond market that occurred on May 23. I believe that was a very important moment in recent and longer-term financial history. In the near-term, I believe it marked the end of the "sweet spot," a term I have used to describe the environment we've been in where people believe that central banks could create an easy-money nirvana at the push of a button...

 I believe the action in Japan is analogous to first-payment defaults during the mortgage meltdown, which began in early 2007 and were a sign that the subprime market had cracked. However, it wasn't declared "contained" until six to nine months later. During that period, fallout from the bursting of the housing bubble was not only not contained, it was spreading.

14---Major Japan banks' JGB holdings plunge in April - BOJ, Reuters

15---Gross: What hath Kuroda wrought? JGB yields a bigger influence on Treasuries than tapering potential., marketwatch
 
16---Jap QE designed to implement austerity reforms, IFR
 
Structural reforms.
Borrowing costs are not all that prevents companies from investing: employment rules are too rigid and electricity tariffs paid by Japanese manufacturers are among the highest in OECD. Unless Abe’s administration takes decisive steps to make the economy more competitive, Japan may never be able to surmount its ageing population and achieve decent growth without excessive government borrowing and spending
 

Don’t rising yields threaten the government’s ability to service its debt?

With national debt at about 237 percent of GDP, investors worry that even relatively small shifts in borrowing costs will quickly push up the government’s interest bill. Japan’s average borrowing costs are currently about 1.2 percent a year. But it needs to refinance one-seventh of its 713 trillion yen ($7.06 trillion) in outstanding bonds every year.
Add new issuance, and Japan may need to borrow about 170 trillion yen this year. Even if the government borrows at a 3 percent rate, its overall average interest cost will rise to just 1.6 percent. It would take several years of elevated yields, unaccompanied by higher taxes or lower spending, before investors seriously started to question Tokyo’s ability to service its debt.

Will high yields undermine Japan’s economic recovery?

The key figure to watch is real, not nominal, interest rates. Japan’s consumer prices are still sliding 0.5 percent a year. With 10-year bonds yielding close to 0.9 percent, that means the real interest rate is around 1.4 percent. Compare that to the United States. Nominal yields are more than twice Japan’s, but rising prices mean that the real interest rate is just 1 percent.
If inflation in Japan rises to the Bank of Japan’s target of 2 percent, borrowers would still be better off even if yields hit 3 percent. As long as consumer prices are still falling, though, rising yields will discourage investment and borrowing.
Volatility is another worry. Though yields are still low by historic standards, fluctuating prices will force banks to charge a premium for uncertainty, limiting demand for credit.

17---Reality bites US dollar markets, IFR

“In the past week the market has changed dramatically – it’s night and day,” said one investment-grade syndicate manager in the US....

The problem is that low rates … have driven a lot of inflows into high-yield over the last couple of years, so a different investor base is holding high-yield now,” he said. “If it starts looking like [the 10-year yield] is going to be above 2% for a while, these same investors might start to shift their allocations away from high-yield back into investment-grade or US Treasuries

“It’s how quickly it went from 1.6% to 2.2% that’s made people nervous,” said Mirko Mikelic, portfolio manager at Fifth Third Asset Management. “It tells you that once that announcement [of the Fed beginning to taper off QE] is made, look out below.”
The 10-year Treasury rate went from a low of 1.89% the week before to a high of 2.23% overnight in Asian trading on Tuesday, after comments from the Fed about tapering potentially starting later in the year was followed by a round of economic data that were better than expected.
That forced underwriters worldwide to put deals on hold, and caused recent intermediate and longer-dated transactions to plunge in price terms

18---German Savings: Why Europe is broken, China Financial Markets

An agreement among labor unions, businesses and the government to restrain wage growth in Germany (which dropped from 3.2 percent in the decade before 2000 to 1.1 percent in the decade after) caused the household income share of GDP to drop and, with it, the household consumption share. Because the relative decline in German household consumption powered a relative decline in overall German consumption, German saving rates automatically rose.

Notice that German savings rate did not rise because German households decided that they should prepare for a difficult future in the eurozone by saving more. German household preferences had almost nothing to do with it. The German savings rate rose because policies aimed at restraining wage growth and generating employment at home reduced household consumption as a share of GDP.

As national saving soared, the German economy shifted from not having enough savings to cover domestic investment needs to having, after 2001, such high savings that not only could it finance all of its domestic investment needs but it had to invest abroad by exporting large and growing amounts of savings. As it did so its current account surplus soared, to 7.5 percent of GDP in 2007. Martin Wolf, in an excellent Financial Times article on Wednesday on the subject, points out that

between 2000 and 2007, Germany’s current account balance moved from a deficit of 1.7 per cent of gross domestic product to a surplus of 7.5 per cent. Meanwhile, offsetting deficits emerged elsewhere in the eurozone. By 2007, the current account deficit was 15 per cent of GDP in Greece, 10 per cent in Portugal and Spain, and 5 per cent in Ireland.
 
Employment policies and the savings rate

It is tempting to interpret Germany’s actions as the kind of far-sighted and prudent actions that every country should have followed in order to keep growth rates high and workers employed, but it turns out that these policies did not solve unemployment pressures in Europe, and this is implied in the second sentence of Martin Wolf’s piece. Germany merely shifted unemployment from Germany to elsewhere. How? Because Germany’s export of surplus savings was simply the flip side of policies that forced the country into running a current account surplus.

As German savings rose, eventually exceeding German investment by a wide margin, Germany had to export the difference, which its banks did largely by making loans into the rest of Europe, and especially those countries that were financially “shallower”. Declining consumption left Germany producing more goods and services than it could absorb domestically, and it exported excess production as the automatic corollary to its export of savings.
Of course the rest of the world had to absorb excess German savings and run the current account deficits that corresponded to Germany’s surpluses. This was always likely to be those eurozone countries that joined the monetary union with a history of higher inflation and currency depreciation than Germany – countries which we are here calling “Spain”. As monetary policy across Europe was made to fit German needs, which was looser than that required by Spain, and as German savings were intermediated by German banks into Spain, the result was likely to be higher wage growth, higher inflation, and soaring asset prices in Spain.

In fact this is exactly what happened. Spain and the other peripheral European countries all saw their trade deficits expand dramatically or their surpluses (many were running large surpluses in the 1990s) turn into large deficits shortly after the creation of the single currency as their savings rates shifted to accommodate German exports of its excess savings.

The way in which the German exports of savings were absorbed by Spain is at the heart of the subsequent crisis. As long as Spain could not use interest rates, trade intervention, or currency depreciation to block German exports, it had no choice but to balance the excess of German savings over investment. This meant that either its investment would have to rise or its savings would have to fall (or both).

Both occurred. Spain increased investment in infrastructure and in real estate (and less so in manufacturing, probably because German growth occurred at the expense of the manufacturing sectors in the rest of Europe), but it seems to have done both to excess, perhaps because of the sheer amount of capital inflows. After nearly a decade of inflows larger than any it had ever absorbed before, Spain, like nearly every country in history under similar circumstances, ended up with massive amounts of misallocated investment.

But this was not all. If the savings that Germany exported into Spain could not be fully absorbed by the increase in Spanish investment, the only other way to balance was with a sharp fall in Spanish savings. There are two ways Spanish savings could have fallen. First, as the Spanish tradable goods sector lost out to German competition, Spanish unemployment could rise and so force down the Spanish savings rate (unemployed workers still must consume).

Second, Spain could have reduced household savings voluntarily by increasing consumption relative to income. Higher Spanish consumption would cause enough employment growth in the services and real estate sectors to make up for declining employment in the tradable goods sector.

Raising consumption

Not surprisingly, given the enormous optimism that accompanied the creation of the euro, the latter happened. As German money poured into Spain, helping ignite a stock and real estate boom, ordinary Spaniards began to feel wealthier than they ever had before, especially those who owned their own homes. Thanks to this apparent increase in wealth, they reduced the amount they saved out of current income, as households around the world always do when they feel wealthier. Together the reduction in Spanish savings and the increase in Spanish investment (in infrastructure and real estate) was enough to absorb the full extent of Germany’s export of excess savings.

But at what cost? The imbalance created within Europe by German policies to constrain consumption forced Spain into increasing consumption and boosting investment, much of the latter in wasted real estate projects (as happened in every one of the deficit countries that faced massive capital inflows). There are of course no shortage of moralizers who insist that greed was the driving factor and that Spain wasn’t forced into a consumption boom. “No one put a gun to their heads and forced them to buy flat-screen TVs”, they will say,

But this completely misses the point. Because Germany had to export its excess savings, Spain had no choice except to increase investment or to allow its savings to collapse, with the latter either in the form of a consumption boom or a surge in unemployment. No other option was possible.

To insist that the Spanish crisis is the consequence of venality, stupidity, greed, moral obtuseness and/or political short-sightedness, which has become the preferred explanation of moralizers across Europe begs the question as to why these unflattering qualities only manifested themselves after Spain joined the euro. Were the Spanish people notably more virtuous in the 20th century than in the 21st? It also begs the question as to why vice suddenly trumped virtue in every one of the countries that entered the euro with a history of relatively higher inflation, while those eastern European countries with a history of relatively higher inflation that did not join the euro managed to remain virtuous.

The European crisis, in other words, had almost nothing to do with thrifty Germans and spendthrift Spaniards. It had to do with policies aimed at boosting German employment, the secondary impact of which was to force up German national savings rates excessively. These excess savings had to be absorbed within Europe, and the subsequent imbalances were so large (because German’s savings imbalance was so large) that they led almost inevitably to the circumstances in which we are today.

For this reason the European crisis cannot be resolved except by forcing down the German savings rate. And not only must German savings rates drop, they must drop substantially, enough to give Germany a large current account deficit. This is the only way the rest of Europe can unwind the imbalances forced upon the region in a way that is least damaging to Europe as a whole. Only in this way can countries like Spain stay within the euro while bringing down unemployment.
 
 

 
 
 

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