Sunday, June 30, 2013

Today's links

1---Deflation By Any Other Name Would Smell As Foul, oftwominds

Over the weekend, the BIS came with a curious number on the losses, as quoted by Reuters :


The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors - excluding the Federal Reserve - of more than $1 trillion, or 8% of U.S. gross domestic product.
The potential loss of value in government debt as a share of GDP is at a record high for most advanced economies, ranging from about 15% to 35% in France, Italy, Japan and Britain.
"As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said.


Curious, because a 3 percentage point rise is a large number (so large it may well have been picked to throw people off) and losses will already be very substantial at a much lower percentage too. Moreover, in the $82 trillion or so global bond markets, a $1 trillion loss looks very low in comparison, certainly when you see the BIS claim that France, Italy, Japan and Britain can see their bonds lose a third of their value. But still, again, this is deflation.

Perhaps the clearest, most down to earth and black and white illustration of deflation comes from two graphs that Ambrose Evans-Pritchard posted overnight . Remember, deflation does not equal falling prices, they're just a consequence. Deflation is the combination of the money and credit supply with the velocity of money. We know what that means for Japan, where velocity is extremely low, and PM Abe finds out that he can try to increase the money supply, but he has no control over the velocity. Here are M1 and velocity for the US:








Not a picture that leaves many questions open, it would seem. Still, it would be good to note that these developments didn't start with the latest market turmoil. If anything, they're the best illustration we can hope for of the failure of QE and other stimulus to induce an economic recovery. It's still impossible for all intents and purposes to find even one single politician or "expert" who does not talk about a return to growth and recovery, and that, in view of what we see out there, is taking on a bizarre character.
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2---Real wages decline; literally no one notices, angry bear
Cross-posted from Middle Class Political Economist.
Your read it here first: Real wages fell 0.2% in 2012, down from $295.49 (1982-84 dollars) to $294.83 per week, according to the 2013 Economic Report of the President. Thus, a 1.9% increase in nominal wages was  more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak.

Yet no one in the media noticed, or at least none thought it newsworthy. I searched the web and the subscription-only Nexis news database, and there are literally 0 stories on this. So I meant it when I said you read it here first. In fact, there was little press coverage of the report at all, in sharp contrast to last year.

3---Wages Falling, angry bear

And an op ed by David Cay Johnston this last week:
Breaking news alert! Wages fell at the fastest rate ever recorded during the first quarter of this year, the government’s Bureau of Labor Statistics reported.
Hourly wages fell 3.8 percent in the first quarter, the biggest drop since the BLS began tracking compensation in 1947. Productivity rose half a percentage point. The result was that what economists call “labor unit costs” fell 4.3 percent.
In plain English, that means paychecks overall shrank, but work output grew. If you are a business owner, that is news worthy of a toast with a bottle of the finest Cristal champagne, which at $595 is more than the $518 that a median-wage worker earns in a week.

If you have not heard this news about plummeting wages, it is not surprising. Except for right-wing websites, and an item at the liberal Huffington Post, the June 5 announcement went unreported.
The networks and the major newspapers all have staffs of business reporters, yet they missed the third paragraph of the official government announcement that contained this important news.
That is because they are mostly assigned to write about hedge funds, high finance and the latest smartphone app. Hardly any business reporters cover workers or work, and when they do, it is often from the perspective of company executives and investors.

4---New threats to China's property bubble , sober look

based on the house price to wage ratio compiled by the IMF, China's large cities have the most expensive real estate in the world. Beijing is particularly expensive, as party officials deploy their "hard-earned" cash.

Source: Credit Suisse

The recent madness in China's money markets and PBoC's "delayed reaction" to tight monetary conditions (see discussion) could potentially spill over into the broader credit markets, resulting in increased lending rates and tighter credit conditions in general. That's not great news for property markets.
JPMorgan: - We expect liquidity conditions to ease in July, but in the near term, there is a risk that the tough line taken by the PBOC will create an artificial liquidity squeeze and cause an increase in the lending rate to the real sector (the SHIBOR rate also increased significantly, to 5.4%), putting further pressure on already-weak economic activity. In our view, the PBOC should reintroduce reverse-repo [injecting liquidity] operations very soon to calm the panic in the interbank market.
These threats to China's property markets, combined with weakness in manufacturing, do not bode well for China's near term growth prospects

5---QE's awesome failure in one chart:  Richard Koo on the ineffectiveness of monetary expansion, zero hedge

Koo: As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down. At the moment, however, that is not yet the case, as the sharp fall of the yen following the announcement of Abenomics with its commitment to monetary easing amply demonstrates...

 The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limited impact...

 In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging


Koo affirms that fiscal spending and not monetary policy saved the US from the Great Depression:

Koo: Unfortunately there was a period in economics profession, from late 1980s to early 2000s, where many noted academics tried to re-write the history by arguing that it was monetary and not fiscal policy that allowed the US economy to recover from the Great Depression. They made this argument based on the fact that the US money supply increased significantly from 1933 to 1936. However, none of these academics bothered to look at what was on the asset side of banks’ balance sheets.

The asset side of banks’ balance sheet clearly indicates that it was lending to the government that grew during this period (chart below). The lending to the private sector did not grow at all during this period because the sector was still repairing its balance sheets. And the government was borrowing because the Roosevelt Administration needed to finance its New Deal fiscal stimulus. In other words, it was Roosevelt’s fiscal stimulus that increased both the GDP and money supply after 1933...

Although deficit spending is frequently associated with crowding out and misallocation of resources, during balance sheet recessions, the opposite is true...

About Japan’s Abeconomics:

Koo: In Japan, the new governor of Bank of Japan Mr. Kuroda, who has no prior experience with monetary policy, is still clinging to the obsolete idea that additional bond purchases will somehow get the economic activity and inflation rates to pick up.

About the withdrawal of liquidity by central banks:

Koo: But once the private sector finishes repairing balance sheets and regains its appetite for borrowings, the central bank will be forced to remove the massive reserves in the banking system before both money supply and inflation go through the roof. The benefit of implementation QE and the cost of its removal are not symmetrical because the two take place at different phases of the economy. At this juncture, a QE of $200 billion or $2 trillion really does not make much difference because the money multiplier is dead in the water...

This time, however, the US and UK central banks are in the long end of the market. This means the removal of QE will have much larger effect at the long end of the yield curve, with equally larger impact on the economy just when the economy is regaining its health and willingness to borrow (The risks outweigh the benefits?) 

6----Abennomics; The false hope of "trickle down", NYT

A wide recovery in consumer spending has been the weakest link in “Abenomics,” the bold economic stimulus strategy that Mr. Abe has pushed since taking office in late December.
      
Abenomics has already brought big profit bumps to the nation’s exporters, thanks to a yen made weaker by Mr. Abe’s aggressive policies. He found a kindred spirit in Haruhiko Kuroda, the Bank of Japan’s new governor, who has committed the central bank to easing the money supply and reinflating the economy. Stock markets have rallied, as foreign investors jumped back into a country they had all but written off for its seemingly unshakable stagnation.
      
Numbers released on Friday by the government provided more proof of Japan’s corporate recovery. Industrial production rose by a robust 2 percent in May from the previous month. Tokyo’s benchmark Nikkei index climbed 3.5 percent Friday on the strong showing.
      
Reversing a 15-year-long slide in prices, which Mr. Abe has singled out as both a cause and a symptom of waning profits, wages and consumption, is a tougher order. For companies to feel confident enough to start raising prices, Japan’s consumers have to start spending again, and data confirming that trend is still mixed.
      
Separate figures released on Friday showed that household spending fell 1.6 percent in May from a year earlier, confounding economists’ expectations of a 1.3 percent rise. Still, for the first time in seven months, Japan’s core consumer prices in May did not fall compared to the previous year, staying flat for that month after falling 0.4 percent the previous month.
      
“We are comfortable with our view that the uptrend of consumption continues,” Masamichi Adachi, Tokyo-based economist at JPMorgan Securities Japan, said in a note Friday. “An expected rise in summer bonuses, paid in June and July, and improvement in general sentiment are the main reasons,” he said.
      
There are some signs that after years of penny-pinching, conspicuous spending is on the rise again in Japan. But for now, it is starting at the very top, among the financiers, professionals and other well-to-do Japanese who have benefited from the recent stock market gains.
       
Sales of Ferrari cars in Japan have jumped almost 20 percent so far this year, figures from the Japan Automobile Importers Association show, thanks to this newfound exuberance among the nation’s rich.
“We’ve seen confidence start to explode over the last months ...
 
Consumers grew accustomed to expecting that the longer they waited, the cheaper goods would become. And they held back on spending. That led to even less demand and more years of deflation.
The challenge for Mr. Abe has been to reverse those entrenched expectations. For now, he is helped by a weak yen, which inflates the price of imported products. And enthusiasm over signs of life in the stock market, as well as over expectations for a recovery, are lifting spirits. (expectations don't matter if wages are falling. Wages have been falling for 20 years in Japan.)
 
 
The president of the European parliament has demanded an explanation from US authorities over the latest revelation that EU diplomatic missions in Washington, New York and Brussels were under electronic surveillance from the NSA.
“I am deeply worried and shocked about the allegations of US authorities spying on EU offices,” said the President of the European Parliament Martin Schulz. “If the allegations prove to be true, it would be an extremely serious matter which will have a severe impact on EU-US relations.”
“On behalf of the European Parliament, I demand full clarification and require further information speedily from the US authorities with regard to these allegations," he added

 
 

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