Saturday, June 15, 2013

Today's links

1---Report Warns Shadow Inventory Threat Remains, realtormag

2--The End of Syria as We Know It?; Why Obama is Declaring War on Syria, counterpunch

The “chemical weapons-red line” is not taken seriously on Capitol Hill for the reason that the same “inclusive evidence” of months ago is the same that is suddenly being cited to justify what may become essentially an all-out war against the Syrian government and anyone who gets in the way.  Hand wringing over the loss of 125 lives due to chemical weapons, whoever did use them, pales in comparison to the more 50,000 additional lives that will be lost in the coming months, a figure that  Pentagon planners and the White House have “budgeted” as the price of toppling the Assad government.

“We are going to see a rapid escalation of the conflict”, a staffer on the US Senate Foreign Relations Committee emailed this observer: “The president has made a decision to give whatever humanitarian aid, as well as political and diplomatic support to the opposition that in necessary. Additionally direct support to the (Supreme Military Council), will be provided and that includes military support.” The staffer quoted the words of Deputy National Security Advisor Ben Rhodes to the media on 5/13/13 to the same effect.

A part of this “humanitarian assistance” the US is going to established in the coming weeks a “limited, humanitarian no-fly zone, that will begin along several  miles of the Jordanian and Turkish borders in certain military areas into Syrian territory, and would be set up  and presented as a limited bid  to train and equip rebel forces and protect refugees. But in reality, as we saw in Libya a Syrian no fly zone would very likely include all of Syria.

3----The Falling Nikkei, prag cap

The Tokyo Nikkei Average has been in another free-fall since the top in May, falling -22%. Before we get to the long-term chart, let’s look at the one-year daily bar chart.

4---U.S. Stocks Fall on IMF Outlook, Warning on Stimulus Exit, Bloomberg

“We’re hitting a period of higher volatility,” Bryan Novak, who helps oversee about $650 million at Chicago-based Astor Asset Management LLC, said in a telephone interview. “Interest rates need to rise, but while you have an economic picture, where growth is around 2 percent, you don’t have a lot margin of error to work with in terms of interest rates. That has a meaningful impact on the futility of the economy at this point. The market is going to focus heavily on every word that the Fed says.”
The Washington-based IMF lowered its U.S. growth forecast for 2014 to 2.7 percent, from 3 percent predicted in April. It left its predication for this year unchanged at 1.9 percent. The IMF sees the Federal Reserve maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets.

Fed Speculation

The S&P 500 rallied 1.5 percent yesterday on better-than-estimated economic reports and speculation the Federal Open Market Committee will maintain record low interest rates. The Fed will hold its two-day policy meeting next week, with Fed Chairman Ben S. Bernanke scheduled to speak after the central bank’s decision on June 19.

Investors have been scrutinizing economic data to determine whether growth is strong enough to prompt the Fed to scale back stimulus measures.

The Thomson Reuters/University of Michigan June preliminary index of consumer sentiment fell to 82.7 from a final reading of 84.5 the prior month, a report showed today. The median forecast in a Bloomberg survey was unchanged at 84.5. Other reports showed U.S. industrial production was unchanged in May and wholesale prices climbed for the first time in three months, reflecting an increase in fuel and food prices that failed to filter through to other goods.

5---Fed Report Proposes Use of Eminent Domain for Underwater Mortgages, DS News

6---FHFA: 45% of HARP Refis in Q1 Were for Underwater Borrowers , DS News

7---Vital Signs Chart: Mortgage Rates at 14-Month High, WSJ
Mortgage rates are rising. During the first week of the month, interest on a 30-year fixed-rate mortgage climbed to 4.15%, the highest level since March 2012. That increase has slowed refinancing, but applications for loans to purchase homes remain up by 14% from a year earlier. Still, almost 70% of applications were to refinance homes, not purchase properties.

8---Foreign Investors Show Interest in Treasury Bonds, Not U.S. Firms , WSJ

9---Consumer Sentiment Dips in Early June, WSJ

10--Abenomics roundup, Felix Salmon, Reuters

The prime minister’s three-pronged plan is certainly ambitious. In order to do “whatever it takes” to hit a 2% inflation target, the Bank of Japan is flooding the markets with money and the government has implemented major fiscal stimulus. Last week, Abe proposed a growth strategy that includes a target to lift per-person income by 40% over 10 years and “a series of deregulated and lightly taxed zones around the country”. Abe has said this is the most important of the three prongs, but The Economist notes that the announcement “left many disappointed by its timidity”.
As far as growth goes, David Keohane points out that “it’s hard to escape the effects of demographic determinism.” Japan has an aging population, a very low fertility rate, and Abe has not yet proposed a great solution to fix this.
What Japan does have going for it is low unemployment, although as Noah Smith has pointed out, a lot of that has to do with falling real wages and women opting out of the labor force. But Joseph Stiglitz is still bullish on Japan, noting that “we see that even after two decades of ‘malaise,’ Japan’s performance is far superior to that of the United States”  – if you consider a broader range of factors like inequality and life expectancy. The Nikkei is still up almost 20% since the beginning of the year
The second arrow was a similarly dramatic fiscal stimulus package worth {Yen}10.3 trillion ($116 billion). But the keenly awaited growth strategy is the most important of the three arrows, since it seeks to boost Japan’s long-term economic performance. When it came, however, the announcement left many disappointed by its timidity. Coming after a series of stockmarket falls, it suggested that Abenomics was already fizzling out.
To help design the strategy, Mr Abe had convened a series of reform committees, most notably the Headquarters for Japan’s Economic Revitalisation inside his own Liberal Democratic Party (LDP), and the Industrial Competitiveness Council (ICC). He invited onto them private-sector businesspeople, economists and proponents of reform, including Heizo Takenaka, the former right-hand man of Junichiro Koizumi, who as prime minister between 2001 and 2006 fought against fierce opposition to privatise the postal system...

One area that reformers hoped the committees would tackle is Japan’s labour market. Unless they are going out of business, firms are barred from firing staff employees. That produces perverse results; in January the labour ministry investigated the sad phenomenon of oidashi-beya, or “banishment rooms”. Some well-known firms, it was reported, were sending hundreds of employees into special rooms and leaving them with little or nothing to do all day. Officially, the rooms are to retrain people for new assignments, but the true purpose, many say, is to push workers into leaving. Most companies hang on to their excess workers, so their costs are inflated, leaving them unwilling to take on young employees or to raise salaries. This in turn has contributed to stagnant wages and continued deflation.

The reformists made bold suggestions for the labour market and for other parts of the economy. Firms should be able to fire employees with severance pay, some argued. Agriculture is in urgent need of reform as Japan enters negotiations for the Trans Pacific Partnership, a free-trade agreement, in July. Most farmers, tending tiny plots on a part-time basis, are uncompetitive. Companies should be allowed to buy farmland, said private-sector members of the ICC; at present they may only rent, and are bound by tight regulations. To help eliminate loss-making firms and encourage the birth of profitable new ones, the LDP panel urged an overhaul of Japan’s famously poor corporate governance. The law, it said, should oblige firms to enlist independent board directors....

But the government’s announcement did not go so far. Indeed, most of the more radical ideas put forward by Mr Abe’s committees failed to make it into the strategy announced on June 5th, which instead evoked the long tradition of multi-year economic plans. It contained plenty of ambitious targets, such as a promise to lift income per person by 40% over ten years. And it has some helpful measures, such as lifting a ban on the sale of drugs online. Its centrepiece is a series of deregulated and lightly taxed zones around the country, to be overseen by a new minister. These will become the engine to pull the economy forward, says Akira Amari, the economy minister. Several past governments have created such zones, with some success; the robotics industry, for instance, benefited from being able to test new robots in special areas. But under the Democratic Party of Japan in 2009-12, a series of international zones failed to achieve much.
Little has been included on the key issues of the labour market, health care, agriculture and broader business deregulation, says a member of the ICC. Instead of tackling dismissal rules, the government’s strategy creates a third category of contract worker..

growth strategy also takes steps to allow patients to pay privately for advanced drugs without forfeiting public coverage of the rest of their treatment, as happens now; doctors fiercely oppose this, he says.

12----How Do You Say "Housing Bubble" In Canadian?, CEPR

On the other hand, the standard mortgage in the UK is an adjustable rate mortgage. In Canada it's typically a 5-year mortgage that has to be paid off or refinanced at the end of the period. It's easy to see what happens in these cases when interest rates rise and it's not pretty

13---Abenomics is, without a doubt, a huge step in the right direction., Joseph Stiglitz, NYT

Abenomics is, without a doubt, a huge step in the right direction.....Japan’s growth is far lower than it was before its crisis, in 1989. From our own recent experience in America, we know the devastating effects of even a short (albeit much deeper) recession: in America, we’ve had soaring inequality (with the top 1 percent securing all of the gains of the “recovery,” and even more income), increased joblessness, and a middle that has been falling farther and farther behind. Japan’s example shows that full recovery doesn’t happen on its own. Luckily for Japan, its government took steps to ensure that the extremes in inequality that happened in the United States weren’t manifest there, and now is finally being proactive about its growth....

WITH his three-pronged approach — structural, monetary and fiscal policies — Mr. Abe, who took office last December, has done what America should have done long ago. Though the structural policies have not been fully fleshed out, they are likely to include measures aimed at increasing labor-force participation, especially among women, and hopefully by facilitating employment for the large number of healthy elderly. Some have suggested encouraging immigration as well. These are areas in which the United States has done well in the past, and are crucial for Japan to address, for the sake of both growth and inequality......

Mr. Abe’s plan also reflects an understanding that monetary policy can only go so far. One needs to have coordinated monetary, fiscal and structural policies.
Those who see Japan’s performance over the last decades as an unmitigated failure have too narrow a conception of economic success. Along many dimensions — greater income equality, longer life expectancy, lower unemployment, greater investments in children’s education and health, and even greater productivity relative to the size of the labor force — Japan has done better than the United States. It may have quite a lot to teach us. If Abenomics is even half as successful as its advocates hope, it will have still more to teach us.

14---Government Loansharking; An Update on the Student-Debt Crisis, Boston Review

15---IMF Article IV on the US: "deficit reduction in 2013 has been excessively rapid and ill-designed", econbrowser

The IMF has just concluded its Article IV consultation with the US. The concluding statement observes:
In particular, the automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth. These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration’s budget proposal. At the same time, the expiration of the payroll tax cut and the increase in high-end marginal tax rates also imply some further drag on economic activity. A slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further.

On the fiscal front, the IMF staff recommends:
  • Repealing the sequester and adopting a more balanced and gradual pace of fiscal consolidation in the short term;
  • Expeditiously raising the debt ceiling to avoid a severe shock to the U.S. and the global economy;
  • Implementing a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability;
This point is highlighted by the slowdown in growth. Monthly indicators of growth have flattened.

16---Japan’s still-falling inflation rate is signalling the need for labour-market reforms, VOX

17---A Shortage of Low-Wage Workers?? That’s Not the Right Defense of Immigration Reform, Jared Bernstein

18---Taxes and inequality, EPI

19---Ah ha! The root of the crisis: we've seen what Marx saw in the 19th century - that a lack of profitable opportunities in the real economy pushes people down "the adventurous road of speculation, credit frauds, stock swindles, and crises.", stumbling and bumbling

The IFS says:
The last decade as a whole was characterised by a very poor performance for average incomes. Between 2002–03 and 2009–10, no single year saw an increase in median income of  more than 1.0%.
This reminds us of something I fear is often forgotten - that our economic troubles did not begin with the financial crisis of 2007-08 but rather pre-dated them. Capexp
My chart shows this. It shows that firms were loath to invest long before the crisis. Capital spending fell relative to retained profits in the early 00s and stayed very low by historical standards. This reflects the "dearth of domestic investment opportunities" in western economies of which Ben Bernanke spoke in 2005. This is, of course, a cause of the weak income growth of which the IFS speaks; firms' reluctance to spend held down wage and employment growth. The "Great Moderation" might have led to irrational exuberance in financial markets, but it certainly did not unleash a boom in corporate animal spirits and real investment.
In fact, one could argue - as Ravi Jagannathan has (pdf) - that the financial crisis is not the cause of our woes but rather a symptom of this underlying problem. The story goes something like this.
After 1997, Asian economies wanted to run big current account surpluses, either as a policy of export-led growth or in order to rebuild reserves depleted by the 97 crisis. By definition, this meant they were net savers, which put incipient downward pressure upon global interest rates. In a parallel universe, these high savings might have financed a boom in real capital spending in the west. But because firms couldn't see good investment opportunities, this didn't happen.Instead, the lower interest rates fuelled a housing boom and the hunt for yield led to strong demand for mortgage derivatives. These bubbles in housing and derivatives then burst, giving us the crisis.
In this way, we've seen what Marx saw in the 19th century - that a lack of profitable opportunities in the real economy pushes people down "the adventurous road of speculation, credit frauds, stock swindles, and crises."
I say all this as a corrective to a common view on the non-Marxist left - that our economic problems are due to greedy bankers and to austerity. But this is nothing like the  whole story. This has been a crisis of real, and not just financial, capitalism - which is why it is so intractable.
John Maynard Keynes, who said so many things so well, once wrote (in his introduction to Cambridge Economic Handbooks: "[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions."

21---I.M.F. Urges Washington to Repeal ‘Ill-Designed’ Spending Cuts, NYT

22---Why Bernanke was right to speak out on fiscal policy, mainly macro

Macroeconomists know little enough, but we do know something about how conventional monetary and fiscal policy works, and we have a lot of data that can help us. We know so much less about unconventional monetary policy. What kind of model we should use is unclear, and we have very little data.

The second argument would be right if we could fix inflation expectations in exactly the same way as we could, absent the ZLB, fix nominal interest rates. Would a nominal GDP target do that? Of course not. I think it would help, particularly compared to an inflation target regime, because the latter actually inhibits inflation expectations rising above that target. That is why I have recently argued that a path for nominal GDP should be adopted by central banks as an intermediate target. Would adopting such a target raise inflation expectations and speed a recovery? - I think it would. Would it raise inflation expectations by enough to negate the need for any fiscal stimulus (or, more realistically, to counteract the impact of fiscal tightening)? There is no logical reason why it should. But let us just suppose it did. Does that mean we can ignore fiscal policy?

Absolutely not. What we are getting in this case is a recovery achieved by raising expected inflation above (in the UK, US and Eurozone) 2%. That is costly, because it means actual inflation must be allowed to go above 2%. The more we deflate demand through fiscal austerity, the higher inflation has to go (or the longer it has to be above 2%). So monetarists who believe in the expectations channel cannot be indifferent to fiscal policy, unless they also believe it has no effect, or that inflation above 2% is costless. (I make a similar point a little more carefully here.) If, as Paul Krugman says, fiscal policy makers are doing the wrong thing, that is a cost worth paying, but it is a cost nonetheless.

This is why it is really important that central banks, like the Fed, make it publicly clear the difficulties that fiscal tightening is causing them in meeting their mandate. Either this is because they are, quite rightly, uncertain about the impact of QE, or they are aware that the more fiscal tightening there is, the more inflation will have to go above 2% to counteract its impact.

The idea that to speak this truth is wrong because it might frighten the horses is silly. I have used the following analogy before. No one wants to hear a pilot tell passengers that they are no longer in control of the plane. However a better analogy in this case would be the pilot not telling the co-pilot, which would be highly dangerous. The horses that matter here are those in charge of fiscal policy, and they need frightening.

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