Wednesday, July 17, 2013

Today's links

 1---Bernanke Drives Interest Rates Higher, Then Shifts Blame, Mark Gongloff

At the same time, the economic data have actually gotten a little bit worse in the months since that report, in every area besides employment. GDP grew at an anemic 1.8 percent annualized rate in the first quarter, and probably slowed to a 1 percent pace in the second quarter, many economists estimate. Manufacturing has slowed down. The jump in interest rates has hurt demand for mortgages.
Even employment isn't in such great shape -- the unemployment rate has actually risen by a tick, to 7.6 percent from 7.5 percent, and new weekly claims for unemployment benefits have risen, as the Wall Street Journal's Justin Lahart points out (subscription only).
Bernanke does admit that "probably" some "excessively risky or leveraged positions unwound in the last month or two as the Federal Reserve communicated about policy plans." But he also thinks this is a good thing, because maybe it avoided dangerous bubbles, who knows?
That's possibly true. But the more Bernanke talks about how great the economy is doing, the less connected from reality he appears

2---Canada house prices set new record, macrobusiness

3---Some Further Comments on Nominal Wage Flexibility, economists view

 Tyler Cowan thinks that we should cut minimum wage, and links to Bryan Caplan for an explanation. And Caplan thinks that it's all quite elementary:
Cutting wages increases the quantity of labor demanded. If labor demand is elastic, total labor income rises as a result of wage cuts. 
Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income.  So unless employers are unusually likely to put cash under their mattresses, wage cuts still boost aggregate demand.
Let's take this step by step. First, consider the claim that cutting wages increases the quantity of labor demanded. Through what mechanism does this occur? Consider a firm (McDonald's, say) that can now pay its workers less. It will certainly do so. But will it increase the size of its workforce? Not unless it can sell more burgers and fries. Otherwise its newly expanded workforce will produce a surplus of happy meals that will (unhappily) remain unsold. And this will not only waste the expense of hiring and training new workers, it will also waste significant quantities of meat, potatoes and cooking oil. So the firm will make do with its existing workforce until it sees an uptick in demand. And no cut in the minimum wage will automatically provide such an increase in demand. As a result, the immediate effect of a cut in the minimum wage will be a decline in total labor income.
Employer income, of course, will rise. Some of this will be spent on consumption, but less than would have been spent if the same income had been received by low wage earners. The net effect here is lower aggregate demand. But wait, what will happen to the remainder of the increase in employer income? It will not be placed under mattresses, on this point I agree with Caplan. It will be used to accumulate assets. If these are bonds, then long rates will decline, and this might induce increases in private investment. Then again, it might not, unless firms believe that additions to productive capacity will be utilized. And right now they do not: private investment is not being held down by high rates of interest on long-term debt.

4---US Special Forces accused of ordering torture and murder of civilians, RT

5---Report: Traditional Buyers Need to Fill the Widening Cash Buyer Void, DS News

6---China in four charts, zero hedge

7---Inflationphobia, NYT

The defining characteristic of the Great Depression was deflation, which began in 1927, two years before the stock market crash. The following data from the Bureau of Labor Statistics show the average change in the Consumer Price Index.
Bureau of Labor Statistics
Between 1926 and 1933, the price level fell about 25 percent. This meant that any obligation fixed in dollars increased 25 percent in real terms. This was particularly important in two areas – wages and debts. If a worker managed to keep the same monetary wage between 1926 and 1933, she actually got an increase in pay of 25 percent in terms of what she could buy because the prices of things she consumed fell 25 percent.

Similarly, if one had a debt in 1926, the real burden of that debt and the debt service increased 25 percent between 1926 and 1933. This was especially important for farmers because the prices of agricultural produce fell very rapidly and the burden of their debts increased just as rapidly.
The great economist Irving Fisher thought that the increasing real burden of debt resulting from deflation was the core cause of the Great Depression.....

In 1933, Franklin D. Roosevelt became president and tried to stanch the deflation by suspending the gold standard and proposing legislation that would fix prices and prevent them from falling further. But these policies were ineffective because they did not get at the root of the problem, which was a fall in the money supply......

In a June 10, 1934, article for The Times, Keynes explained that monetary stimulus by itself was insufficient to stop deflation and that the
price-fixing instituted by the National Industrial Recovery Act was counterproductive, if well intentioned. He said government spending was essential to get money moving throughout the economy and recommended an increase of $400 million per month – close to $100 billion per month in today’s economy.

8---Wall Street profits and the widening social divide in America, wsws

The profits of the biggest US banks continued to swell in the second quarter of this year, even as the impact of five years of mass unemployment, stagnant economic growth and brutal cuts in social spending produced a further rise in poverty, homelessness and hunger.....

This vast subsidy for the big banks goes hand in hand with sweeping attacks on working class wages and living standards. The imposition of $85 billion in federal spending cuts this fiscal year, as part of the ten-year “sequester” cut of $1.2 trillion, has resulted in unpaid furloughs for hundreds of thousands of government employees, amounting to pay reductions of up to 20 percent. The sequester cuts also include sweeping reductions in housing assistance and education, as well as cuts of 15-20 percent in extended unemployment benefits for 2 million people.

The sequester cuts are only the beginning. On July 1, the interest rate on government subsidized college loans, which are given out selectively to low- and medium-income students, doubled, rising from 3.4 percent to 6.8 percent. The rate increase affects nearly 7.5 million students.
Last week, the House of Representatives passed a farm bill that excludes $743 billion in food stamps—a political maneuver that anticipates a bipartisan deal with the Obama White House and congressional Democrats to impose sharp cuts in the nutrition program upon which 48 million people—one in six Americans—depend.
Earlier this month, the Obama administr
ation said it was delaying by one year the implementation of a legal requirement as part of its health care overhaul for businesses with 50 or more full-time employees to provide health insurance. At the same time, the administration and Congress are working to slash hundreds of billions of dollars from Social Security, Medicare and Medicaid in the next round of budget discussions.

In Detroit, Emergency Manager Kevyn Orr announced a plan last month to wipe out the pensions and health benefits of all current and retired city workers, calling for the elimination of $9 billion in benefits at one stroke.

The juxtaposition of draconian austerity for working people and unlimited cash for the financial elite makes clear that the growth of social inequality, poverty and social deprivation is not simply the result of impartial economic forces. It is the result of a conscious class policy being carried out by the Obama administration with the support of both parties.

9---The Dollar: A Love Story, Big Picture

Chart
Source: MoneyBeat


10---Fed Acknowledges Some Excessive Risk Taking Sparked by Its Policies , WSJ

Concerns that the Federal Reserve’s easy-money policies may be fueling excessive risk-taking in financial markets have occupied some Fed officials this year.

In a report to Congress delivered Wednesday, the Fed acknowledged that there is some evidence its policies have led certain investors to take on excessive leverage, duration risk or other forms of risk in order to boost returns. However, the Fed also said that recent developments may have risk-hungry investors changing their tune.

“[T]he recent rise in interest rates and volatility may have led some investors to reevaluate their risk-taking behavior,” the report said.

Longer-term interest rates started increasing in May as investors reacted to news that the Fed could begin winding down its $85 billion-per-month bond-buying program.

One area where the rise in interest rates has had an impact is among so-called mortgage real estate investment trusts, or REITs, which are investment vehicles that buy mortgage-backed securities. Other regulators and individual Fed officials have singled these companies as a potential threat to the U.S. financial system because they use large amounts of short-term debt — which can dry up in times of stress — to buy mortgage debt, offering returns to investors of as much as 15%. These funds have grown tremendously in the last few years.

The Fed report said this industry is an area where investors have been “willing to take on risk to achieve higher returns” amid the long period of ultra-low interest rates engineered by the Fed.
Because these funds use large amounts of volatile short-term funding to buy mortgage securities, they are vulnerable to a sharp rise in interest rates and could cause problems in the broader mortgage-backed securities market, the report said.

The recent rise in interest rates has thus impacted mortgage REITs, the report said. Stock prices of the publicly-traded companies have fallen about 20% during the recent rise in interest rates, “and some of these firms have reportedly sold assets to offset the resulting increase in their leverage,” the Fed said.
The Fed said that sales by mortgage REITs and other funds with similar positions may have “amplified the initial rise in rates,” but so far they’ve not hurt market functioning.

11---How Far Should Fed Go to Pop Potential Bubbles?, WSJ

12---Fed Chief Calls Congress Biggest Obstacle to Growth', economists view
http://economistsview.typepad.com/economistsview/2013/07/fed-chief-calls-congress-biggest-obstacle-to-growth.html

13--The Doors, The End, you tube

"Father?"
"Yes son".
"I want to kill you."
Hmmmmmm. Jimbo classic

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