Sunday, August 4, 2013

Today's links

1---As Dow hits new record--Dismal jobs report exposes claims of US recovery, wsws

The US economy added 162,000 net jobs in July, the Labor Department reported Friday, the worst jobs figure in four months. The jobs total was lower than economists’ projections and well below the number needed to have an impact on mass unemployment.

The report underscored the fact that, five years after the 2008 financial crash, the US remains mired in a deep economic slump. Over the past four months, the US economy averaged only 173,000 new jobs per month, even though the working-age population is growing by a monthly average of 184,000....

In the face of this crisis, the Obama administration and the ruling class as a whole have no policies to offer for serious economic growth or job-creation. Their response is to intensify the assault on the working class. Obama's so-called “jobs” program consists entirely of tax cuts and subsidies for business and incentives to slash the wages and benefits of workers—in the name of increasing US “competitiveness” and convincing transnational companies to shift jobs from foreign cheap labor havens to take advantage of near-poverty wages in the US.

This is combined with austerity policies that further depress economic growth.

In his latest speech on the economy Tuesday in Chattanooga, Tennessee, Obama proposed cutting the corporate tax rate from 35 percent to 28 percent, with a 25 percent rate for manufacturers, while calling on the government to “partner with the private sector” to provide infrastructure, social services and education—code words for privatization and spending cuts.

This is under conditions where the Obama administration has rejected any federal assistance to the city of Detroit, which declared bankruptcy on July 18. State and city officials, representing the demands of the banks and major bondholders, are seeking to use the bankruptcy to slash the retirement benefits of 20,000 city workers and privatize the city's assets, including the world-famous collection of the Detroit Institute of Arts.

Meanwhile, the US Federal Reserve Board made clear in its latest statement this week that it will continue its $85 billion-per month money-printing operation and near-zero interest rate policy for the foreseeable future. The contrast could not be more stark: virtually unlimited funds are made available to finance the enrichment of the financial elite, while there is “no money" to pay the legally-mandated pensions of Detroit workers.

These vast cash handouts have driven an ongoing stock market rally. Despite the poor jobs figures, both the Dow Jones Industrial Average and the S&P 500 index set new records Friday for the second consecutive day

2---Brooks and Marcus on PBS News: Getting Just About Everything Wrong on the Economy , (Dreadful) CEPR

Starting at the beginning, Brooks noted the slower than projected job growth and told listeners:
"Yes, I think there's a consensus growing both on left and right that we -- the structural problems are becoming super obvious.
"So when the -- this recession started a number of years ago, you had 63, something like that, out of 100 Americans in the labor force. Now we're down, fewer than in [the employment to population ratio is now 58.7 percent] -- than when the recession started. And so that suggests we have got some deep structural problems. It probably has a lot to do with technological change. People are not hiring -- companies are not hiring human beings. They're hire machines."
It's hard to know what on earth Brooks thinks he is talking about. There is nothing close to a consensus on either the left or right that the economy's problems are structural, as opposed to a simple lack of demand (i.e. people spending money).....

Marcus then chimed in, reinforcing Brooks' assertions:
" ... And so that just gives you a measure of the dauntingness. And you look not just at -- everybody looks at 7.2 percent [the actual rate is 7.4 percent], the new unemployment figure. It is down a little bit. But let's take a look at the total unemployment picture, the discouraged workers, the less -- or the people who have just stopped looking for work, the people who aren't working as hard as they would like to, as many hours as they'd like to.
"That's 14 percent of the labor force. I think David's totally right when he talks about how we need to sort of get to some really structural solutions. And the thing that's so disappointing is that we're looking at a political system that doesn't seem capable of achieving that."
From the comments---Quantitative easing has little to do with increasing demand
written by Kaleidic, August 03, 2013 9:36
The main effect of quantitative easing has been to blow up another asset bubble while being completely negative for the real economy, especially savers, retirees and the middle class. As John Hussman says, "Frankly, I still view QE as a confidence game that has no financial mechanism except to make investors uncomfortable holding Treasury bills, and no theoretically valid or empirically supported transmission mechanism to the real economy at all." ...
This is why I have also stopped listening to NPR
written by Tom Stickler, August 03, 2013 2:17
It was hard to stay straight on the road while listening to this yesterday. More and more frequently I find myself stabbing the OFF button on the car radio while listening to NPR.
Mission accomplished!)  The Labor Department reported on Friday that the economy continued to add jobs in July and that the unemployment rate fell to 7.4 percent, from 7.6 percent. But the pace of job growth slowed somewhat from the first half of the year and remains modest enough that the economy is years away from a full recovery.
Contributing to the hangover from the worst financial crisis in decades is a wave of cuts in domestic and military spending, known collectively as the sequester, which is causing government furloughs as well as job losses and curtailed hours among federal contractors.
Although the sequester became law on March 1, some of the effects, like the forced leaves, have begun to ramp up only recently. More job losses, rather than shorter workweeks, are predicted if the cuts remain in place into next year. ...
Corporate and academic economists say that Washington’s fiscal fights have produced budget policies that amount to a self-inflicted drag on the economy’s recovery.
Joseph J. Minarik, director of research at the corporate-supported Committee for Economic Development and a former government economist, said he could not remember in postwar times when fiscal policy was so at odds with the needs of the economy.
“The macroeconomic situation is highly unusual,” he said, adding: “We have to be concerned about our debt getting totally out of hand, so we are concerned about the federal budget. But the concern has got to be tempered by the fact that we have got to get some economic growth going as well.”
The effects of the cuts could be found in the details of Friday’s jobs report. Although federal government employment did not decline in July as it had in previous months this year, the number of people who were working part time because they could not get their employers to give them full-time hours rose significantly. This probably reflects decisions by many government agencies to achieve their required budget cuts by forcing employees to take unpaid leave. ...
“The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime,” said Justin Wolfers, an economics professor at the Gerald R. Ford School of Public Policy at the University of Michigan. “At a time of mass unemployment, it’s clear, the economics textbooks tell us, that this is not the right time for fiscal retrenchment.”
Given that rough consensus in an otherwise quarrelsome profession, he added, “To watch it be ignored like this is exasperating, horrifying, disheartening.”
After the release of the jobs report, the first thought of many business forecasters was of the Federal Reserve, and what the data might suggest for its next move in September, when analysts believe it probably will begin tapering its stimulus measures known as quantitative easing. As the Fed chairman, Ben S. Bernanke, has made clear — including repeatedly to Congress — the Fed has continued its stimulus policies in part to offset the drag from fiscal policy...
“Over all, fiscal drag has likely reduced growth this year at least 1.5 percentage points, and isn’t over yet,” Bank of America Merrill Lynch wrote to clients on Friday. “The last thing the economy needs is a repeat performance. A key part of our optimistic forecast for next year is that there is not a sustained shutdown this fall; the latest bickering leaves us a little more concerned.” ...
Senior administration officials and a group of Senate Republicans will continue to explore possible compromises during August, they say, but neither side sounds hopeful. Perhaps the best that can come of the fall showdown, according to people with knowledge of the issues, is a compromise that still would keep the so-called discretionary spending at the lowest levels in a half-century — reducing the fiscal drag, but hardly providing the sort of stimulus that Mr. Obama has proposed.
“The private sector has been healing and that’s helping to offset the adverse effects of the sequester. We’re seeing the housing market turnaround, consumption has been a bit stronger the last couple of quarters,” said Alan Krueger, a Princeton economist whose last day as Mr. Obama’s chairman of the Council of Economic Advisers was Friday. “But we know we can grow faster than 1.7 percent.”
By linking interest rates directly to the rate of unemployment, Bernanke is explicitly acknowledging that the Federal Reserve Board has two mandates -- not just price but also employment. "The conditions now prevailing in the job market represent an enormous waste of human and economic potential," said Fed Chairman Ben S. Bernanke.
These are refreshing words at a time when Congress and the White House seem more concerned about reducing the federal budget deficit than generating more jobs.
But the sad fact is near-zero interest rates won't do much for jobs because banks aren't allowing many people to take advantage of them. If you've tried lately to refinance your home or get a home equity loan you know what I mean.

Banks don't need to lend to homeowners. They can get a higher return on the almost-free money they borrow from the Fed by betting on derivatives in the vast casino called the global capital market.
Besides, they've still got a lot of junk mortgage loans on their books and don't want to risk adding more.
Low interest rates also lower the cost of capital, which in theory should encourage companies to borrow for expansion and more hiring. But companies won't expand or hire until they have more customers. And they won't have more customers as long as most people don't have additional money to spend.

And here we come to the crux of the problem. Consumers don't have additional money. The median wage keeps dropping, adjusted for inflation. Most of the new jobs in the economy pay less than the jobs they replaced.
Corporate profits are taking a higher share of the total economy than they have since World War II, but wages are taking the smallest share since then (see graph).
(Business Insider, St. Louis Federal Reserve Board)
(Business Insider, St. Louis Federal Reserve Board)

9---Wow, sober look

When credit growth significantly outpaces investments into the economy, a nation could be in for a deleveraging period. The 1985-1989 Japan is an example.

10---Holy Shit! Loan growth shrunk during QE3 and mortgage rates rose 60 effing basis points. Failure all around!, sober look

One could presumably argue that QE2 resulted in stemming the credit contraction taking place in 2010. It's hard to make that argument for QE3.

Given this result, why would any central bank want to continue on its current path? Some would argue it is to keep longer term interest rates low. But the 30-year mortgage rate is now some 60+ basis points higher than it was when QE3 was announced. So if it's not credit growth or interest rates, what is the mechanism to transmit this "unconventional" monetary policy into the economy and job growth?

You hear economists talk about how the Fed should continue buying securities at the current pace because the US economic growth remains tepid. But isn't this simply doing the same thing (now for a year) and expecting different results?

11---The abysmal "job's report" and failing QE in Japan, Testosterone Pit

Jobs still lousy in the US: 162,000 jobs created in July (worse than expected), unemployment rate edged down to 7.4% (better than expected). A lot of crummy details:
- New jobs created in May and June were revised down by 26,000.
- Hourly wages fell and the average work week got shorter (confirming other reports that people are falling further behind).
- Part-timers who wanted to work full-time remained stuck at 8.2 million.
- 2.4 million people were “marginally attached to the labor force”; they wanted a job but didn’t count as unemployed, thanks to our silly definitions, because they hadn’t looked for a job in the last four weeks – discouraged?
- Civilian participation rate dropped to 63.4%, just a hair above its 34-year low.
- And the horrible employment-population ratio. Statistically one of the least foggy measures the BLS issues: people 16 years and older who have jobs as a percent of the total population. At 58.7%, it hovered near its 3-decade low and shows that jobs are being created, but only at about the rate at which the population grows. An indictment of the Fed's policies. Here is what that looks like:


Bank of Japan fail: its money-printing and bond buying binge has created a stock market bubble with massive hot-money volatility – the Nikkei now routinely moves 3% a day, up or down. And it has allowed the three TBTF banks to profit by buying JGBs at auction and then selling them to the BOJ (same as the QE scam in the US). For months, the BOJ has told banks to unload their vast holdings of JGBs, ostensibly so that they would lend that money to businesses and stimulate economic activity, but in reality so that banks would get out from under that pile that is doomed to lose value and threaten the survival of these banks as yields drift up with inflation. The banks listened: the three TBTF banks got rid of ¥23.8 trillion ($242 billion) in JGBs in the last quarter, most of it shuffled off to the BOJ. Sumitomo dumped about half of its JGBs in the quarter, after having already dumped a bunch in the prior quarter! But the banks aren’t lending. Apparently there just isn't any demand for loans from the kind of corporations that banks like to lend to, as these corporations just aren't investing, period. So instead of making loans to foster economic activity, banks stash that money at the BOJ: large “city banks” and the larger “regional banks” combined increased their excess reserves at the BOJ by ¥29.7 trillion from mid-January through mid-June – a seven-fold jump! Economic benefits: nil!

Beneficiaries of the Bank of Japan's money printing? The three TBTF banks! Ha, we knew that. But now it's official. During the quarter ending June, their earnings surged as they wrote up their stock holdings and extracted fees from the frenzied trading activities. But profits from trading domestic bonds dropped as banks are trying to get out from under the mountain of JGBs they’re holding. Earnings at Mitsubishi UFJ Financial Group (Morgan Stanley's top stockholder) jumped 40%; at Sumitomo Mitsui Financial Group, they more than doubled; and at Mizuho Financial Group, they rose 35%. The one thing the BOJ has not yet accomplished is any kind of uptick in borrowing by companies for expansion purposes – to benefit the real economy.

“Wealth Effect” bogged down in Japan? Despite massive money-printing and bond-buying by the Bank of Japan to create a stock market bubble, among other asset bubbles, stocks closed down for the month of July. The third month in a row of declines. The Nikkei swooned 202 points today, closing at 13,668, edging 9 points below the June close. What this number doesn't show is the hair-raising volatility with exuberant ups and ferocious downs. On July 19, the Nikkei reached 14,953, its highest level since the May high. In the eight trading days since, it dropped 8.6%! But that's not as bad as the 22% drop from its May high to its June low. Followed by a dizzying recovery. All in three months! Where are the seatbelts? ...

China and Japan to kiss and make up? Um, no. Japanese Prime Minister Shinzo Abe had said on Saturday that he'd like to hold a summit with Chinese leaders, a big move in the right direction to defuse the escalating tensions between the two countries. On Sunday, his advisor Isao Iijima told reporters after a jaunt to Beijing that a summit would be held "in the not-so distant future." Then a reality check: “What Iijima told reporters on Sunday is not true and is fabricated, based on the needs of Japan’s domestic politics,” an "unnamed" Chinese official retorted in the China Daily. Iijima had not met any Chinese government officials, and no meetings were discussed by either side, he said. “Beijing has ruled out the possibility of an upcoming leaders’ summit with Tokyo.” Foreign ministry spokesman Hong Lei seemed to confirm this in an online statement: “As far as I know”, Iijima “has not engaged in any official activity in China, nor have officials of the Chinese government made contact with him.” The end of Abe’s dream, for now.

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