Friday, October 18, 2013

Today's links

1---The Carlyle Group’s Latest Investment... Trailer Parks, zero hedge

Carlyle Group LP,  a private-equity firm that has interests in everything from an oil refinery to a vitamin maker, is adding trailer parks to its portfolio.

 The Washington-based company has struck a deal to acquire two Florida communities for a total of $30.8 million. The sellers are two entities managed by Shamrock Holdings LLC, a Paradise Valley, Ariz., owner and operator of communities, said owner Patrick O’Malley. The deal is expected to close this month

2---Federal Reserve Policy Failures Are Mounting , zero hedge

Academic studies indicate the Fed's efforts are ineffectual
Another piece of evidence that points toward monetary ineffectiveness is the academic research indicating that LSAP is a losing proposition. The United States now has had five years to evaluate the efficacy of LSAP, during which time the Fed's balance sheet has increased a record fourfold.

It is undeniable that the Fed has conducted an all-out effort to restore normal economic conditions. However, while monetary policy works with a lag, the LSAP has been in place since 2008 with no measurable benefit. This lapse of time is now far greater than even the longest of the lags measured in the extensive body of scholarly work regarding monetary policy.

Three different studies by respected academicians have independently concluded that indeed these efforts have failed. These studies, employing various approaches, have demonstrated that LSAP cannot shift the Aggregate Demand (AD) Curve. The AD curve intersects the Aggregate Supply Curve to determine the aggregate price level and real GDP and thus nominal GDP. The AD curve is not responding to monetary actions, therefore the price level and real GDP, and thus nominal GDP, are stuck—making the actions of the Fed irrelevant.

The papers I am talking about were presented at the Jackson Hole Monetary Conference in August 2013. The first is by Robert E. Hall, one of the world's leading econometricians and a member of the prestigious NBER Cycle Dating Committee. He wrote, "The combination of low investment and low consumption resulted in an extraordinary decline in output demand, which called for a markedly negative real interest rate, one unattainable because the zero lower bound on the nominal interest rate coupled with low inflation put a lower bound on the real rate at only a slightly negative level."

Dr. Hall also wrote the following about the large increase in reserves to finance quantitative easing: "An expansion of reserves contracts the economy." In other words, not only have the Fed not improved matters, they have actually made economic conditions worse with their experiments. Additionally, Dr. Hall presented evidence that forward guidance and GDP targeting both have serious problems and that central bankers should focus on requiring more capital at banks and more rigorous stress testing.

The next paper is by Hyun Song Shin, another outstanding monetary theorist and econometrician and holder of an endowed chair at Princeton University. He looked at the weighted-average effective one-year rate for loans with moderate risk at all commercial banks, the effective Fed Funds rate, and the spread between the two in order to evaluate Dr. Hall's study. He also evaluated comparable figures in Europe. In both the U.S. and Europe these spreads increased, supporting Hall's analysis.

Dr. Shin also examined quantities such as total credit to U.S. non-financial businesses. He found that lending to non-corporate businesses, which rely on the banks, has been essentially stagnant. Dr. Shin states, "The trouble is that job creation is done most by new businesses, which tend to be small." Thus, he found "disturbing implications for the effectiveness of central bank asset purchases" and supported Hall's conclusions.

Dr. Shin argued that we should not forget how we got into this mess in the first place when he wrote, "Things were not right in the financial system before the crisis, leverage was too high, and the banking sector had become too large." For us, this insight is highly relevant since aggregate debt levels relative to GDP are greater now than in 2007. Dr. Shin, like Dr. Hall, expressed extreme doubts that forward guidance was effective in bringing down longer-term interest rates.

The last paper is by Arvind Krishnamurthy of Northwestern University and Annette Vissing-Jorgensen of the University of California, Berkeley. They uncovered evidence that the Fed's LSAP program had little "portfolio balance" impact on other interest rates and was not macro-stimulus. A limited benefit did result from mortgage-backed securities purchases due to the announcement effects, but even this small plus may be erased once the still unknown exit costs are included....

The level of velocity in the second quarter is at its lowest level in six decades. By allowing high debt levels to accumulate from the 1990s until 2007, the Fed laid the foundation for rendering monetary policy ineffectual. Thus, Fisher was correct when he argued in 1933 that declining velocity would be a symptom of extreme indebtedness just as much as weak aggregate demand.

3---Game-Changing Investments for the U.S., NYT

Today G.D.P. in the United States remains nearly $2 trillion below the prerecession trend and is expanding at an anemic annual rate of about 2 percent, both because of weak aggregate demand and because of the slowdown in the economy’s potential growth rate. A resurgence in investment is essential to address both causes of the disappointing recovery and to create jobs.

Annual net private nonresidential fixed investment — a measure of the productive investment and real expansion in physical structures, equipment and software — fell to less than $100 billion (in 2005 dollars) in 2009 and 2010 from a peak of $435 billion in 2007. And while it has recovered since then, it remains 40 percent below its prerecession peak. ...

In 2012, after four years of recovery, the share was still below 2 percent of G.D.P., less than half of its 2000 peak of 4.7 percent. ...

Net real government investment in infrastructure and other forms of productive capacity, including utilities, schools and hospitals, also remains at depressed levels, down 86 percent in 2012 from its 2009 peak. The last time net government investment was as low as it was in 2012 for a sustained period was in the 1970s, when the economy was less than half its current size. In 2012, the share of such investment in G.D.P. was lower than in any year since 1970. ...

Instead of a virtuous circle of strong investment fueling aggregate demand and building future productive potential, the United States economy is caught in a vicious cycle of weak investment, lackluster job creation and a faltering potential growth rate.
There are still two million fewer jobs today than when the recession began five years ago, and the labor force participation rate is at a 34-year low. And the longer the economy operates far below its capacity, the slower the growth in its future capacity as a result of diminished risk-taking, forgone investment and the erosion of the skills base....

The last piece of the growth puzzle is infrastructure investment. The United States has been underinvesting in infrastructure for the last two decades, and the result is plain to see: congested roads, crumbling bridges and delays at airports. ...

According to a recent commentary by Lawrence Summers, data from the most recent C.B.O. budget projections suggest that a 0.2 percentage point increase in the annual G.D.P. growth rate would eliminate the long-run budget gap.

4--Shiller ; Stocks are too high, Big Picture

Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences says US stocks are expensive. They are the most expensive relative to earnings they have been in more than five years — since the lows follwoing the great collapse of 2007-09.

5---Abe gets ready to start "naming and shaming", sober look
As discussed earlier (see post), the key issue with Japan's economy these dyays is wage growth - or lack thereof. And that is holding back the so-called Abenomics. Recent increases in prices (mostly from yen's depreciation) can not be sustained unless salaries keep up. Inflation and weak wage growth can squeeze consumer spending power and stall economic growth. And Japan needs to have a sustainable period of price increases to get out of the deflationary hellhole. With a long history of wage declines however, getting Japanese firms to change their behavior has been a difficult task.

Apparently Abe has had enough. According to TV Tokyo (h/t ISI Group) Abe will begin pressuring business leaders directly to raise wage
6---Guardian faces parliamentary investigation over Snowden revelations, wsws
7---The US budget deal: A new stage in the attack on the working class, wsws
From the standpoint of the political establishment, the main achievement of the budget deal is the creation of a framework within which the two parties can come to an agreement on sweeping cuts in social spending and reductions in corporate taxes. The agreement mandates the formation of a conference committee to forge a bipartisan budget agreement by mid-December that will reduce the deficit and the national debt, primarily through the slashing of entitlement programs such as Medicare and Social Security.

In his press conference Thursday morning, President Barack Obama made clear that the focus of the Democrats and Republicans will now turn to these programs. “In the coming days and weeks,” he said, “we should sit down and pursue a balanced approach to a responsible budget, a budget that grows our economy faster and shrinks our long-term deficits further.”

Obama added, “The challenges we have right now are not short-term deficits; it’s the long-term obligations that we have around things like Medicare and Social Security.” As a result of the massive cuts already implemented, he said, short-term deficits have already fallen significantly.

Thus the government shutdown and threatened debt default have been used to establish the political conditions for the imposition of massively unpopular cuts to Social Security and Medicare, while making these cuts somehow appear “rational” and “moderate.”...

The initial issue that led to the shutdown—opposition within the “Tea Party” wing of the Republican Party to the Obama administration’s health care plan—faded into the background and has been dropped. While sections of the Republican Party oppose the plan, it was ultimately supported by the US corporate establishment, which quite correctly sees it as a mechanism for slashing workers’ health care benefits and a prelude to privatization schemes planned for Medicare.

What is most significant is that, throughout the entire debate over the budget, the sentiments of the great majority of the population were totally excluded. As the political establishment conspires to slash the two most important social programs in the United States, which keep millions of people out of poverty, there is not a voice of opposition from within the two big business parties or the mass media.

This is one particularly striking expression of the almost surreal political vacuum that exists in the United States. Under conditions of historic inequality, record corporate profits, collapsing wages and a universal attack on every social right of the working class, there is no organized resistance. The trade unions and the various organizations that orbit around the Democratic Party not only do nothing to oppose what is taking place, they participate in the process.

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