Sunday, May 25, 2014

Today's Links

Today's quote:  "The dramatic upward redistribution of recent decades is the result of specific government policies and downward redistribution could in theory be accomplished in much the same way. This is an important point— upward redistribution has had little to do with ‘market’ forces and ‘correcting’ it would in capitalist economic theory ‘improve’ market outcomes."  Rob Urie, Economic Stagnation and the Stagnation of Economics,  counterpunch

1--Krugman, Following Summers, Endorses Asset Bubbles, naked capitalism (archive)

2---The Obvious Reason QE Doesn't Work, zero hedge

In the BoE's latest quarterly bulletin, they conceded this point, recognizing that QE is indeed tantamount to pushing on a piece of string. The article tries to salvage some central banker dignity by claiming somewhat hopefully that the artificially lower interest rates caused by QE might have stimulated some loan demand.

 However the elasticity or price sensitivity of demand for credit has long been understood to vary at different points in the economic cycle or, as Minsky recognized, people and businesses are not inclined to borrow money during a downturn purely because it is made cheaper to do so. Consumers also need a feeling of job security and confidence in the economy before taking on additional borrowing commitments.

3---World Trade Suddenly Slumps, Testosterone Pit

World trade volume dropped 0.5% in March from February, after it had already dropped 0.7% in February, the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just reported in its March world trade report. For the first quarter, volume was down 0.8%, after a 1.5% increase in the fourth quarter....

4---Ukraine: A Prize Neither Russia Nor the West Can Afford to Win, Brookings

The Russia attitude is, if the Western coalition wants to use Ukraine against us, let them see how much it will cost.
It is clear to most observers that the West would not be able to defend Ukraine economically from a hostile Russia. Russia is in a position to do far more damage than the West can defend against or repair. It’s always true that it’s easier to undermine a country economically than to build it up. It’s easier to destabilize than stabilize. It is perhaps less evident that the West would have a very hard time stabilizing the Ukrainian economy even if Russia weren’t around to make mischief. The simple fact is that Russia today supports the Ukrainian economy to the tune of at least $5 billion, perhaps as much as $10 billion, each year. ...

The main support comes in form of Russian orders to Ukrainian heavy manufacturing enterprises. This part of Ukrainian industry depends almost entirely on demand from Russia. They wouldn’t be able to sell to anyone else....

If the West were somehow able to wrest full control of Ukraine from Russia, could the United States, the other NATO nations, and the EU replace Russia’s role in eastern Ukraine? The IMF, of course, would never countenance supporting these dinosaurs the way the Russians have. So the support would have to come in the way of cash transfers to compensate for lost jobs. How much are we talking about? The only known parallel for the amount of transfer needed is the case of German reunification. The transfer amounted to 2 trillion euros, or $2.76 trillion, over 20 years. If Ukraine has per capita income equal to one-tenth of Germany’s, then a minimum estimate is $276 billion to buy off the east. (In fact, since the population size of eastern Ukraine is larger than East Germany’s, this is an underestimate.) It is unthinkable that the West would pay this amount. ...

Economically, Russia can afford losing Ukraine. What Russia could not afford is to win Ukraine, that is, to be saddled with not only its current costs of up to $10 billion a year for eastern Ukraine but the much larger amounts that would be needed to support the rest of the country if they were cut off from its western markets.
The key point here is that there can be no viable Ukraine without serious contributions from both Russia and the West. Of all the options for Ukraine’s future, a Ukraine exclusively in the West is the least feasible. A Ukraine fully under Russian control and with severed links to the West is, unfortunately, possible. But it is in no one’s interest — not Russia’s, not the West’s and certainly not Ukraine’s.
For those who want to punish Russia and nothing else, that’s the answer: hand over Ukraine to the Russians and let them turn it into Malaya Rossiya. It would suck Russia dry. For anyone who really cares about Ukraine, there is, like it or not, only one option: the one in the middle. (Finland)

5---Barrons Interview Posits Weak US Economy, across the curve (Pomboy)

People will realize that the economy really has not achieved any self-sustaining momentum and that it requires continued stimulus. I liken it to a car on a flat road that has no momentum. When you take your foot off the gas, the car just stops moving. That’s essentially what the Fed is doing.....

 It is scary to imagine, because if you look at a chart of nominal consumer spending, which is 70% of GDP [gross domestic product], it has continued to decelerate, even in this period of unprecedented monetary accommodation and rampant financial-asset inflation.....

I expect to see Treasury yields trading in a range from 2% to 3%, basically how it’s been for the past several years. You want to sell at 2% and buy at 3%. I wouldn’t be surprised to see rates fall below 2%, as investor perceptions about the economy meet with reality and they realize that the Fed still has a lot of work to do. In the past, the prospect of the Fed pausing the taper would have been a recipe for running to risk assets. But this time, there would be such disappointment that the economy really isn’t up to snuff. We will have had QE1, QE2, and QE3. So how many times is the Fed going to get it wrong before people start to say, “These guys don’t know any better than the rest of us what’s going on, and they certainly don’t have the solution because they’ve done QE three times and it hasn’t helped?”....

Foreigners are buying about $10 billion a month of Treasuries. This compares with deficit financing needs for the U.S. government of roughly $40 billion a month, based on this year’s deficit. So the Fed needs to pick up roughly $30 billion a month in slack. When the Fed slashed its buying to $25 billion, effective this month, it for the first time opened up a demand deficit for Treasuries. If they continue to taper, that gap will expand, and things could get bumpy in the Treasury market. Rates won’t go up five basis points before the Fed would start talking about more QE.

Who is going to buy a 10-year Treasury yielding 2% when inflation in the U.S. is 2%? No profit-oriented domestic investor is going to do that. We were able to rely on foreign central banks to buy our Treasuries, because they were trying to debase their currencies to manage their exports. But that’s not the case anymore. The upshot is that we are out of natural buyers of Treasuries, and that’s where the Fed has been so critical. So unbeknownst to many, the reason why Treasury yields are 2.6% is in part due to the economy, but it is largely due to the fact the Fed has just been sopping up all of the surplus supply that foreigners are leaving behind.

So, what kind of investing makes sense now?
Given my thesis that the Fed is going to have to taper the taper, so to speak, it will become clear that the economy can’t handle a reduction of stimulus. As a result, Treasuries should continue to rally, in part because buying long-dated Treasuries is the mechanism by which the Fed will continue the stimulus. Second, the dollar should take a hit. There is a feeling that the U.S. is the furthest along in the recovery as it unwinds its stimulus, while the central banks in Japan and Europe are just getting started.

6---Wall Street and Multinationals Get Theirs While America Suffers, economic populist

7---Fifty years since Johnson’s “Great Society” speech, wsws

8--Why are bond yields so low?, CNN

9---U.S. Retailers Missing Estimates by Most in 13 Years, Bloomberg

10---Dean Baker on Housing, TARP and Geithner, firedog lake

This massive trade deficit created a fundamental imbalance in the U.S. economy. Geithner either does not understand or opts to ignore the basic economics. A trade deficit creates a gap in demand that must be filled by either large public deficits or large private deficits, meaning that private investment must exceed private saving....

It should have been pretty obvious to anyone involved in economic policymaking that the housing bubble was driving the economy in the years 2002-2006. Residential construction, which had averaged 4.0-4.5 percent of GDP, exceeded 6.0 percent of GDP in 2005. The savings rate out of disposable income had averaged more than 8.0 percent in the years before the wealth effect from the stock bubble drove it down to 4.0 percent by 2000. While the saving rate rose following the stock crash, the wealth effect from the housing bubble drove saving rates even lower than had the stock bubble, with the rate averaging just 3.0 percent from 2005-2007.

The simple arithmetic showed that the bubble adding as much as 5 percentage points of GDP ($850 billion a year in today’s economy) to demand. With housing likely to fall below its historic norm due to the overbuilding from the bubble years, a collapse in house prices was certain to create a huge hole in demand.
What could Geithner and his colleagues at the Fed possibly think would fill this gap?  That’s a serious question with a very short list of potential answers. Demand comes from consumption, residential investment, non-residential investment, government, and net exports. With drops in the first two being the source of the problem, we are left with the last three categories.....

TARP and the Fed Commercial Paper Lending Facility
The next excursion in deception is the discussion of the debate over the passage of the TARP in the weeks following the collapse of Lehman. Geithner chronicles the political debate against the backdrop of what was happening in financial markets and the Fed’s actions. In the case of the latter, Geithner notes that Federal Reserve Board Chair Ben Bernanke announced the creation of the Commercial Paper Funding Facility in October and that it began operations by the end of the month (page 229). The key fact that Geithner leaves out of the discussion is that Bernanke’s announcement took place the weekend after the House approved the TARP on a very close vote, after previously rejecting it.

This is important because the most compelling argument that there was an urgency to pass the TARP was the claim the commercial paper market was shutting down. Major companies like Boeing and Verizon rely on borrowing in the commercial paper market to finance their ongoing operations. If these companies could not get the funding needed to meet their payrolls and pay their suppliers we would literally be looking at a complete economic collapse.

If Congress recognized that the Fed actually had the power to support the commercial paper market without the TARP then it might have felt less urgency to rush to approve the bill. This would have allowed room for more debate and perhaps more conditions – like a requirement that TARP beneficiaries write-down principle on underwater mortgages. But the threats from the Paulson, Bernanke, Geithner team that the alternative to TARP was the end of the world prevented a more level-headed discussion.

11--LDP touts moves to bolster ‘Abenomics’, JT

Corporate tax cuts, stronger corporate governance and closing the tax gap between one- and two-income households are among the Liberal Democratic Party’s recommendations for inclusion in Prime Minister Shinzo Abe’s economic growth strategy, due by the end of next month.
The LDP, which met Tuesday to discuss the recommendations, will submit its draft to Abe later this month, a source close to the matter said.

The Cabinet is likely to approve this year’s growth strategy on June 27 after reviewing the recommendations from the LDP and other government councils.
The LDP draft outlines “seven pillars,” including improving the governance of companies, reforming public funding, utilizing foreign labor, promoting entrepreneurship and more women in the workforce, and revitalizing local economies

12--Fed's experimental reverse repo program ramps up , sober look 
Growth in US reserve balances (funds that banks hold at the Federal Reserve) has stalled recently. Part of the reason for the slower growth is of course the Fed's taper. Yet the Fed's balance sheet is still increasing, albeit at a slower rate. Which means that bank reserves should be growing as well, unless of course some reserves have been "drained".

There are a couple of ways the Fed can drain the reserves: sell securities or take in deposits/borrow. It turns out that the Fed is doing the latter by borrowing overnight via reverse repo (RRP). The newly established Overnight Fixed-Rate Reverse Repurchase Agreement program that the Fed has been testing (discussed here) has become quite popular.

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