Saturday, November 1, 2014

Today's Links

1--John Maynard Keynes Is the Economist the World Needs Now,  Bloomberg

Keynes said that when companies don’t want to invest and consumers don’t want to spend, government must break the dangerous cycle by stepping up its own spending or cutting taxes, either of which will put more money in people’s pockets. That is not, contrary to some of his critics, a recipe for ever-expanding government: Keynes said governments should run surpluses during boom times to pay off their debts and soak up excessive private demand. (The U.S. ran small surpluses in two boom years of the Clinton administration.) Far from a wild-eyed radical, he said economists should aspire to the humble competence of dentists. He wanted to repair economies, not overthrow them.....

Cutting interest rates is fine for raising growth in ordinary times, he said, because lower rates induce consumers to spend rather than save while stimulating businesses to invest. But where rates sink to the “lower bound” of zero, he showed, central banks become nearly powerless, while fiscal policy (taxes and spending) becomes highly effective as a fix for inadequate demand. Governments can raise spending to stimulate demand without having to worry about crowding out private investment—because there’s plenty of unused capacity, and their spending won’t lift interest rates.
It’s the closest thing economists have found to a free lunch.

2--Fox appointed to watch henhouse, preyday lenders

Most recently, the Consumer Financial Protection Bureau (CFPB) handpicked O’Shaughnessy for a three-year term on its Consumer Advisory Board (you read that right… Consumer Advisory Board).

At the time of his appointment, CFPB Director Richard Cordray said Advisory Board members would “provide valuable input to help us better understand the consumer financial marketplace.” The CFPB – the government agency charged with overseeing that marketplace, including payday lenders like O’Shaughnessy’s Advance America – is considering new rules for the payday lending industry that would protect consumers from predatory lenders like O’Shaughnessy. Talk about a fox in the hen house!...

Advance America’s debt collection tactics are far worse than simply signing folks up for additional loans – how it convinces customers to take out additional loans is perhaps even more problematic. As PR Watch reported:
“A primary goal is to get customers to continually renew their loans. ‘We had to call in our numbers every night to Advance America’s corporate headquarters. They were not interested in numbers on who paid off their loans, but on who renewed their loans. They wanted folks to pay the interest rate and keep the loan going and going,’ says the former [Advance America] employee.

3---Japan risks Asian currency war with fresh QE blitz, Telegraph
The Bank of Japan is mopping up the country's vast debt and driving down the yen in a radical experiment in modern global finance

The Bank of Japan has stunned the world with fresh blitz of stimulus, pushing quantitative easing to unprecedented levels in a bid to drive down the yen and avert a relapse into deflation.
The move set off a euphoric rally on global equity markets but the economic consequences may be less benign. Critics say it threatens a trade shock across Asia in what amounts to currency warfare, risking serious tensions with China and Korea, and tightening the deflationary noose on Europe.
The Bank of Japan (BoJ) voted by 5:4 in a hotly-contested decision to boost its asset purchases by a quarter to roughly $700bn a year, covering the fiscal deficit and the lion’s share of Japan’s annual budget. “They are monetizing the national debt even if they don’t want to admit it,” said Marc Ostwald, from Monument Securities.
In a telling move, the bank will concentrate fresh firepower on Japanese government bonds (JGBs), pushing the average maturity out to seven to 10 years. It also pledged to triple the amount that will be injected directly into the Tokyo stock market through exchange-traded funds, triggering a 4.3pc surge in the Topix index.....

Marcel Thieliant, from Capital Economics, said the BoJ already owns a quarter of all Japanese state bonds, and a third of short-term notes. Its balance sheet will henceforth rise by 1.4pc of GDP each month, three times the previous pace of QE by the US Federal Reserve.
There is little chance that the BoJ will meet its 2pc inflation target by early next year, showing just how difficult it is to generate lasting price rises once deflation has become lodged in an economy. Household spending fell 5.6pc in September, though there are tentative signs of an industrial rebound. ...

The latest move - already dubbed QE9 – sent the yen plummeting 2.6pc to ¥112 against the dollar, the weakest in seven years. The currency has fallen 40pc against the dollar, euro and Korean won since mid-2012, and 50pc against the Chinese yuan. This is a dramatic shift for a country that remains a global industrial powerhouse, with machinery and car producers that compete toe-to-toe with German and Korean rivals in global markets. “They are going to be screaming across Asia if the yen gets near ¥120 to the dollar,” said Mr Ostwald. ...

As each country resorts to a beggar-thy-neighbour policy in moves akin to the 1930s, deflation is dumped in the lap of any region that is slow to respond - currently the eurozone.
Stephen Lewis, from Monument, said the BoJ’s new stimulus is a disguised way to soak up some $250bn of government bonds that will be coming onto the market as Japan’s $1.2 trillion state pension fund (GPIF) slashes its weighting for domestic bonds to 35pc. This avoids a spike in yields, the nightmare scenario for Japanese officials.

4---ETF's: Emerging Trouble in the Future?, economist

COULD the hottest trend in investment management be the greatest danger to financial stability? Exchange-traded funds (ETFs)—pooled portfolios of assets that trade on stockmarkets, usually linked to an index—have grown from a total value of $416 billion in 2005 to $2.5 trillion today. Their rapid growth has left regulators worrying about what might happen if the money that has flowed into ETFs decides to flow out again.

Investors can sell their holdings in ETFs throughout the day, but the assets of some ETFs may be hard to sell immediately. One obvious area is the corporate-bond market, where banks have retreated from trading, and so hold less inventory. There are some 46,000 separate bond issues, not all of which will find ready buyers during a rout.

In other words, there is a potential mismatch between the liquidity of the funds and the liquidity of the assets they own. A stampede out of ETFs might cause a fire sale of assets that would ripple through the financial system...

Almost as important for the ETF are the authorised participants, or APs, which act as marketmakers. The APs, most of which are banks, help to keep the share price of the ETF close to the value of the underlying assets. Imagine that one big investor in an ETF with, say, a 10% stake, wanted to sell its holding in a single day. There might not be ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns....

So how might this process go wrong? One obvious danger might be the role of the APs. If they fail to make a market in the security, then the price could get out of kilter with the asset value of the fund. Alternatively, they might go bust in the middle of the creation or redemption process, which takes three days to complete. That might leave the ETF short of the shares needed to top up the fund (and match its benchmark) or the cash to pay its investors....

5---Why the Financial and Political System Failed and Stability Matters , nomi prins

The biggest banks, and the US and European markets, are now floating on more than $7 trillion of Fed and ECB intervention with little to show for it on the ground and more to come. To put that into perspective – consider that the top 100 global hedge funds manage about $1.5 trillion in assets. The Fed’s book has ballooned to $4.5 trillion and the ECB’s book stands at $2.7 trillion – a figure ECB President, Mario Draghi considers too low. Thus, to sustain the illusion of international systemic health, the Fed and the ECB are each, as well as collectively, larger than the top 100 global hedge funds combined.
Providing ‘liquidity crack’ to the financial system has required heightened international government and central bank coordination to maintain an illusion of stability, but not true stability. The definition of instability is this epic support network. It is more dangerous than in past financial crises precisely because of its size and level of political backing.

6---QE, Debt and the Myth of a Liberal Left, Rob Urie, Counterpunch

QE Debt and the Myth of a Liberal Left_html_m2fbee92f

Graph (1) above: it is clear that since 2007 wealth has continued to increase for the very rich while it has plummeted for everyone else. This is the largest reversal of fortune in modern history for the bottom 90% of the population and it is ongoing. The decline is directly tied to the housing boom and bust engineered by Wall Street banks that were deregulated by the (Bill) Clinton administration and resolved and covered up by the Barack Obama administration.

QE Debt and the Myth of a Liberal Left_html_82e0ee
Graph (3) above: as the interest rate on corporate bonds (Baa Yield) has fallen the level of corporate borrowing relative to economic production (GDP) has risen. QE lowers the absolute level of interest rates and it also lowers the relative rate of interest by making risky assets more attractive. In recent years corporations have borrowed overwhelmingly to buy back corporate stock. This raises the value of stock by reducing the supply.

QE Debt and the Myth of a Liberal Left_html_29556f92
Graph (4) above: this is Graph (3) with interest rates removed for clarity. U.S. corporations have been gorging themselves on cheap debt provided by the flood of money from QE. Corporate debt is divided by economic production (GDP) to scale it. Under mainstream economic theory companies borrow to finance investment. In contrast, U.S. corporations have used the bulk of the money borrowed since 2009 to buy back stock. Stock buybacks boost the value of the stock options that executives and corporate boards have awarded themselves. The rise in debt leaves behind highly leveraged corporations that are more prone to bankruptcy in the next inevitable economic downturn. Source: SIMFA

7---UN report condemns US government’s “international criminal program of torture, wsws

A recent report to the UN Committee Against Torture concludes that the US presidential administrations of George W. Bush and Barack Obama are responsible for far-reaching violations of international law for directing and covering up a global torture program developed by the US Central Intelligence Agency in the years following the September 11, 2001 attacks.

The report, prepared by the “Advocates for US Torture Prosecutions,” Dr. Trudy Bond, Prof. Benjamin Davis, Dr. Curtis F. J. Doebbler, and The International Human Rights Clinic at Harvard Law School, states unequivocally that entire sections of the state apparatus are responsible for “breathtaking” crimes against international law.

“Civilian and military officials at the highest level created, designed, authorized and implemented a sophisticated, international criminal program of torture,” the report states.....

In its concluding recommendation to the UN Committee Against Torture, the legal scholars demand that the US government adopt a legal and policy course that is 180 degrees opposed to that followed by the Obama administration since taking office.
“The United States should promptly and impartially prosecute senior military civilian officials responsible for authorizing, acquiescing or consenting in any way to acts of torture committed by their subordinates,” the rapporteurs write.

8---Who is Mr Putin?, RT (Video)

9---Falling Behind: Optimism Dims for U.S. Middle Class, NYT

It’s evening in America. That is the worrying news from the latest Heartland Monitor Poll, conducted quarterly and sponsored by the insurer Allstate and National Journal.

The researchers made a striking finding: The U.S. middle class, long the world’s embodiment of optimism and upward mobility, today is telling a very different story. The chief preoccupation of middle-class Americans is not the dream of getting ahead, it is the fear of falling behind.
The poll found that 59 percent of its respondents — a group of 1,000 people selected to be demographically representative of the United States as a whole — were afraid of falling out of their economic class over the next few years. Those who described themselves as lower middle class were even more scared than the overall group — 68 percent feared they could slip even lower down the economic ladder.
This wary vision of the future went hand-in-hand with a diminished idea of what it meant to belong to the middle class. More than half of the people polled — 54 percent — said that being middle class meant having a job and being able to pay your bills. Fewer than half — just 43 percent — took the more expansive view that membership in the middle class was a passport to financial and professional growth, buying a house and saving for the future.
“The key finding is that the middle class in America is more anxious than it is aspirational,” Jeremy Ruch, a senior director at the strategic communications practice of FTI Consulting , and one of the people who led the polling, told me. “Some of the traditional characteristics of middle classness are not seen as realistic. They have been replaced by an anxiety about the possibility of falling out of their economic class.”
Even more arresting was the extent to which things that used to be the unquestioned trappings of middle class life have come to be seen as upper-class luxuries. Nearly half — 46 percent — of the respondents who described themselves as middle class said that being able to pay for children’s college education was possible only for the upper class. Forty-three percent thought that only the upper class had enough savings to deal with a job loss, and 40 percent believed only the upper class could save enough to retire comfortably.

For the land of opportunity, this is a seismic shift. America was created as a country where the middle class could prosper — Thomas Jefferson crowed that America had no paupers and few who were rich enough to live without labor.
This was supposed to be the place where, as Bill Clinton liked to put it, if you worked hard and played by the rules, you could get ahead. And Yanks gloried in the fact that the world’s huddled masses regularly demonstrated their belief in the American dream by voting with their feet.
The respondents to the Heartland poll know the world has changed. Nearly two-thirds of those who described themselves as middle class said their generation had less job and financial security than their parents. More than half said they had less opportunity to advance.
The academy can be sniffy about the economic instincts of ordinary folk, but in this case Joe Public seems to have gotten it right. The respondents were on target when asked to estimate the income of the typical American middle-class family: They said between $60,000 and $65,000 per year. According to U.S. census data from the Current Population Survey, median income for a family of four is $68,274.
And most economists think the anxiety articulated in this poll is a reaction to a real and new peril.
“I don’t blame them,” Erik Brynjolfsson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology, told me. “They are falling behind, so it is not surprising that they are feeling anxious.
“The disappointment and the anger of the middle class is not just whining, it is based on real economics,” Mr. Brynjolfsson said. “The job security and the income of the middle class is declining, and so is social mobility.”
The saddest paradox revealed in the poll is that ordinary Americans agree with the elites about what it takes to get ahead, or at least to stay afloat, in the 21st-century United States. Half of the respondents said that college was the best way to earn and maintain membership in the middle class. But almost half — 49 percent — thought that only the upper class could afford to pay for their children’s higher education.
Humans have always been good at focusing on the immediate threat, and the nonstop media cycle has only exacerbated that trait: One week it is Hurricane Sandy, the next it is Cyprus, and then it is the Boston Marathon explosions.
For the Western industrialized countries, however, the really big story is the slow, inexorable decline of the middle class. Watching it happen is about as exciting as studying paint as it dries, or a frog as it boils. But the pain is now being felt even in perennially optimistic America. There are still a few hours left before midnight — let’s hope we can act in time.

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