Tuesday, March 15, 2016

Today's Links

1--Negative Rates: Central banks confront unintended consequences

The policy has also failed to promote growth. In the fourth quarter of 2015, the Japanese economy contracted at an annual rate of 1.1 percent and further negative growth is expected in the first quarter of this year. This would mark the third technical recession—defined as two consecutive quarters of negative growth—in four years...

The move to negative interest rates has backfired badly, however. Instead of falling, the yen has actually risen in recent weeks, while the stock market has declined. This is because the BoJ decision had unintended consequences. First, it was seen as making less likely a decision by the US Fed to further increase interest rates, following the 0.25 percentage point increase in December. This had the effect of slowing the appreciation of the dollar relative to the yen and other currencies.

Second, the Japanese decision added to the growing perception in financial markets and more broadly that the world’s central bankers have no clear idea of where their policies are heading. Instead, they seem to be stumbling in the dark and reacting in an ad hoc manner to each development.

The increase in uncertainty, combined with fear that negative rates would have an adverse impact on the business models and profits of banks, made investors more wary and resulted in a shift to so-called safe havens. As Japan is regarded one as of these, the yen rose, rather than declined as might otherwise have been expected....

A source cited by the Wall Street Journal as “close” to the BoJ commented: “There is a perception that we are set to further lower the negative rates, and it seems to be stoking a sense of uneasiness among the public.” The article noted that opinion polls regarded the negative rate policy as ineffective and consumer sentiment last month fell at its sharpest rate for two years....

However, as with the BoJ decision, the latest ECB measures seemed to have the opposite effect from what was intended. The further lowering of interest rates into negative territory could have been expected to lower the value of the euro. After an initial fall, the euro rose, swinging through a range of 4 percent in a single day, because Draghi appeared to indicate that interest rates would not be reduced further.

2--(Brilliant) Economic nationalism, war and the fight for international socialism

Such an analysis begins by posing the question: where is the campaign of economic nationalism leading? What would be the consequences of a return to isolated national economies? The tortured and bloody history of the twentieth century provides the answer.

The resort to economic nationalism arises out of the breakdown of the global capitalist order signalled by the financial crisis of 2008. The last great breakdown of the capitalist system, which began with the outbreak of World War I and led to the Great Depression, shows where it is heading. The rise of economic nationalism during the 1930s, as each country sought to protect itself from the collapse of the world market through the erection of customs and tariff barriers, created a disaster.

From the introduction of the protectionist Smoot-Hawley Act in the US in June 1930 to the end of 1932, it has been estimated that world trade contracted by as much as one half to two-thirds, leading to the disintegration, not advancement, of entire economies. The inevitable outcome was World War II and the relapse into barbarism.

The reactionary logic of economic nationalism was demonstrated most clearly in the case of Germany. Adolf Hitler came to power on the basis of a program of economic autarchy. But within a very short space of time an economic crisis began to develop, as this policy ran up against the constrictions of the German nation-state. Further national economic development therefore required territorial expansion—Lebensraum—and from 1936 onwards the entire economic policy of the Hitler regime was based on military conquest, a program that led directly to World War II and all of its resultant horrors....

task is to tear down the walls and barriers of the nation-state system, overturn the profit system, and take political power into its own hands in order to establish a new and higher socio-economic order based on the harmonious development of the productive forces on a global scale through a planned, consciously regulated and democratically controlled economy.

3--When CBs cut rates, the price of money is reduced. Not always. BOJ edition

The yen advanced to 113.05 per dollar as of 4:59 p.m. in Tokyo, about 6 percent stronger than it was at the start of the year -- an appreciation that has undercut the competitive advantage that previous BOJ easing had won. The currency’s gains are a risk to growth in corporate profits, especially among Japan’s exporters, and to inflation because of lower import costs....inflation expectations have weakened recently.

The hope is that by bringing down borrowing costs, the strategy will spur companies to borrow and consumers to spend. "It is an absolute benefit that is going to transmit into increased purchasing power," Jesper Koll, the Japan head of WisdomTree Investments Inc. in Tokyo, told Bloomberg TV.


4--Negative rates:

Household reaction

With concerns that deposit rates may go below zero, sales of safes are surging. The number of 10,000 bills in circulation in 2015 rose at the fastest pace in more than a decade, which may suggest households are hoarding cash. 

Sentiment hit

Consumers’ and merchants’ sentiment dropped in February, requiring the government to lower its assessment of confidence. Japan’s corporate sentiment fell into negative territory, according to a survey for the first quarter, following an economic contraction in the last quarter of 2015.

4--“Free Trade”: The Elites Are Selling It But The Public Is Longer Buying

5--"Trickle up" continues under Obama

If, in 2008, one hoped for the presence of more poor people and for a greater concentration of wealth in the hands of the rich, so far, during Obama’s presidency, these hopes have been fulfilled

These figures show that during the presidencies of Bush Sr., Clinton, G. W. Bush, and Obama so far, a greater portion of the nation’s wealth has become more concentrated in the hands of the rich as indicated by the share of wealth held by the top 1%. From 1989 to 2010, it increased from 30.1% to 34.5% and, under another methodology, to 36.6% in 2013.

From 1989 to 2013, the share of the top 10% went from 67.2% to 75.2% or from slightly over 2/3 to more than 3/4 of the nations’ total wealth. This means that from 1989 to 2013, the drop in the share of wealth held by the bottom 90% went from 32.9%, almost a third, to 24.8%, less than one-fourth....

In 2008, Obama spoke of hope for a better future. If the wealthy hoped for a greater share of the nation’s wealth, their hope was fulfilled while the wealth conditions of most everyone else have declined.

These changes in wealth holdings were clearly described by Federal Reserve Board head Janet Yellen who began a speech on October 17, 2014 noting:

“The distribution of income and wealth in the United States has been widening more or less steadily for several decades… This trend paused during the Great Recession because of larger wealth losses for those at the top of the distribution and because increased safety-net spending helped offset some income losses for those below the top. But widening inequality resumed in the recovery…” (emphasis added). 2...

While wealth inequality has increased, the number of people living in poverty has also generally increased...

Even the record during Reagan’s presidency may be viewed as more favorable than Obama’s. During the time Reagan was president, the official rate of poverty peaked at 15.2% in 1983. Thereafter, it gradually declined to 13.0% in 1988.7 By contrast, the rate of poverty during Obama’s time in office has always been more than 14.3% and was 14.8% in 2014, or almost 2% higher than it was at the end of Reagan’s presidency.

A quip that was made about Reagan is that he liked poor people so much that he acted to increase their numbers. During his first three years, the poverty rate and the number of people deemed to be impoverished increased, reaching its peak in 1983. Thereafter, from 1983 to the end of Reagan’s presidency in 1988, the number of people deemed to be poor declined by over 3.5 million ending at slightly below the total during the first year of his presidency.

In contrast to the record of Reagan’s presidency, during the time Obama has been president and statistics are available, 2009-2014, the population has grown by 11.98 million. This is close to its growth for the last six years of Reagan’s presidency. Yet, the number of people deemed to be living in poverty has not declined, but has increased by more than 3 million

6--Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales

Most analysts have shrugged off talk of a subprime auto-loan bubble. They said the economy isn’t in recession, unemployment rates are fairly stable and low gasoline prices are putting more money in people’s pockets.

The U.S. auto industry has been on a tear. Sales of new cars and light trucks came in at a record 17.5 million in 2015, and the strong pace has carried into the new year. Sales of used cars, which a majority of subprime borrowers purchase, also are increasing, according to the National Automobile Dealers Association.

The total volume of U.S. auto loans is now at an all-time high of close to $1 trillion, with a fifth made to subprime borrowers, according to Equifax. Many of those loans are repackaged into bonds to free up capital so that new loans can be made

7---Lenders drove the boom and the bust

In the years leading up to the 2008 financial crisis, trillions of new dollars flooded into housing.  Why?

Was it coaxed into the housing market by borrowers who convinced bankers they could pay back the loans?

No. It gushed into the housing market from financiers with piles of money they needed to invest.

In other words, the housing boom was driven by lenders, not by borrowers, say several economists.

Economist  Zoltan Pozsar writes about the piles of money in his recent “A Macro View of Shadow Banking,”  which expands on his 2011 study “Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System.”  While these cash pools have been discussed before, most notably by National Public Radio, Pozsar fills in important understandings.

These pools, largely developed since 2000, fueled the housing boom a decade ago, caused the bust that followed in 2008 and threaten further destabilization today, writes Pozsar who is calling for a better understanding of the pools.

Examples are pension plans, corporate treasuries, money market funds, endowments, mutual funds, insurance separate accounts, foundations, hedge funds, central bank and government holdings, mortgage real estate investment trusts (mREITs), and securities lenders.

Each pool controls enormous piles of money that it must invest

8--In the 2000’s the housing boom was not driven by borrowers who wanted money to spend, although many didn’t seem to mind taking the cash that lenders offered. Instead, the housing boom was driven by investors who wanted to get a good return on their savings, according to several economic studies.

Wrote economist Zoltan Pozsar in “A Macro View of Shadow Banking,” published Jan. 31, 2015:

The conceptual link between repo and the provision of working capital is clear through the observation that just as working capital refers to the short-term funding of real economy transactions with an aim to satisfy household and business consumers by producing and delivering real goods, repos … aim to satisfy retail and institutional investors’ wealth aspirations by delivering financial goods in the form of excess return.

Pozsar said this may reflect a natural evolution in the financial needs of a maturing economy.

9--We’ve reached a permanently low floor in mortgage interest rates

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