Monday, April 18, 2016

Today's Links

1--Here’s one more sign the US economy is slowing


Add one more signal that the U.S. economy is slowing down.

Sales and profits are falling at more of America's biggest companies, according to the latest quarterly survey of a group of business economists.

The share of those reporting stronger sales dropped to the lowest level in seven years, according to the National Association for Business Economics. And, for only the second time since the end of the Great Recession, more respondents said profits were falling than those who said profits were rising at their companies.

...

Last month, industrial production fell by a worse-than-expected 0.6 percent, the sixth drop in the last seven months.


The official read on first-quarter GDP won't be out until April 28, the day after the Fed's next policy meeting, but early projections aren't looking good. The Atlanta Fed is currently estimating that the economy pretty much stood still in the first three months of 2016, expanding by just 0.1 percent


2--Freelancing in America


"We have entered a new era of work in this country"  Shitty part-time contract labor replaces good, full-time decent paying jobs with benefits.


3--Not even low interest rates are enticing consumers to borrow


Consumers are saving a lot more money than they did before the Great Recession, and it is changing the world of finance in significant ways.

Finance officials hoping to stimulate developed economies with spending are frustrated, as nothing they do tempts consumers out of a savings-first mindset, Reuters reported.

"I do think we should entertain (the idea) that this is a substantial change in household behavior and that means a much less leveraged consumer than in the past," Adam Posen, president of the Peterson Institute for International Economics, told Reuters....


The Great Recession seems to have permanently altered consumer spending habits, and now homeowners are intent on paying off their mortgages instead of borrowing against them. Interest rates for a typical 30-year home mortgage have slipped to a three-year low because of economic worry, mortgage finance agency Freddie Mac announced Thursday. The rate currently sits at 3.58 percent, and dropping. This is not the expected path of mortgage rates in a growing economy and suggests that consumers are acting independent of the actual economic benchmarks, Reuters reported.


Financial institutions the world over are throwing everything they have at their sluggish economies, even experimenting with previously unheard-of negative interest rates. The International Monetary Fund is pushing its standard strategy: urge governments to spend more when consumers won't. The Federal Reserve has raised interest rates just once since the Recession's end, but the response was so cautious that future raises are on hold....

Consumers remain intent on trying to live within their means and pay off debts, and financial officials are increasingly recognizing that they need new policies to manage economies in which homeowners behave differently.


"You can't create demand from thin air," a top policymaker from Japan, who is involved in this week's Group of 20 negotiations in Washington, told Reuters. "What’s needed is to create an environment in which companies and households feel confident to spend."


4--Ben Bernanke’s New Helicopter Money Plan


In any event, behold Bernanke’s latest contribution to the history of monetary crankery. The very idea that the Fed would set up a “loan account” that our already incurably profligate Washington politicians could tap at will is so nutty as to be virtually impossible to paraphrase. So let the man’s words do the dirty work:

Ask Congress to create, by statute, a special Treasury account at the Fed, and to give the Fed (specifically, the Federal Open Market Committee) the sole authority to “fill” the account, perhaps up to some prespecified limit. At almost all times, the account would be empty; the Fed would use its authority to add funds to the account only when the FOMC assessed that a Money-Financed Fiscal Program (MFFP) of specified size was needed to achieve the Fed’s employment and inflation goals.

Should the Fed act, under this proposal, the next step would be for the Congress and the Administration — through the usual, but possibly expedited, legislative process — to determine how to spend the funds (for example, on a tax rebate or on public works)… Importantly, the Congress and Administration would have the option to leave the funds unspent. If the funds were not used within a specified time, the Fed would be empowered to withdraw them.

5--Central banks may do more harm than good, says head of India’s central bank


MarketWatch: You’ve said you’re concerned with the wealth effect of quantitiative easing – that asset prices have gone up and investors are worried they are going to come back to earth.

Rajan: This is the problem of the bridges. If you build a bridge it has to reach to the other side. So I think a bridge that relies on wealth effects, you better hope that you got enough growth to justify the asset price increase which created the wealth effect in the first place. So there is some sort of virtuous cycle that gets kicked off which becomes self-fulfilling over time. The alternative is you kick off the wealth effect now, but over time people realize the wealth ain’t coming and then you have an asset price adjustment. I think the jury is still out on which one we’re going to go through...


Rajan: Take any model you want. If inflation is relatively low and investment is relatively low, my guess is you would come up with a very low neutral rate, because you want to pump up investment to get more aggregate demand and the low inflation suggests there is weak aggregate demand relative to supply. And I guess you also want to pump up consumption because investment alone won’t do it. You want to bring down savings and domestically you want to bring up investment to increase domestic demand and so consumption and investment work together. So in that kind of model, it seems as if the equilibrium interest rate is strongly negative. If you push it down low enough, things sort of iron out. But the question you have to ask yourself is — is it possible that consumption behaves perversely with respect to interest rates beyond a certain point?


6--Morgan Stanley Profit Plunges By More Than 50% As Trading Revenue Tumbles 40%


7--Bernanke says so-called helicopter money could work


Former Fed chief Ben Bernanke earned the nickname “Helicopter Ben” for a speech in which he cited Milton Friedman’s imagery of dropping money from the sky in the fight against deflation.

Now, Bernanke is taking on the concept that’s becoming more popular in economic circles — so-called helicopter money. That refers to either a tax cut, or public spending, being financed by a permanent increase in the money supply.

That has a benefit over traditional fiscal injections, because households don’t have to fear future tax increases to pay for the current spending.


Bernanke, in a blog post in his current role at the Brookings Institution, says there are a number of factors standing in the way of helicopter money, or as he likes to call it, a money-financed fiscal program. He also says there’s no need for such stimulus now. But Bernanke also sees a role for helicopter money.

“Under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out,” Bernanke writes.

That said, he does see a number of obstacles.

One is simply the legality. So-called people’s QE, as has been advocated for by U.K. Labour Party leader Jeremy Corbyn, would be illegal in most or all jurisdictions, Bernanke points out. (That would involve the central bank printing money and giving it away.)


8--Treasury, Fed officials tell senators liquidity is fine in bond markets


He noted that both domestic and foreign companies are relying on the U.S. markets to issue debt, demonstrated by a record issuance, $7.8 trillion, of corporate since the beginning of 2010.

Warren asked Weiss about whether the problems of fleeting liquidity experienced during the crisis were over. Weiss said yes. Regulation, he said, “has produced a higher likelihood that liquidity will be there now when we need it.”


9--Investors look for trough in profit downturn

10--Treasury, Fed officials tell senators liquidity is fine in bond markets

($8 trillion more in corporate bonds since 2010!)

He noted that both domestic and foreign companies are relying on the U.S. markets to issue debt, demonstrated by a record issuance, $7.8 trillion, of corporate since the beginning of 2010.

Warren asked Weiss about whether the problems of fleeting liquidity experienced during the crisis were over. Weiss said yes. Regulation, he said, “has produced a higher likelihood that liquidity will be there now when we need it.”


11--Corporate defaults are rising at their fastest pace since 2009

12--The bad smell hovering over the global economy


Put your ear to the ground though, and it is possible to hear the blades whirring. Far away, preparations are being made for helicopter drops of money onto the global economy. With due honour to one of Humphrey Bogart’s many great lines from Casablanca: “Maybe not today, maybe not tomorrow but soon.”


Then there’s the US. Here there are two problems – one glaringly apparent, the other lurking in the shadows. The overt weakness is that real incomes continue to be squeezed, despite the fall in unemployment. Americans are finding that wages are barely keeping pace with prices, and that the amount left over for discretionary spending is being eaten into by higher rents and medical bills.

For a while, consumer spending was kept going because rock-bottom interest rates allowed auto dealers to offer tempting terms to those of limited means wanting to buy a new car or truck. In an echo of the subprime real estate crisis, vehicle sales are now falling.

The hidden problem has been highlighted by Andrew Lapthorne of the French bank Société Générale. Companies have exploited the Federal Reserve’s low interest-rate regime to load up on debt they don’t actually need.


“The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand,” Lapthorne says. “The effect on US non-financial balance sheets is now starting to look devastating.”

He adds that the trigger for a US corporate debt crisis would be falling share prices, something that might easily be caused by the Fed increasing interest rates. .....


The fact that economists at Deutsche Bank published a helpful cut-out-and-keep guide to helicopter money last week is a straw in the wind.

As the Deutsche research makes clear, the most basic variant of helicopter money involves a central bank creating money so that it can be handed to the finance ministry to spend on tax cuts or higher public spending. There are two differences with QE. The cash goes directly to firms and individuals rather than being channeled through banks, and there is no intention of the central bank ever getting it back....


It will take some time to get the helicopters into the air. Central banks can muddle through for the rest of this year, beefing up their QE programmes and driving interest rates deeper into negative territory. The underlying softness of the global economy, however, means that it is quite easy to envisage a downturn in 2017, the 10th anniversary of the start of the financial crisis.

In those circumstances, the unconventional would quickly become conventional, as it did after the collapse of Lehman Brothers. The only question would be which central bank would move first....


Instead, it would be a toss up between the Fed, which is normally prepared to experiment with something different if the situation is desperate enough, or the Bank of Japan, where – as the Deutsche research reminds us – helicopter money was used successfully in the 1930s to help the country escape the Great Depression with far less damage than to other western nations. So give it a few months then listen hard. The choppers are coming.


13--Helicopter money is closer than you think

14--Fears of "the big one" grow

15--The Phony War in Syria, Eric Margolis


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