Monday, December 19, 2016

Today's links

Today's quote: "Senator John McCain, in an appearance on CNN, cited the intervention of Russia in Syria as “a sign of a possible unraveling of the world order that was established after World War II,” in other words, an end of the dominant position of the United States." Patrick Martin, WSWS

1--U.S. Addicted to Stock Buybacks

American manufacturers have chosen a different path. Their CEOs grow wealthy by financially strip-mining their own companies, aided and abetted by elite financiers who have only one goal: extracting as much wealth as possible from the company while putting back as little as possible into production and workers.

The heroin driving their addiction is stock buybacks—a company using its own profits (or borrowed money) to buy back the company’s own shares. This directly adds more wealth to the super-rich because stock buybacks inevitably increase the value of the shares owned by top executives and rich investors. Since top executives receive the vast majority of their income (often up to 95%) through stock incentives, stock buybacks are pure gold. The stock price goes up and the CEOs get richer. In this they are in harmony with top Wall Street private equity/hedge fund investors who incessantly clamor for more stock buybacks, impatient for their next fix.

For the few, this addiction is the path to vast riches. It also is the path to annihilating the manufacturing sector. (For a definitive yet accessible account see “Profits without Prosperity” by William Lazonick in the Harvard Business Review.)

Wait, wait, isn’t this stock manipulation? Well, before the Reagan administration deregulated them in 1982, stock buybacks indeed were considered stock manipulation and one of the causes of the 1929 crash. Now they are so ubiquitous that upwards of 75% of all corporate profits go to stock buybacks. Over the last year, 37 companies in the S&P 500 actually spent more on buybacks than they generated in profits, according to Buyback Quarterly.

Little wonder that stock buybacks are a major driver of runaway inequality. In 1980 before the stock buyback era, the ratio of compensation between the top 100 CEOs and the average worker was 45 to 1. Today it is a whopping 844 to 1. (The German CEO gap is closer to 150 to 1.)

Germany holds down its wage gap, in part, by discouraging stock buybacks. Through its system of co-determination, workers and their unions have seats on the boards of directors and make sure profits are used to invest in productive employment. As a result, in Germany stock buybacks account for a much smaller percentage of corporate profits.

Between 2000 and 2015, 419 U.S. companies (on the S&P 500 index) spent a total of $4.7 trillion on stock buybacks (annual average of $701 million per firm). During the same period, only 33 German firms in the S&P350 Europe index conducted buybacks for a total of $111 billion (annual average of $211 million per firm). (Many thanks to Mustafa Erdem Sakinç from the Academic-Industry Research Network for providing this excellent data.)

Let’s do the math: U.S. firms as a whole spent 42 times more on stock buybacks than German firms!
Little wonder that our manufacturing sector is a withering appendage of Wall Street, while German manufacturing leads the global economy.

2--Trump’s Coming Confrontation with Yellen and the Federal Reserve

Trump has a big stimulus plan. It’s a bad plan, but it’ll still create some jobs, and Yellen has said:
“I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Yellen said.
That’s Fed speak for “spend the money if you want, but we’ll neutralize every dollar you spend.” Which, by the way, has been orthodox Fed policy since Greenspan and arguably Volcker–almost 40 years.
So, Trump (and Bannon) if they want a good economy and their stimulus to work, have a problem: Yellen and the Federal Reserve Board. And Yellen has stated she won’t step down till her term ends, in 2024....

Don’t defend the Federal Reserve if you claim to care about workers, the middle class, or anyone under the top 10 percent or so. They have acted unutterably evil for decades, and if it takes another evil person to destroy their power, I’m fine with it. Frankly, the Federal Reserve should be placed under direct control of Congress with four year terms at most, and every central bank in the world should lose its “independence.” They have misused that independence to do little more than make the rich richer for decades and they are profoundly anti-democratic.

3--False optimism?  Rates Are Rising Because Of China, Not Inflation

4--A Bearish David Rosenberg Re-Emerges: "Fade This Rally" As "Trump Will Engineer A Return To Deflation

5--Uh oh!   Let’s Shrink the Balance Sheet, Bullard Says

6--The biggest obstacles to Trumponomics: Janet Yellen and the dollar

7--CPI: The dog that didn't bark

Fed still failing to hit its 2% target after years of trying, and after years of forecasting that it would hit its 2% target:

8--Infinite poverty and immiseration for the masses; Brazilian President Temer Signs Constitutional Amendment Imposing 20 Years of Austerity

9--Foreigners are Dumping US Treasurys as Never Before

10--China dumps record U.S. securities in Oct

11--McConnell, Warning of ‘Dangerous’ Debt, Wants Tax Cut Offsets

President-elect Donald Trump’s race to enact the biggest tax cuts since the 1980s went under a caution flag Monday as Senate Majority Leader Mitch McConnell warned he considers current levels of U.S. debt “dangerous” and said he wants any tax overhaul to avoid adding to the deficit.

“I think this level of national debt is dangerous and unacceptable,” McConnell said, adding he hopes Congress doesn’t lose sight of that when it acts next year. “My preference on tax reform is that it be revenue neutral,” he said.
During a news conference, McConnell also poured cold water on the idea of a massive stimulus package, effectively laying out markers on taxes and spending that that could cramp Trump’s ambitions.

The Committee for a Responsible Federal Budget, a nonpartisan think tank, has projected that Trump’s plans would increase the debt by $5.3 trillion over a decade, with deficits already over $600 billion a year and rising on autopilot....

What I hope we will clearly avoid, and I’m confident we will, is a trillion-dollar stimulus,” he said. “Take you back to 2009. We borrowed $1 trillion and nobody could find that it did much of anything. So we need to do this carefully and correctly and the issue of how to pay for it needs to be dealt with responsibly.”...

The debt limit will need to rise next year to avoid defaulting on government obligations; McConnell said he wasn’t sure if that would be paired with any deficit-reduction measures next year as it was in 2011, when Republicans held the debt limit hostage and extracted more than $2 trillion in deficit cuts over a decade from President Barack Obama.
House Speaker Paul Ryan has also said he wants tax changes to be deficit-neutral, indicating that Republicans will assume positive macroeconomic benefits from tax cuts to ease the projected budgetary hit -- a process known as dynamic scoring that is popular on the right.

12--Will the Trump Era Bring Higher Interest Rates? Don’t Count On It

As my colleague Binyamin Appelbaum writes, any stimulative fiscal policy from the Trump administration could well face an equal and opposite tightening of monetary policy by a Fed that raises interest rates.

The central bank will seek to prevent too much inflation from breaking out in an economy it believes is getting close to operating at its full potential, which means Mr. Trump’s stimulus might run up against the Fed chair Janet Yellen’s (and perhaps her successor’s) counter-stimulus....

the Trump agenda might pack less of a growth punch than some have imagined. If so, you would expect the same cautious approach to rate increases from the Fed....

it’s worth diving into the details of the Trump policies that led to the postelection-day market rally in stocks and the sell-off in bonds.
He wants to enact major tax cuts, for one, which all else being equal, would tend to create a short-term boost in economic growth and higher interest rates. But there are some early signals that the Republican lawmakers who actually have to pass any changes to tax law, especially those in the Senate, are wary of tax cuts that would increase the budget deficit as much as Mr. Trump’s campaign plan would.

“My preference on tax reform is that it be revenue neutral,” the Senate majority leader Mitch McConnell told reporters this week.
Another big plank underneath the idea that Mr. Trump’s economic policy will be stimulative is an expectation that he will embrace a large-scale infrastructure spending package.
But while the president-elect mentioned that idea in his election victory speech, he hasn’t put much meat on the bones of the plan since. The details matter a great deal for how much an infrastructure plan could lift growth. For example, tax credits that make the finances of building toll roads more favorable are less likely to create a huge boost in activity than spending on upgrading physical infrastructure outright...

So on both tax cuts and infrastructure, there’s no guarantee that the actual scale of stimulus will match some of the early postelection talk. Economists at JPMorgan Chase, for example, are forecasting economic growth of just under 2 percent for both 2017 and 2018 — about the same as the pace of the last six years....

There are two vacancies on the Fed’s seven-member board of governors already, and Ms. Yellen’s term as chairwoman expires in February 2018; the vice-chairman Stanley Fischer’s term is up in June of that year. Add it up, and within 18 months of taking office, Mr. Trump could have appointed a majority of the Fed’s board, including its chair and vice chair.

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