Category Archives: Macroeconomic policy

EU Puts Periphery Countries on the Rack

For those of you unfamiliar with medieval implements of torture, the rack was believed to be quite effective in extracting information, but generally by having a potential victim watch it in use, with the obvious threat that he was next unless he cooperated. The rack was not only terribly painful, but like most old school methods of torture, often crippled those who survived. (Civilized people, which now clearly excludes our President and those in influential positions in the Pentagon, now recognize that torture is good only for producing phony confessions). It was also employed in particularly gory executions, such as drawing and quartering.

The Eurozone seems to be using similar medieval methods on its debt-laden periphery countries with far less clear understanding that serious damage to the subject is a likely outcome.

This Is How QE Really Works

QE2 Is Equivalent to Issuing Treasury Bills. In actual fact, all QE2 does is drain the real economy of interest income by swapping an interest-bearing government liability for a non-interest bearing government liability. This decreases aggregate demand in the economy. So the real economy effects of QE are to slightly lower aggregate demand. This is offset by changing interest rate expectations, which alter private portfolio preferences and risk premia, leading to credit growth, leverage and speculation, forces which should pump up the real economy. The Fed had intended to lower interest rates via the lowered risk premia. To date, the Fed has lowered risk premia. But this has also provided the tender for speculation and leverage. Moreover, the Fed has also raised inflation expectations to boot, causing interest rates to rise and working at cross-purposes with the lowered risk premia. Thus, QE2 has only been successful insofar as it has increased business credit and raised asset prices. In my view, QE2 has been a bust as it adds volatility to the system and will have negative unintended consequences down the line.

Spiralling into the Moussaka

From the morning links

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

Richard Koo: How the West is Repeating Japan’s Mistakes

Richard Koo’s book The Holy Grail of Economics is the definitive work on what he calls “balance sheet recessions”. He explain, among other things, why QE2 is not likely to be successful.

Bernanke Blames the Global Financial Crisis on China

They must put something in the water at the Fed, certainly the Board of Governors and the New York Fed. Everyone there, or at least pretty much everyone who gets presented to the media, seems to have an advanced form of mental illness, namely, an pronounced inability to admit error. While many in public life suffer from this particular affliction, it appears pervasive at the Fed. Examples abound including an overt ones like an article attempting to bolster the party line that no one, and hence certainly not the central bank, could have seen the housing bubble coming, or subtler ones, like a long paper on the shadow banking system that I did not bother to shred because doing it right would have tried reader patience Among other things, it endeavored to present the shadow banking system as virtuous (a necessary position since the Fed bailed it out) because it was all tied to securtization and hence credit intermediation. That framing conveniently omits the role of credit default swaps and how they multiplied the worst credit risks well beyond real economy exposure levels and concentrated them in highly geared financial firms.

Another example of the “it is never the Fed’s fault” disease reared its ugly head in the context of the G20 meetings.

Budgeting, Australian Style

Even if you don’t get all the political and business references, I suspect you’ll appreciate this video. Hat tip readers hum and Hubert:

Obama Happy to Cut Broad Range of Services to Preserve Pentagon Pork

In another manifestation of Obama’s continuing move to the right, his latest stunt has been to out-Republican the Republicans as a defender of the Pentagon. The GOP, which is out to cut $100 billion more from Obama’s version, has targeted the Department of Defense for $15 billion from an initial request of over $500 billion. From a statement released by the Administration:

The bill proposes cuts that would sharply undermine core government functions and investments key to economic growth and job creation and would reduce funding for the Department of Defense to a level that would leave the department without the resources and flexibility needed to meet vital military requirements….If the president is presented with a bill that undermines critical priorities or national security through funding levels or restrictions, contains earmarks or curtails the drivers of long-term economic growth and job creation while continuing to burden future generations with deficits, the president will veto the bill.

Contrast this stand-fast position on the military budget with Obama’s willingness to throw pretty much anyone else under the bus. John Walker provided a pithy illustration of the guns v. everything else tradeoff in a mock letter to low income Americans. Key section:

James Galbraith: Deficit Hawks Down – The Misconstrued “Facts” Behind Their Hype

By James K. Galbraith, a Vice President of Americans for Democratic Action who teaches at the University of Texas at Austin. Cross posted from New Deal 2.0.

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

Marshall Auerback Speaks on BNN About Implications of Unrest in the Middle East

Portfolio strategist, hedge fund manager, and sometime Naked Capitalism guest blogger Marshall Auerback spoke on BNN about the implications of unrest in the Middle East for the economy and investors. Enjoy!

Connecting the Dots Between China’s Falling Consumption Level and Its Banking Crisis

One of the striking features of China’s continuing growth as an economic power is its extreme (as in unprecedented in the modern era) dependence on exports and investments as drivers of growth. Even more troubling is that as expansion continues, consumption keeps falling as a percentage of GDP.

As countries become more affluent, consumption tends to rise in relationship to GDP. And the ample evidence of colossally unproductive infrastructure projects in China (grossly underoccupied malls, office and residential buildings, even cities) raises further doubts about the sustainability of the Chinese economic model.

The post crisis loan growth in China, in tandem with visible signs that a meaningful proportion of it has little future economic value, has stoked worries that Chinese banks will soon be struggling with non-performing loans. China bulls scoff at this view, contending that China’s 2002-2004 episode of non-performing loans was cleaned up with little fuss (I never bought that story and recall how Ernst and Young was basically bullied by the Chinese government into withdrawing a 2006 report that NPLs at Chinese banks were a stunning 46% of total assets of its four largest banks. Note estimates of the NPLs as a percent of total loans from that crisis vary widely, even excluding Ernst, from 20% to 40%).

The latest post by Michael Pettis links the two phenomena, the fall in Chinese consumption and the cleanup of its last banking crisis. If his analysis is correct, this bodes ill for any correction in global imbalances.

Sugar High or Growth from Sustainable Economic Policy?

Last week, I caught some very good commentary by a number of well-known financial industry experts. I wanted to share my own thoughts with you on their commentary, especially in light of my posts at Credit Writedowns on Eisenhower’s Farewell Address and The New Monetary Consensus. I had featured two of the commentaries at CW, from Roach and Faber. I will add a bit from Gross and Grantham and try to unify them into a single theme regarding corporatism and the sustainability of this upturn.

Marshall Auerback: Chinese Trade Policy Must Focus on Social Consequences

By Marshall Auerback, a portfolio strategist and hedge fund manager; first posted at New Deal 2.0

Focusing on currency isn’t going to cut it for America’s workers.

You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.