Archive for June, 2010

Economics Unhinged

By: admin
Published: June 29th, 2010

From RealClearPolitics
By
Robert Samuelson

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. … Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

– English economist John Maynard Keynes (1883-1946)

Almost everyone wants the world’s governments to do more to revive ailing economies. No one wants a “double dip” recession. The G-20 Summit in Toronto was determined to avoid one. In major advanced countries — the 31 members of the Organization for Economic Cooperation and Development — unemployment now stands at 46 million, up about 50 percent since 2007. It’s not just that people lack work. Lengthy unemployment may erode skills, leading to downward mobility or permanent joblessness. But what more can governments do? It’s unclear.

We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists — living and dead — and economists increasingly disagree about what to do. Granted, the initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression. But the crisis has also battered the logic of all major economic theories: Keynesianism, monetarism and “rational expectations.” The resulting intellectual chaos provides context for today’s policy disputes at home and abroad.

Consider the matter of budgets. Would bigger deficits stimulate the economy and create jobs, as standard Keynesianism suggests? Or do exploding government debts threaten another financial crisis?

The Keynesian logic seems airtight. If consumer and business spending is weak, government raises demand through tax cuts or spending increases. But in practice, governments’ high debts impose financial and psychological limits. The ratio of government debt to the economy (gross domestic product) is 92 percent for France, 82 percent for Germany and 83 percent for Britain, reports the Bank for International Settlements in Switzerland.

This means that the benefits of higher deficits can be lost in many ways: through higher interest rates if greater debt frightens investors; through declines in private spending if consumers and businesses lose confidence in governments’ ability to control budgets; and through a banking crisis if bank capital — which consists heavily of government bonds — declines in value. There’s a tug of war between the stimulus of bigger deficits and the fears inspired by bigger deficits.

Based on favorable assumptions, the Obama administration says its $787 billion “stimulus” program created or saved up to 2.8 million jobs. This might be. Lenders haven’t yet lost confidence in U.S. Treasury bonds. Interest rates on 10-year Treasuries are just over 3 percent. But in Europe, financial limits have bitten. Greece‘s huge debt (debt-to-GDP ratio: 123 percent) resulted in a steep rise of interest rates. Germany and Britain are both debating plans to cut their deficits to avoid Greece’s fate.

That’s lunacy, writes Martin Wolf, chief economic commentator for the Financial Times. Concerted austerity may destroy the recovery. Exactly, echoes Nobel Prize-winning economist and New York Times columnist Paul Krugman, who argues that the U.S. economy needs more stimulus and bigger deficits. “Penny-pinching at a time like this …,” he writes, “endangers the nation’s future.”

Not so, counters Harvard economist Ken Rogoff. President Obama’s stimulus package may have “helped calm the panic” in 2009, but boosting spending now — with federal deficits exceeding $1 trillion — raises “the risk of having a debt crisis down the road.” Deficits should be gradually trimmed, he argues.

Indeed, some economists believe that budget cutbacks can stimulate economic growth under some circumstances. A study by economists Alberto Alesina and Silvia Ardagna found that budget cutbacks in wealthy countries often had an expansionary effect when spending reductions, not tax increases, were emphasized. Presumably, these budget plans favorably influenced interest rates and confidence without weakening the incentives to work and invest.

Like textbook Keynesianism, “monetarism” has also suffered in its explanatory power. This theory holds that big injections of money (“reserves”) into the banking system by the Federal Reserve should lead to higher lending, higher spending and — if large enough — inflation. Well, since the summer of 2008, the Fed has provided about $1 trillion of reserves to banks, and none of these things has happened. Inflation remains tame, and outstanding bank loans have dropped more than $200 billion in the past year. Banks are sitting on massive excess reserves.

There’s a great deal economists don’t understand. Not surprisingly, the adherents of “rational expectations” — a theory that people generally figure out how best to respond to economic events — didn’t anticipate financial panic and economic collapse. The disconnect between theory and reality seems ominous. The response to the initial crisis was to throw money — to lower interest rates and expand budget deficits. But with interest rates now low and deficits high, what happens if there’s another crisis?

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Discussion About the Deficit Spending

By: admin
Published: June 28th, 2010

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Krugman: Bush’s Deficit Bad, Obama’s Deficit Good

By: admin
Published: June 28th, 2010

From Townhall
by Larry Elder

Left-wing economist, Nobel laureate and New York Times columnist Paul Krugman hates deficits in tough economic times — when the president of the United States is named George W. Bush.

Krugman, in a November 2004 interview, criticized the “enormous” Bush deficit. “We have a world-class budget deficit,” he said, “not just as in absolute terms, of course — it’s the biggest budget deficit in the history of the world — but it’s a budget deficit that, as a share of GDP, is right up there.”

The numbers? The deficit in fiscal year 2004 — $413 billion, 3.5 percent of the gross domestic product.

Back then, a disapproving Krugman called the deficit “comparable to the worst we’ve ever seen in this country. … The only time postwar that the United States has had anything like these deficits is the middle Reagan years, and that was with unemployment close to 10 percent.” Take away the Social Security surplus spent by the government, he said, and “we’re running at a deficit of more than 6 percent of GDP, and that is unprecedented.”

He considered the Bush tax cuts irresponsible and a major contributor — along with two wars — to the deficit. But he also warned of the growing cost of autopilot entitlements: “We have the huge bulge in the population that starts to collect benefits. … If there isn’t a clear path towards fiscal sanity well before (the next decade), then I think the financial markets are going to say, ‘Well, gee, where is this going?’”

Three months earlier, Krugman said, “Here we are more than 2 1/2 years after the official end of the recession, and we’re still well below, of course, pre-Bush employment.” In October 2004, unemployment was 5.5 percent and continued to slowly decline. At the time, Krugman described the economy as “weak,” with “job creation … essentially nonexistent.”

How bad will it get? If we don’t get our “financial house in order,” he said, “I think we’re looking for a collapse of confidence some time in the not-too-distant future.”

Fast-forward to 2010.

The numbers: projected deficit for fiscal year 2010 — over $1.5 trillion, more than 10 percent of GDP.

This sets a post-WWII record in both absolute numbers and as a percentage of GDP. And if the Obama administration’s optimistic projections of the economic growth fall short, things will get much worse. So what does Krugman say now?

We must guard against “deficit hysteria.” In “Fiscal Scare Tactics,” his recent column, Krugman writes: “These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.”

Read the rest of this entry »

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Repent at Leisure

By: admin
Published: June 28th, 2010

From The Economist

Borrowing has been the answer to all economic troubles in the past 25 years. Now debt itself has become the problem, says Philip Coggan

MAN is born free but is everywhere in debt. In the rich world, getting hold of your first credit card is a rite of passage far more important for your daily life than casting your first vote. Buying your first home normally requires taking on a debt several times the size of your annual income. And even if you shun the temptation of borrowing to indulge yourself, you are still saddled with your portion of the national debt.

Throughout the 1980s and 1990s a rise in debt levels accompanied what economists called the “great moderation”, when growth was steady and unemployment and inflation remained low. No longer did Western banks have to raise rates to halt consumer booms. By the early 2000s a vast international scheme of vendor financing had been created. China and the oil exporters amassed current-account surpluses and then lent the money back to the developed world so it could keep buying their goods.

Those who cautioned against rising debt levels were dismissed as doom-mongers; after all, asset prices were rising even faster, so balance-sheets looked healthy. And with the economy buoyant, debtors could afford to meet their interest payments without defaulting. In short, it paid to borrow and it paid to lend.

Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.

The answer to all problems seemed to be more debt. Depressed? Use your credit card for a shopping spree “because you’re worth it”. Want to get rich quick? Work for a private-equity or hedge-fund firm, using borrowed money to enhance returns. Looking for faster growth for your company? Borrow money and make an acquisition. And if the economy is in recession, let the government go into deficit to bolster spending. When the European Union countries met in May to deal with the Greek crisis, they proposed a €750 billion ($900 billion) rescue programme largely consisting of even more borrowed money.

Debt increased at every level, from consumers to companies to banks to whole countries. The effect varied from country to country, but a survey by the McKinsey Global Institute found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008 (see chart 1 for a breakdown by country). There were even more startling rises in Iceland and Ireland, where debt-to-GDP ratios reached 1,200% and 700% respectively. The burdens proved too much for those two countries, plunging them into financial crisis. Such turmoil is a sign that debt is not the instant solution it was made out to be. The market cheer that greeted the EU package for Greece lasted just one day before the doubts resurfaced.

From early 2007 onwards there were signs that economies were reaching the limit of their ability to absorb more borrowing. The growth-boosting potential of debt seemed to peter out. According to Leigh Skene of Lombard Street Research, each additional dollar of debt was associated with less and less growth (see chart 2).

Stopping the debt supercycle

The big question is whether this rapid build-up of debt—a phenomenon which Martin Barnes of the Bank Credit Analyst, a research group, has dubbed the “debt supercycle”—has now come to an end. Debt reduction has become a hot political issue. Rioters on the streets of Athens have been protesting against the “junta of the markets” that is imposing austerity on the Greek economy, and tea-party activists in America, angry about trillion-dollar deficits and growing government involvement in the economy, have been upsetting the calculations of both the Democratic and Republican party leaderships.

To understand why debt may have become a burden rather than a boon, it is necessary to go back to first principles. Why do people, companies and countries borrow? One obvious answer is that it is the only way they can maintain their desired level of spending. Another reason is optimism; they believe the return on the borrowed money will be greater than the cost of servicing the debt. Crucially, creditors must believe that debtors’ incomes will rise; otherwise how would they be able to pay the interest and repay the capital?

But in parts of the rich world such optimism may now be misplaced. With ageing populations and shrinking workforces, their economies may grow more slowly than they have done in the past. They may have borrowed from the future, using debt to enjoy a standard of living that is unsustainable. Greece provides a stark example. Standard & Poor’s, a rating agency, estimates that its GDP will not regain its 2008 level until 2017.

Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth. As Roland Nash, head of research at Renaissance Capital, an investment bank, puts it: “Can the West, with its regulated industry, uncompetitive labour and large government, afford its borrowing-funded living standards and increasingly expensive public sectors?”

Sovereign default is far from inconceivable. Many people are forecasting that Greece, despite its bail-out package from the EU and the IMF, will be unable to repay its debts in full and on time. Faced with the choice between punishing their populations with austerity programmes and letting down foreign creditors, countries may find it easier to disappoint the foreigners. Defaults have been common in the past, as Carmen Reinhart and Ken Rogoff showed in their book, “This Time is Different”. Adam Smith, a founding father of economics, noted in “The Wealth of Nations” that “when national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having being fairly and completely paid.”

Governments now face a tricky period when they have to deal with the debt overhang, decide how quickly to cut their deficits (and risk undermining growth), and try to distribute the pain of doing so as equitably as possible.

Debt is often treated as a moral issue as well as an economic one. Margaret Atwood, in her book of essays, “Payback: Debt and the Shadow Side of Wealth”, notes that the Aramaic words for debt and sin are the same. And some versions of the Lord’s Prayer say “Forgive us our debts” rather than “Forgive us our trespasses”.

The Live 8 campaign in 2005 tried to shame developed nations into forgiving the debts of poor countries, particularly in sub-Saharan Africa. Economists have developed the concept of “odious debt” in which citizens should not be forced to repay money borrowed by tyrannical or kleptocratic rulers. Interest payments on debt are often regarded as an onerous burden placed on the poor; interest is seen as an unjustified reward for capital, a concept that goes back to Aristotle and is implicit in the Christian idea of usury. Islam forbids it altogether. The book of Deuteronomy suggested a debt amnesty every seven years, which survived into later Jewish custom.

But conventional morality has not always been on the side of the borrowers. Some regard debt as the road to ruin and the failure to repay as a breach of trust. In the 18th and 19th century debtors in Britain were often thrown into jail (as in Charles Dickens’s “Little Dorrit”), though Samuel Johnson spotted the flaws of the practice: “We have now imprisoned one generation of debtors after another, but we do not find that their numbers lessen. We have now learned that rashness and imprudence will not be deterred from taking credit; let us try whether fraud and avarice may be more easily restrained from giving it.”


Movable morals

In the past 100 years the moral battle has moved in favour of the debtors. Bankruptcy is no longer stigmatised but simply regarded as bad luck. When consumers borrow beyond their means, the blame is laid on lax lending practices rather than irresponsible borrowing. Governments have encouraged more people to become homeowners and thus to take on debt. And defaulting on one’s debts has become much less cumbersome; in the current housing slump many American homeowners have resorted to “jingle mail”, dropping their keys through the lender’s letterbox and walking away from their property.

In business, a few failed directorships are a sign of entrepreneurship rather than incompetence. America’s Chapter 11 process allows the managers of companies to remain in place and the business to be protected from its creditors. The number of companies with safe AAA credit ratings has collapsed as more have acted on the theory that a debt-laden balance-sheet is more efficient (because interest payments are tax-deductible in most countries).

The recent crisis has also diminished belief in the judgment of the financial markets. The role of banks in the credit crunch and the cost of the financial sector bail-out has undermined the idea that the markets assess risk fairly and rationally. Instead, higher borrowing costs are seen as the result of unscrupulous speculation.

The role of sovereign credit-default swaps (CDS), a way of betting on the likelihood of a country’s failure to repay the money it has borrowed, has proved particularly controversial. Southern European nations, which have been at the heart of the recent market turmoil, have been quick to blame an Anglo-Saxon conspiracy, brewed up by hedge funds, credit-rating agencies and even newspapers like this one, for unfairly pushing up their borrowing costs. The German government moved to ban short-selling of government bonds and some CDS transactions last month. As Charles Stanley, a stockbroking firm, cynically puts it, EU nations are saying: “Please fund our lifestyles, but don’t hold us to any commitments.”


Why it matters

If a husband borrows money from his wife, the family is no worse off. By extension, just as every debt is a liability for the borrower, it is an asset for the creditor. Since Earth is not borrowing money from Mars, does the debt explosion really matter, or is it just an accounting device?

During the credit boom of the early 1990s and 2000s the conventional view was that it did not matter. Not only were asset prices rising even faster than debt but the use of derivatives was spreading risk across the system and, in particular, away from the banks, which had capital ratios well above the regulatory minimum.

The problem with debt, though, is the need to repay it. Not for nothing does the word credit have its roots in the Latin word credere, to believe. If creditors lose faith in their borrowers, they will demand the repayment of existing debt or refuse to renew old loans. If the debt is secured against assets, then the borrower may be forced to sell. A lot of forced sales will cause asset prices to fall and make creditors even less willing to extend loans. If the asset price falls below the value of the loan, then both creditors and borrowers will lose money.

This is particularly troublesome if the economy slips into deflation, as happened globally in the 1930s and in Japan in the 1990s. Debt levels are fixed in nominal terms whereas asset prices can go up or down. So falling prices create a spiral in which assets are sold off to repay debts, triggering further price falls and further sales. Irving Fisher, an economist who worked in the first half of the 20th century, called this the debt deflation trap.

Another reason why debt matters is to do with the role of banks in the economy. By their nature, banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once. If banks struggle to meet their own debts, they have no choice but to reduce their lending. If this happens on a large scale, as it did in the 1930s, the ripple effect for the economy as a whole can be devastating.

Both of these effects were seen in the debt crisis of 2007-08. Falling property prices caused defaults and a liquidity crisis in the banking system so severe that the authorities feared the cash machines would stop working. Hence the unprecedented largesse of the bank bail-out.

Hyman Minsky, an American economist who has become more fashionable since his death in 1996, argued that these debt crises were both inherent in the capitalist system and cyclical. Prosperous times encourage individuals and companies to take on more risk, meaning more debt. Initially such speculation is successful and encourages others to follow suit; eventually credit is extended to those who will be able to repay the debt only if asset prices keep rising (a succinct description of the subprime-lending boom). In the end the pyramid collapses.

In the aftermath of the latest collapse it is clear that the distinction between debt in the private and public sector has become blurred. If the private sector suffers, the public sector may be forced to step in and assume, or guarantee, the debt, as happened in 2008. Otherwise the economy may suffer a deep recession which will cut the tax revenues governments need to service their own debt.

If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.

An interactive chart allows you to compare how the debt burden varies across 14 countries and to examine different types of borrowing.

Listen to an interview with the author of this special report.

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Daily Readings 06-28-2010

By: admin
Published: June 28th, 2010

In China, Worries Over Municipal DebtsThe Chinese government has begun a series of investigations of how much debt was incurred by local governments last year as part of economic stimulus programs undertaken in response to the global financial downturn

Ken Courtis Says He Sees Chance of `Substantially’ Lower Equity MarketsThe global financial crisis is far from over, with more countries and companies likely to default on their debt, according to Kenneth Courtis, the founding partner of Themes Investment Management.

Krugman: We are now in the early stages of a third depressionIt will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

Obama: Americans can’t buy the world’s prosperity - Debt-ridden Americans can no longer “borrow and buy” the world’s way toward prosperity, US President Barack Obama said Sunday, warning new drivers of growth were needed to fuel global recovery.

Recovery means no ‘undue’ edge for nations: Obama - “So we also discussed the need for currencies that are market-driven,” he added, welcoming China’s decision to let its yuan float more freely against the dollar.

Fiscal disarray is the least of the G20’s sinsThe first Group of 20 summit in November 2008 proclaimed a new era of “global solutions to global problems”. Less than two years later, with the economic crisis barely contained, the partners are at odds

US state budget crises threaten social fabricThe small southern California city of Maywood has hit on a unique solution to its budget crisis. Crushed by the recession and falling tax revenues, the city is disbanding its police force and firing all public sector employees.

Biden: We Can’t Recover All the Jobs LostVice President Joe Biden gave a stark assessment of the economy today, telling an audience of supporters, “there’s no possibility to restore 8 million jobs lost in the Great Recession.”

JD Hayworth Infomercial: Free money! You never have to pay it back!

RBS tells clients to prepare for ‘monster’ money-printing by the Federal Reserve - As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

G-20 Leaders Agree to Tackle Deficits Once Economic Recoveries Are AssuredAdvanced economies will aim to at least halve deficits by 2013 and stabilize their debt-to-output ratios by 2016, according to a statement released as leaders finished meeting in Toronto today. The G-20 said banks need to raise capital “significantly” and countries will be allowed to phase in new rules, with a goal of meeting new standards by the end of 2012.

The Democrats’ Vision Problemgiving more stuff to the poor and middle class because they are “falling behind.”

Reinvent efficiency to cut deficitsEfforts to reform government operations to save money while improving performance deserve closer scrutiny.

Want to protect the poor? Then give them jobs - Most people who are ‘forced’ into minimum wage jobs move quite quickly up the earnings ladder, says Janet Daley

Financial Reform Makes Biggest Banks StrongerThe too-big-to-fail monster lives: how the Dodd-Frank bill maintains the status quo.

Wall Street’s New RealityWill the president’s bill save us from another financial meltdown? Unlikely, says Charlie Gasparino—there are still plenty of loopholes in it for bankers to exploit.

Financial DeformThe financial reform bill that’s about to be passed is reform in name only. It does little to correct the problems that led to our meltdown, and may do more harm by giving people a false sense of security.

US warns over recession risks as G20 meeting startsAs the G20 summit begins in Canada, US Treasury Secretary Timothy Geithner said Europe and Japan should boost domestic demand instead of cutting spending.

States of Crisis for 46 Governments Facing Greek-Style DeficitsCalifornians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end.

Corporate Bond Sales in U.S. Fall 19% as Recovery Shows Strain“There’s definitely fear and paranoia,” said Scott MacDonald, head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut. “The economy’s going to slow in the second quarter and there’s going to be more a lot more talk about a double dip, there’s no question about it.”

America’s Ticking Debt Bomb: Like Greece, “Only Worse,” Pento Says

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Brewer to Obama: Warning Signs Are Not Enough

By: admin
Published: June 27th, 2010

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Biden Visits Custard Shop Calls Manager, Who Told Him To Lower Taxes A “Smartass”

By: admin
Published: June 27th, 2010

VP Bite Me Biden…..

You call us  the “small” people of America –  smart asses,

but

we call you  - the politicians –  assholes

How about that…

We are pissed off and we are not going to take it any more!

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