Mystery Economic Theater 2012

[ewmayer]

o Hurricane Sandy provides a great illustration of the "all productivity is good" myth, by way of the broken window fallacy.

o Wary of Future, Professionals Leave China in Record Numbers: Although China’s economic boom has created millions of well-paying jobs, its skilled workers are moving elsewhere, in search of better quality of life, and religious and political freedoms.

[ewmayer]

Trio of articles from Die Welt [Feed links to Google translate for a full-article auto-translation]:

Greece Rescuers are Kidding Themselves: Calculations by Commerzbank reveal what politicians do not want to admit: The austerity requirements are pushing Greece into bankruptcy. The numbers lead to only one conclusion.


Evictions driving Spaniards to suicide: In Spain, hundreds of thousands of people are losing their homes because they can not repay their loans. The wave of foreclosures has had dramatic consequences.

The evictions are the flip side of the banking crisis. In Spain instead of renting apartments it is common practice to buy them on credit and pay the borrowed money back to the lending bank in monthly installments.

Due to the high unemployment - with a rate of about 25 percent - many families can no longer pay the installments. The resuling bad loans have brought several financial institutions in financial distress.

But greater still is the plight of families who have to leave their homes. "The government wants to spend 60 billion euros to rescue the banks, but nothing for the hundreds of thousands of people who have to leave their homes," said the Socialist deputy and former Labor Minister Valeriano Gómez.

Toxic repression secretly destroys our money: The greatest fear of German savers is inflation. But that is not the problem. Rather, they are losing their money through an underestimated danger: the insidious poison of financial repression

Hyperinflation is by definition a short-term phenomenon of a few weeks or months. The investor can literally watch as he is ruined as he trundles the wheelbarrow full of paper money bundles to the bakery. The danger posed is clear, vivid and recognizable.

Not so for financial repression. It is an insidious and slow-acting poison. Financial repression occurs when real interest rates are negative for years. Even a slightly negative rate already destroys the compounding effect.

The Weimar hyperinflation destroyed the German middle class and was a major factor in helping the NSDAP (Nazi party) to power. German investors are therefore historically calibrated to recognize inflationary dangers early. However this leads to the question whether we are looking in the euro crisis for signs of hyperinflation which does not even exist.

Apparently we underestimate the current financial repression. Or is it even being caused deliberately? Financial repression and hyperinflation are identical in the direction of their effect: they deleverage the government, expropriate wealth and cause a redistribution from savers to borrowers.

Hyperinflation and financial repression have such powerful effects on state and society because in wealth-political terms they act to level a society without anyone being held responsible.

[ewmayer]

Mish has a nice in-depth piece on the dubious benefits of reserve currency status.


Ideology Over Reality: Senate Republicans seem to have pressured the Congressional Research Service to withdraw a report debunking conservative economic orthodoxy.

In a brazen example of putting ideology ahead of reality, Senate Republicans seem to have pressured the Congressional Research Service to withdraw a report debunking conservative economic orthodoxy. Cutting tax rates at the top appears “to have little or no relation to the size of the economic pie,” the report said. “However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” So charging the rich lower tax rates doesn’t promote economic growth; it merely increases economic inequality.

The CRS is a highly respected, independent agency that prepares reports for members of Congress and routinely issues findings that disappoint or even irritate their clients, who usually just grin and bear it, or at least bear it. But Congressional Republicans seem to think that the CRS should function like Pravda.

In recent months, Republicans have been on a paranoid tear. They attacked the private and equally authoritative Tax Policy Center because it bothered to analyze Mitt Romney’s tax plan and found that it’s pretty much impossible to cut taxes by 20 percent without increasing the deficit. And they claimed there was a conspiracy at the Bureau of Labor Statistics when it reported last month that the unemployment rate had dipped below 8 percent.

With respect to the latter point, the deeply flawed nature of the BLS headline unemployment number is widely known. The big drop in said number in the last report caused many conservative pundits and pols to cry "election-season fudging!" ... note that Mish has put together a pretty good case that it is something both more benign (in the sense that it is not a BLS conspiracy to aid Obama`s re-election) and more insidious (in terms of long-term macroeconomic implications) in the form of many employers cutting full-time workers` hours and hiring more part-timers in preparation for the implementation of the 3-hour "full time worker" definition of the Obama health care act. interesting that in their zeal to score quick "TV news-sound-bite points" congressional Republicans in fact missed a more-viable talking point which fits their agenda. Such an oversight couldn`t happen to a nicer bunch of pandering liars. :)

[ewmayer]

In the wake of superstorm mega-boffo-perfect-global-warming-caused-meteorological-cataclysm Hurricane Sandy, a piece on the phony U.S. "big government" debate by Rolling Stone's Matt Taibbi:

Hurricane Sandy and the myth of the big government vs small government debate

The almost certain reality is that we'll end up with a big (and perhaps even a rapidly-expanding) government no matter who gets elected. People seem to forget that this time four years ago, George W. Bush was winding down one of the most activist, expensive, intrusive presidencies in history, an eight-year period that saw a massive expansion in the size of the federal government. Almost exactly four years ago, this is what the conservative Washington Times wrote about the outgoing president:

George W. Bush rode into Washington almost eight years ago astride the horse of smaller government. He will leave it this winter having overseen the biggest federal budget expansion since Franklin Delano Roosevelt seven decades ago.

Bush, it is true, consistently expanded the size of the federal bureaucracies almost across the board during his eight years in office, greatly increasing the size of government just in terms of sheer numbers and volume of spending, but that wasn't all he did.

People forget that he also took a major qualitative step forward in expanding the role of government, when in 2008 his Treasury Secretary, Hank Paulson, teamed up with then-Fed official and Paulson's future counterpart in the Obama administration, Tim Geithner, to design a series of financial bailouts and state-aided mergers. The bailout program that began under Bush cost trillions of dollars and left the state hopelessly and irrevocably involved in the insurance, banking and auto industries, among other things.

But within a few years, that was forgotten. Forget about the myth that the Republican Party is sincerely interested in reducing the size of government: the real myth is that the American people are in favor of reducing the size of government. And that myth was alive and well again by the summer of 2010, in the runup to midterm elections. Back then, Slate columnist Anne Applebaum described the national self-deception this way:

Americans on both the left and the right have, for the last decade, consistently voted for high-spending members of Congress and consistently supported ever-higher levels of government intervention and regulation at all levels of public life. As a result, the federal government expanded under George W. Bush's administration at a rate that was, at least until President Barack Obama came along, totally unprecedented in U.S. history.

In the abstract, most Americans want a smaller and less intrusive government. In reality, what Americans really want is a government that spends less money on other people.

Hurricane Sandy is a perfect, microcosmic example of America's attitude toward government. We have millions of people who, most of the year, are ready to bash anyone who accepts government aid as a parasitic welfare queen, but the instant the water level rises a few feet too high in their own neighborhoods, those same folks transform into little Roosevelts, full of plaudits for the benefits of a strong state.

I would like to point out that we can have a very robust national emergency response capability without running annual trillion-dollar deficits - even the worst-case cost estimates for Hurricane Sandy come in well under the cost of bailing out that overleveraged-hedge-fund-disguised-as-global-insurance-giant AIG back in 2008, and are absolutely dwarfed by the increases in annual spending on defense and Medicare over the past decade.

[chappy]

Originally Posted by ewmayer

I would like to point out that we can have a very robust national emergency response capability without running annual trillion-dollar deficits - even the worst-case cost estimates for Hurricane Sandy come in well under the cost of bailing out that overleveraged-hedge-fund-disguised-as-global-insurance-giant AIG back in 2008, and are absolutely dwarfed by the increases in annual spending on defense and Medicare over the past decade.

agreed. although AIG did pay back the entire amount of their bailout. (in fact 83% of the bank bailout has been repaid by various institutions, and the Government still owns quite a bit of AIG et al which may be counted as profit on the whole venture.)

I won't argue about defense spending, although I'd defend it more if we engaged in smart defense spending instead of building large ships and stealth planes. But, Medicare isn't a wholly losing venture by the Government. It has risen faster than inflation for sure, but that includes the bulk of the baby-boomers, and it has grown a great deal slower than private medical coverage during that same period. And may, in fact, provide a limiting factor against even more excessive growth. Not that we don't need to worry about it.

The Obamacare laws push the unfunded portion down, but don't eliminate it. That is a worry. But, likely I'll be dead by then and it will be Dubslow's problem. :)

[garo]

Originally Posted by chappy

agreed. although AIG did pay back the entire amount of their bailout. (in fact 83% of the bank bailout has been repaid by various institutions, and the Government still owns quite a bit of AIG et al which may be counted as profit on the whole venture.)

What? What? What? WTF are you talking about? They still have $2.6b outstanding. http://projects.propublica.org/bailout/entities/8-aig

[chappy]

my source from only one day later says that the debt was fully repaid, but you also seem to be right that there are still subsidiary obligations of $2.62b "Treasury has recovered a total of $65.22 billion (including proceeds from the sale of the non-TARP shares), compared to total TARP disbursements of $67.84 billion. Treasury currently holds a total of approximately 234 million AIG common shares, consisting of 154,529,686 TARP shares and 79,639,470 non-TARP shares." from yesterday's daily TARP report.

additionally private and public (see page 20) sources indicate that the Government was way ahead on its AIG investment way back in March, not even counting the preferred stock interest.

and apparently I was also mistaken 88% of Tarp has been repaid, not 83%

[ewmayer]

Originally Posted by garo

What? What? What? WTF are you talking about? They still have $2.6b outstanding. http://projects.propublica.org/bailout/entities/8-aig

Let's also not forgot that TARP, being by far the most-visible of the government bailout programs (and having the most strings attached related to executive compensation) was the one the recipients rushed to repay by any means necessary, especially once it became clear that even-more-generous backdoor funding would be available on less onerous terms. (Many of the firms in fact simply used the other lines of funding such as cut-rate Fed loans to repay their TARP loans, freeing themselves to resume lavish exec comp and bonuses.) There have been multiple trillions of dollars pumped into the financial sector by he Fed in the way of its alphabet soup of cheap-lending facilities, coupled with a huge balance sheet expansion, much of which is due to the Fed deliberately overpaying to take mortgage-backed loans off the TBTF banks' books, which has helped buoy the share prices of the beneficiary banks and entities like AIG, which was heavily leveraged in MBS-related insurance:

The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans.

The costs of all these "confidence restoring" initiatives have been borne by the general populace by way of decimated interest rates on savings accounts (and another "risky investments bubble" from the resulting yield-chasing by investors) and currency debasement showing up by way of price inflation in "things you have to buy" such as food and fuel. And, the Fed's resulting bloated balance sheet remains to be dealt with - it is set to expand by another $1 trillion per year on a now-open-ended basis, now that the fed has embarked on yet another round of money-printing via its QE3 program.

-----------------------------------

Sandy might send more than 250,000 cars to scrap heap: Superstorm Sandy may consign as many as a quarter of a million new and used cars and trucks to the scrap heap, a loss that could eventually lead to a spike in new auto sales, automakers and dealers said.
Mish has "uncovered" another problem related to ongoing jobs-market deterioration going on behind the cheery "uneployment rate drops!" headlines:

Explosion in Uncovered Employment During the Recovery

Covered employment is the set of working employees that have unemployment benefits.

Self-employed persons such as myself have to pay into state unemployment insurance programs but we are ineligible to receive benefits (we are not covered).

Similarly, people selling trinkets on Ebay as well as those involved in multi-level marketing schemes and calling it their only job are not covered either.

Covered employment was one of the topics that came up in my November 2 interview on Capital Account with Lauren Lyster.

In the interview I noted that covered employment has crashed and reader Tim Wallace frequently sends me charts to prove it. Here are the latest charts from Tim.

I added data points to Tim's chart. Let's do the math.

According to the BLS, the economy added 4,951,000 since January 2009. In the same timeframe, uncovered employment rose by 6,573,468! The difference is 1,622,468.

Got that?

133% of the jobs created since January 2009 are not covered. Employment rose by less than 5 million while uncovered employment rose by over 6.5 million.

NB: Capital Account is a weekday-nightly financial-news show on RT, which is a Russian-state-funded multilingual TV network.

RT is interesting - while a lot of their hyper-skepticism of Western "corporate controlled news media" is conspiracy-theory hokum and while one might wish they were as skeptical of the Russian government as the US, the fact is that on matters financial and economic, especially since the onset of the 2008 crisis the Western media and governments have been akin to pathological liars (as reflected in the now-(in)famous quote by Eurogroup head Jean-Claude Juncker: "When it becomes serious, you have to lie"), so on the financial/economic front, I find RT's coverage very refreshing, both for its skepticism of officialdom and for giving a voice to folks like Mish and the acerbic Max Keiser, who the mainstream media would not touch with a 10-foot pole.

Back to the topic at hand: So on the jobs front the so-called "recovery" has consisted of a dismal mix:

1. Extremely low numbers of jobs created - barely keeping pace with population growth, to say nothing of making a dent in the massive numbers of jobs shed during 2008-2009;

2. Extremely low-quality jobs created, relative to those which were lost;

3. There is an ongoing shift to uncovered jobs which exceeds the rate of new jobs created, i.e. is occurring within the ranks of existing jobs as well. That points to a degradation in quality of not just new jobs, but also existing ones. (Note the latter term may be in-apt, since we may be talking here of folks who never went onto the official unemployment rolls, but who lost a covered jo and replaced it with an uncovered one).

[garo]

Originally Posted by ewmayer

Sandy might send more than 250,000 cars to scrap heap: Superstorm Sandy may consign as many as a quarter of a million new and used cars and trucks to the scrap heap, a loss that could eventually lead to a spike in new auto sales, automakers and dealers said.

That's good right? A boost to GDP! Yaay!

[ewmayer]

Originally Posted by garo

That's good right? A boost to GDP! Yaay!

The article certainly appears to be intimating such, but perhaps the author was waiting for a Paul Krugman op-ed in the NYT to the effect that "while superstorm Sandy was a good start, it really needed to be much bigger and more sustained" in order to have political cover.

-----------------------------------

One election result I especially savored was in the Massachusetts Senate race, where financial reformer Elizabeth Warren defeated "liberal Republican" and phony-fiscal-hawk Senator Scott Brown, who had gained the seat via the special election to fill the vacancy left by the death of Ted Kennedyin early 2010:

Elizabeth Warren's Inadvertent Best Friends: Wall Street and Republicans

The Massachusetts Senate race was close right up until the end, with three major polls showing Elizabeth Warren pulling ahead and two newspaper polls showing close to a tie. Now that Warren has defeated Republican Senator Scott Brown, who was once seen as an easy bet for reelection, it’s likely to trigger one of the strongest cases of political regret in recent memory.

Congressional Republicans, Wall Street bankers, and business lobbyists now face the possibility that by driving Warren out of the Consumer Financial Protection Bureau (CFPB), which she helped establish, and which they agitated to keep her from heading, they created a far bigger and more threatening animal: a hugely ambitious senator with national star power, command of financial affairs, and the stature to influence President Obama.
...
Warren, a Harvard law professor and scholar of bankruptcy and the middle class, first suggested the idea of an agency that would protect consumers from exploitation by financial institutions in a 2007 article in the journal Democracy. She was recruited to head the Congressional Oversight Panel monitoring the government rescue of the financial system in 2008, and she pushed for the creation of the bureau.

Four years later, the Dodd-Frank financial reform bill made the CFPB a reality, and Warren spent the next year working to staff it, meeting with community bankers across the country, big-bank CEOs, and policymakers in Washington. Although she was seen as the obvious candidate to ultimately lead the agency, Senate Republicans, intent on weakening its power, indicated they would fight any attempt by President Obama to appoint Warren to the job. The idea of pursuing a Senate seat in Massachusetts was dangled in front of her like a shiny jewel, almost as a way to deflect her attention and get her out of Washington without an ugly partisan battle.

So now the battle shifts to trying to keep her off the key committees. I shall be following developments with interest. I initially liked a lot of what Brown had to say, but he quickly turned out to be another piece of bank-owned real estate:

On December 12, 2010, the Boston Globe reported that "[c]ampaign contributions to [Brown] from the financial industry spiked sharply during a critical three-week period last summer as the fate of the Wall Street regulatory overhaul hung in the balance and Brown used the leverage of his swing vote to win key concessions sought by firms."[77] Brown received more than ten times the amount of contributions from the financial services industry as House Financial Services Committee chairman (and author of the legislation) Barney Frank during the same period.[77] According to the Globe:

Brown’s efforts benefited large Massachusetts companies such as MassMutual Financial Group, Liberty Mutual Insurance, Fidelity Investments, and State Street Corp., whose executives and political action committees contributed $29,000 to Brown during the three-week period he was extracting the concessions from Democrats. They also benefited major out-of-state institutions such as Goldman Sachs, UBS, and JPMorgan Chase. Those and other out-of-state financial interests gave Brown a total of $50,000 during the period.[77]

In other post-election commentary, interesting how the markets reacted the past few days to the resumption of all the bad news out of Europe and elsewhere which had been suppressed in the run-up to the election. What, you mean Apple didn't use its huge pile of cash to secretly bail out Greece? Too bad, because it's gonna cost them more a lot more share-equivalents than it would have a few weeks ago.

[garo]

Originally Posted by garo

Niall Ferguson is a dickhead. End of!

Sooo... Reviving an old theme on this thread. Niall Ferguson had a partisan screed in the Newsweek http://www.thedailybeast.com/newswee...-go.print.html

Obligatory skewering:
http://krugman.blogs.nytimes.com/201...sweek-edition/
http://delong.typepad.com/sdj/2012/0...-ferguson.html
and the best:
http://www.theatlantic.com/business/...-obama/261306/

"Certainly, the stock market is well up (by 74 percent) relative to the close on Inauguration Day 2009. But the total number of private-sector jobs is still 4.3 million below the January 2008 peak."

Notice the switcheroo?




I stand by my ad hominem.