Linking ≠ endorsement.
⇧ It can be morning again for the world’s middle class – FT.com
When Lawrence Summers gets it (at least some of it anyway):
…if it is to benefit the middle class, prosperity must be inclusive and in the current environment this is far from assured. If the US had the same income distribution it had in 1979, the bottom 80 per cent of the population would have $1tn — or $11,000 per family — more. The top 1 per cent $1tn — or $750,000 — less. There is little prospect for maintaining international integration and co-operation if it continues to be seen as leading to local disintegration while benefiting a mobile global elite.
⇧ A new idea steals across Europe — should Greece’s debt be forgiven? | World news | The Guardian
Angela Merkel, where’s your application of the Golden Rule? Your country was aided by a much fairer hand than you have dealt Greece. People have been dying in Greece do to completely unnecessary but counter-productive austerity. Where’s your heart for your fellow Europeans?
SECRET OF THE ‘GERMAN MIRACLE’
Germany’s “economic miracle” (or wirtschaftswunder), which saw the defeated country rebuild its shattered infrastructure to become a world-beating industrial powerhouse, was made possible by a deal struck in London in 1953, which saw half of the debts it owed to the rest of the world written off.
Since the global financial crisis of 2008, Germany’s has been one of the strongest voices advocating programmes of unflinching austerity for Greece and the other bailed-out European economies.
Yet in the wake of the second world war, West Germany managed to secure 15bn deutschmarks of debt forgiveness, in what became known as the London agreement.
The deal is less celebrated than the well-known Marshall plan, which saw US aid flood into Europe; but it was critical to Germany’s re-emergence as a major economic force.
Its creditors feared the threat from the communist east, and believed the West German economy must be allowed to recover. In a proposal drafted in 1950, the US, UK and France argued that “the restoration of German solvability includes an adequate solution for the German debt which takes Germany’s economic problems into account and makes sure that negotiations are fair to all participants”.
After talks that dragged on for several months in 1953, and included private sector lenders as well as governments, all participants agreed to write off about half of the country’s outstanding debt — much of it contracted before the Nazis had come to power, in order to pay off the reparations imposed on Ge rmany after the first world war.
Crucially, it was made a condition of the deal that West Germany would only have to make repayments when it was running a trade surplus: in other words, when it had earned the money to pay up, rather than having to borrow more, or dip into its foreign currency reserves. Its repayments were also limited to 3% of export earnings.
Germany’s creditors therefore had an incentive to buy the country’s goods, so that it would be able to afford to pay them.
This approach was widely seen as helping to sow the seeds of the powerful export sector that has become such a dominant characteristic of the German economy over the past 60 years.
⇧ Bigger Wall Street Bonuses, Bigger Home Budgets – NYTimes.com
How the other half lives, unless you’re part of that other half:
Lisa Larson, an associate broker at Warburg Realty, says that several of her more reluctant clients are now ready to jump into the buyers’ pool. “A couple of my clients, even just a year ago, were sitting on the sidelines and didn’t want to get involved in bidding wars,” she said. “But now there has been a perfect storm of conditions that are making them more optimistic and ready to buy.”
Her clients, and others like them, have a general feeling that they have weathered the recession and are now more confident about holding onto their jobs. Many are also looking to take advantage of low interest rates….
⇧ Five Critiques of Arthur Laffer’s Supply-Side Model Show Tax Cuts as Junk Economics | The Institute on Taxation and Economic Policy (ITEP)
Lawmakers seeking to reduce or eliminate income and estate taxes frequently claim that doing so will result in an economic boom. Supply-side economist Arthur Laffer is often enlisted to bolster this argument with his analyses purporting to show that states lacking an income tax or estate tax have economies that outperform the rest of the country, and that any state can easily replicate that success by abandoning their income and estate taxes.
A series of reports from Institute on Taxation and Economic Policy explains why these supply side claims are not supported by the evidence, and exposes the many serious flaws in the analyses that Laffer has constructed to lend it support.
⇧ Washington | The Institute on Taxation and Economic Policy (ITEP)
We covered this briefly in our immediately prior post but wanted to include more on it. Here’s the source material.
According to ITEP’s Tax Inequality Index, Washington has the most unfair state and local tax system in the country. States with regressive tax structures have negative tax inequality indexes, meaning that incomes are less equal in those states after state and local taxes than before (See Appendix B for state-by-state rankings and more details).
“Comparatively high cigarette tax rate” We don’t consider that a bad thing and shouldn’t be included in “regressive” but rather a special category.
Poor people shouldn’t smoke: shouldn’t waste money on smoking. No one should for that matter.
Also, there are costs to government and other taxpayers for the illnesses from cigarette smoking. Higher cigarette prices via higher taxes on cigarettes are just another incentive to quit and is good public policy and not ideologically wrong within a fully informed democracy. Who doesn’t know cigarette smoking is bad, and what kind of society would we have where everything bad is allowed based solely upon personal choice? Right now, we’d have anarchy, utter chaos.
⇧ What Part of Japan’s 3.5 Percent Unemployment Rate is Anemic? | Beat the Press
Leave it to Dean Baker to inform us of what we typically don’t see anywhere else in the media.
Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies.
⇧ Slimin’ Jamie Dimon Tells Howlers About Persecution of Banks, “Fortress Balance Sheet” | naked capitalism
Yves Smith really, really, really doesn’t like Jamie Dimon of JP Morgan. Does she have a case against him? Read her scathing article and decide.
Jamie Dimon seems to think if he can tell his Big Lies long enough, he’ll be believed. In reality, the only ones who will buy his blather are his fellow members of the elite banker looting classes and their hired help.
…if there might be actual economies of scale, they appear to be more than offset by diseconomies of scope.
…Jamie Dimon is his bank writ large: bullying, dishonest, and an unrepentant lawbreaker.
⇧ Wealthiest 1% will soon own more than rest of us combined, Oxfam says – CNN.com
“Do we really want to live in a world where the 1% own more than the rest of us combined?”….
The 80 richest people on the planet have the same wealth as the poorest 3.5 billion people, the report says.
⇧ Bullish on economy, cautious on housing – OC Housing News
I recently made a series of bold California housing market predictions for 2015. I don’t believe housing will do poorly this year despite high prices because I believe the economy is improving, which will put more people back to work, cause wages to rise, and ultimately help home sales, assuming rising interest rates don’t spoil the party.
The only reason I am not more bullish on housing is the inevitable impact rising mortgage rates will have on sales. The federal reserve will likely begin raising short-term interest rates this year, which will likely cause mortgage rates to rise.
I will make one unusual economic prediction for 2015: I believe the spread between inflation, as measured by CPI, and the yield on 10-year Treasury Notes will hit a record low.
CPI is a heavily manipulated number, but a surging economy will cause prices to rise, so the CPI will go up. Further, the beggar-thy-neighbor policy among central banks worldwide will cause foreign investment to seek the safe haven of the US dollar. This influx of foreign capital will continue to pile in to 10-year Treasuries causing yields to remain very low; thus the gap between CPI and Treasury yields will fall to a record low.
We agree with almost all of Larry’s reasoning there, but we qualify by saying Janet Yellen is going to err on the side of employment. What that means is that so long as fuller employment does not cause price inflation above the Fed’s target, interest rates are likely to remain low. The only thing that could change this is Janet Yellen falling prey to hawks who are driven as much or more by ideology than data.
The Fed should definitely wait until it sees the whites of price inflation’s eyes before pulling the rate-hike trigger. Doing otherwise could shoot the recovery in both feet. Inflation will definitely not runaway if the Fed waits. It can always just hit inflation with a larger than average hike: 100 basis points if necessary. Inflation isn’t going to be able to escape large hikes. Paul Volcker proved that. The most important thing is the recovery, not shooting prematurely and at imaginary inflation shadows at that. Wages must rise significantly and translate into significant, hard price-inflation before the Fed rate is hiked. Anything else would be foolish.
We can’t be sure that Janet Yellen won’t be foolish; but if her speeches are any indication and if she will stay true to her words, we have reason to believe she’ll stay strong and resist the needlessly paranoid.
If she slips up, let’s pray she gets the message quickly and reverses course before much damage is done.
We’re also waiting to see what oil does: the degree to which Fed Vice Chair Stanley Fischer is right or wrong about whether the oil-price drop will do more good than harm (environmental questions aside).
⇧ Malawi faces ‘unprecedented’ flood disaster – Africa – Al Jazeera English
At least 176 people lost their lives and another 200,000 have been displaced when heavy rains submerged homes, schools, and in places, washing away an entire village.
“It has shocked all of us: from government, to donors to the people,” Robert Kisyula, national director of international NGO World Vision Malawi, told Al Jazeera on Saturday. “People hung on to trees, waiting for the waters to subside, as they usually do, but water kept on coming and they were washed away.
“These were unprecedented floods, don’t let anyone tell you otherwise,” he said.
On Friday, the country’s vice-president described the situation as “very bad”. Kisyula, the World Vision offiicial, said that it will take months before people return to any semblance of normality.
For most, the biggest concern now, other than finding those who are still unaccounted for, is to provide the necessary infrastructure and prevent an outbreak of waterborne diseases, such as cholera. “Rain water, sewerage have all mixed with drinking water, and this is the next major concern,” Kisyula said.
⇧ Seconded – Tim Duy’s Fed Watch
As a clear follow-up link to Larry Robert’s post above and our commentary on the topic, here’s Tim Duy:
My opinion is that the global disinflationary environment would support low inflation at levels of unemployment below the Fed’s current estimate of the natural rate, similar to the situation of the late 1990s.
Also, the issue of inequality enters here very much. Productivity gains are not being passed on to labor nearly at the level that used to prevail. That’s because of labor’s weakened hand ever since Ronald Reagan broke the Professional Air Traffic Controllers Organization (union). The strike was technically illegal, but the law was blocking proper reforms, many of which were only adopted after Ronald Reagan fired the strikers. It was not the way we would have handled the situation. We would have backed most of the requested reforms before the strike ever happened.
⇧ Mongols of the Sea (Amateur Historical Speculation) – NYTimes.com
Paul Krugman proving those who call him a know-it-all wrong:
Of course, there’s a strong possibility that this is either (a) obviously wrong for some reason (b) a hypothesis thoroughly discussed by some eminent historian I just happen to have missed, or (c) both.
Actually, it’s a good hypothesis that withstands scrutiny if not more than a bit obvious.
No offense intended, Paul, but “such sailors make good sailors” is something we don’t need to test.
Anyway, we do like the humility; and it is an interesting topic/article.
⇧ Bracing for Stagnation by Raghuram Rajan – Project Syndicate
Raghuram Rajan, Governor, Reserve Bank of India (India’s central bank). He is also a bit of a darling among libertarian-leaning anti-Keynesians.
As 2015 begins, the global economy remains weak. The United States may be seeing signs of a strengthening recovery, but the eurozone risks following Japan into recession, and emerging markets worry that their export-led growth strategies have left them vulnerable to stagnation abroad.
The article doesn’t mention Japan’s dramatic fall in unemployment or that its products are now more affordable abroad.
Besides that, no alternative to debt other than cuts in government spending was offered. What a shame. We doubt very seriously that Raghuram Rajan is unfamiliar with the term “money financed” fiscal spending (which doesn’t increase the budget deficit or national debt a bit). It is the favorite thing for the mainstream to ignore because the mainstream takes its marching orders from the usurers who run the banks in the first place.
⇧ Escape From Draghi QE Sees Traders Going Long U.K. Bonds – Bloomberg
Germany has lost the argument.
Draghi’s bid to overcome German opposition to QE won a legal endorsement on Jan. 14 when the European Union’s top court backed stimulus measures used in 2012 to stem the euro-area debt crisis. BOE Governor Mark Carney also threw his weight behind Draghi, telling lawmakers in London the same day that more stimulus would help the ECB return inflation to its goal of just under 2 percent.
⇧ Six Charts to make you Suspicious of the Chinese Equity Market Rally | Jeroen Blokland Financial Markets Blog
We love it when someone focuses first and foremost on the fundamentals. It’s a month old, but still… Jeroen Blokland:
While equities around the world are getting severely hit this December, one market stubbornly rallies on. For the Chinese stock market lower oil prices, the demolition of Russia, and the political tensions in Greece do not seem to matter for now. With a housing market that is slowly deteriorating, the Chinese now try their luck in equities . But, here are six graphs that should make you at least a little wary of the massive rally that is going on.
⇧ China posts slowest growth in 24 years | Reuters
Policymakers also are concerned about the potential onset of a deflationary cycle, aggravated by plummeting energy prices, industrial overcapacity and sluggish demand.
At the same time, there may be a looming crisis among debt-sodden local governments which are facing strains from sliding property sales, on which they rely for much of their revenue.
In another worrying sign, power output growth in China, used by some as a proxy for economic performance, posted its slowest growth rate since 1998 at 3.2 percent.
⇧ Metro Detroit home prices spike in December; sales flat
Realcomp CEO Karen Kage said there is speculation that a large number of bank-foreclosed houses could flood the market later this year, greatly increasing the number of homes for sale in metro Detroit.
The banks may have been waiting for prices to rebound before foreclosing on these properties.
“If it happens, I don’t think it would really hurt the market unless they all came on the market the same day,” Kage said. “If they are spread out throughout the year, it could actually help the market. It would increase the inventory that is available.”
⇧ The Chinese Housing Market’s Outrageous Price-To-Income Ratio | Seeking Alpha
Focused on the fundamentals:
Who in the U.S. making $50,000 a year would ever consider buying a house for $1.5 million? Obviously no one would. Maybe in their dreams, as they think about what they would do if they won the lottery, but it would only be a dream. A bank wouldn’t even consider giving this type of loan out. In fact, a person wanting to get that kind of outrageous loan wouldn’t even go to a bank, as there would be no hope of getting a loan that large when only making so little.
Yet this is what is happening every day in China. Families are betting the farm on the housing market, trying to buy a home, to fulfill their dreams and feel like they have made it in the world.
Yet families are desperately scraping together the needed amount for a down payment, before housing prices rise even further. And the common consensus among our friends was that they will continue to go up in the future. Obviously prices will not go up forever without some kind of correction. But people don’t always understand this. They just see prices going up and up and think they always will.
So how are these people buying houses? Most of them are not buying them. That privilege is reserved for the wealthier people in China. Instead of investing in stocks or bonds, many wealthy people, or developers, buy houses. And they buy lots of them, hoping to someday sell them for a large profit. In fact, many of these “investments” are empty cement apartments that have not been finished yet. And they will remain empty until the investor decides to sell them. There are estimates that say there are between 50 and 70 million empty apartments in China. Wow!
China’s economy is overly dependent on the property market, especially construction of new buildings and the things that are tied to new houses. Estimates are that up to 25% of China ‘s GDP is tied to the housing and construction market. If things do go downhill in the housing market, GDP will get clobbered.
The government is between a rock and a hard place. They don’t want the economy to slow down, yet a large chunk of GDP is tied to housing in some way or another, and that housing has become extremely expensive for the average person. More housing needs to be built to drive GDP forward, yet almost every city in China, both large and small, has been adding housing projects over the past six or seven years that have literally doubled the size of these cities. Way too many houses are empty, with no intention of anyone living in them, because they are just investments waiting to be sold. But to whom? …
The Chinese government will try everything it can to make sure housing prices never go down too much, as that could discredit them in the eyes of the people, and the government hates social instability and unrest. Peace, prosperity, and harmony are the motto. The government will pull out all the stops and keep on stimulating the economy, like it just announced a while ago with a USD $1 trillion spending package. But how long can this go on?
In the meantime, housing remains out of reach for many people. In my opinion, there is no lack of supply of housing. Speculation is the problem. Someday the price-to-income ratio for housing will come back to normal, which means a day of reckoning will come. I just don’t know when that will be. Nor does anyone, really, as people have been sounding the alarm for a few years now.
⇧ Oil markets dip on weak China GDP data | Reuters
Lower usage in China will offset eventual lower production in the US but by how much?
It looks like Japan will do better than most of the naysayers thought, as it has no place to go but up and is heavily dependent upon imported oil.
As we mentioned above, Japan’s unemployment is down considerably despite the goofy sales-tax increase that never should have happened during a recovery.
Oil markets dipped on Tuesday as China’s economic growth for 2014 undershot a government target and hit its weakest annual expansion in 24 years, adding to worries in energy markets already suffering from slowing demand and oversupply.
⇧ ECB’s QE won’t be enough – YouTube
On Thursday the European Central Bank is expected to launch quantitative easing, but investors are skeptical over its ability to reflate the eurozone. Alberto Gallo, head of macro credit research at RBS, explains why to the FT’s Ferdinando Giugliano.
We think there’s a mental disconnect amongst those surveyed concerning price inflation from the planned QE and growth. However, Alberto Gallo’s observation that depressed consumers will deleverage or save is correct (for a while).