Linking ≠ endorsement.
⇧ Reactions to Mr Osborne’s Autumn Statement — Prime Economics
Today, Chancellor George Osborne set out the Conservative Government’s fiscal plans for the current Parliament and beyond. Although it slightly eases the speed and scope of the spending reductions from the previous July estimates, it still envisages an overall budget surplus of over £10 billion by the last year of this Parliament, 2019/20.
We give below the first reactions to the Chancellor’s speech from four members of the network Economists for Rational Economic Policies (EREP) ….
[Ann Pettifor:] … the global financial crisis has not ended. On the contrary having moved from the core — the UK and US— in 2007-9, the crisis then transferred to the Eurozone, where it is ongoing. Emerging markets centred on China are now at the epicenter of the third phase of this apparently unending crisis. The ending of monetary stimulus in the US and fiscal contraction in important western economies has weakened demand globally, and led to a build-up of gluts in emerging markets and consequent falls in commodity prices.
At the same time there is no sign that the policies that inform the dominant debt-deflationary economic model in the UK and in most of the OECD economies – are changing.
It is therefore unlikely that the British economy will be insulated from a global crisis that this Chancellor’s fiscal consolidation has made worse. He now intends, without any real changes to his economic model, to make Britain’s contribution to weakening global demand less bad.
⇧ The Pfizer—Allergan Merger Is a Disgrace – The New Yorker
In an announcement on Monday morning, Pfizer, the big drug company, whose headquarters are on East 42nd Street, in Manhattan, said that it is merging with one of its competitors, Allergan PLC. Ian Read, a Scottish-born accountant who is Pfizer’s chairman and chief executive, said that the proposed deal, which is valued at a hundred and sixty billion dollars, would “create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world.”
On Wall Street and in the world of big pharma, that statement will raise chuckles. It is widely acknowledged that the primary impetus for the deal is a financial one. In merging with Allergan, which is based in Dublin, Pfizer intends to move its corporate residency to Ireland, where the corporate tax rate is just 12.5 per cent, compared to thirty-five per cent for a company of its size in the United States.
… A venerable member of the Fortune 500 now looks for all the world like a greedy tax exile, skipping off to a dodgy foreign locale. (Viewed in terms of its corporate tax policies and the assist it provides to big multinationals seeking to avoid paying taxes in their homelands, Ireland is distinctly dodgy.)
All things considered, it’s hard to avoid seeing the merger proposal as a cynical move designed to boost Pfizer’s stock price and generate a windfall for the company’s senior managers ….
⇧ Behind the Numbers: PCE Inflation Update, October 2015 – Dallas Fed
The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.3 percent in October, slightly below the trimmed mean’s average pace over the prior three months (about 1.6 percent).
The 12-month rates of increase for the headline, conventional core and trimmed mean all held steady in October, with the headline at 0.2 percent, the core at 1.3 percent and the trimmed mean at 1.7 percent.
Historically, gaps between the 12-month headline and trimmed mean rates tend to be closed by the headline rate converging toward the trimmed mean rate. This is the basis for our rule-of-thumb forecast for future headline PCE inflation: a good guess for the headline rate over the coming 12 months is the trimmed mean rate over the prior 12 months. We thus continue to expect a substantial pickup in the headline inflation rate from its current low 0.2 percent.
Things have been defying historical trends lately. Don’t be surprised at all if the Fed blows it by raising rates too soon and too steeply, overly slowing the economy.
⇧ George Osborne delays the fiscal pain but it will still be ferocious – Telegraph
The Chancellor is right to stop us living so far beyond our means ….
Whenever I hear the words “beyond our means” when applied to a nation that creates its own currency, I wonder how long it will take before the fallacy’s spell is broken.
Means is equated with money, borrowing capacity, and trade capacity; however, in reality, means is only productive capacity with zero currency constraints. Money, borrowing, and trade, per se, are never anything but artificially applied constraints designed to perpetuate the economic-class structure.
⇧ World Halfway to Dangerous Warming as Temperatures Hit Record
The WMO said earlier this month that concentrations of the three main greenhouse gases, carbon dioxide, methane and nitrous oxide, all rose to records in the atmosphere in 2014. That signals more warming to come, because the heat-trapping gases can remain in the atmosphere for decades.
⇧ UK backs off cuts to tax breaks for lower income households – The Boston Globe
Britain’s treasury chief abandoned controversial cuts in tax credits for low-income workers and kept police funding intact Wednesday as he updated Parliament on government budget plans.
A measure to eliminate $4.4 billion in tax allowances for the poor had been blocked in April in an unusual move by the House of Lords, the upper house of Parliament.
That was such an interesting development, as the upper house historically would be elitist while the Commons (lower house) would be for, well, the commoners, the non-elites.
Despite the U-turn on tax credits, Osborne promised to keep in place cuts from the welfare budget over the next five years. The cuts were promised by the Conservative Party during the last election.
⇧ China’s Greenhouse Gases Don’t Seem To Trouble Most Of Its Citizens : Parallels : NPR
China is the world’s biggest greenhouse gas emitter and drives climate change more than any other country. As the world warms and seas rise, researchers say it stands to lose more heavily populated coastline as well.
Most Chinese, though, don’t seem to see climate change as a current threat.
“I’m not really concerned because I think the distant future has little to do with me, because I’ll already be dead,” said a woman named Yu, who didn’t want to give her full name in case government officials didn’t like her comments.
Yu, who is in her 50s, spoke last week as she scanned her smartphone in Shanghai’s People’s Park. She said many Chinese share her thinking.
“Ordinary folks don’t have a lot of vision,” she said. “They are only interested in what’s in front of their eyes.”
“The Chinese are the least intensely concerned of any of the populations of the 40 countries we surveyed,” says Bruce Stokes, director of global attitudes at the Pew Research Center.
⇧ Home buyers face a new threat: higher mortgage rates – The Washington Post
Americans looking to buy a home are facing pressure to act as soon as possible, as the era of rock-bottom mortgage rates that have sustained the nation’s housing market since the recession could be coming to an end.
Well, the last time they went up, sales actually went down.
⇧ Renticity – Rental Simplicity
I saw Renticity mentioned in an article, so I visited the site. What do you think?
Technology is changing the face of tenant screening. It’s also allowing different functions to be merged online.
It’s only the beginning.
One issue I’ve seen is that shifty tenants use aliases to avoid leaving financial trails of devastation.
BTW, PropertyPak has no commercial interest in Renticity.
Screen tenants for free using Experian’s credit check, criminal and evictions reports.
⇧ Multihousing leading real estate recovery | SanDiegoUnionTribune.com
Good article by Roger Showley:
Economists closely watch construction activity because of the multiplier effect of building, outfitting and occupying new dwellings and workplaces. Real estate has typically led economic recoveries but in the current cycle, it has proved less stimulative in the face of weak demand and tough financing rules.
⇧ Problem properties: Landlord gets millions while properties, tenants suffer – Insider – Story
WCPO has spent months covering the impact of problem properties on tenants, neighborhoods and the regulators who are struggling to keep track of them. This story is part of that series.
⇧ Stamp duty rises for rental properties and second homes to kill off booming market | Daily Mail Online
While a £250,000 buy-to-let bought today has a £2,500 stamp duty bill, it will carry a £10,000 tax burden in five months — a hike of £7,500.
For the average buy-to-let property, which costs £184,000, it’ll mean a fivefold increase in stamp duty from £1,180 to £6,700, the Treasury’s own figures show.
In September, the Bank of England warned its popularity could pose a risk to financial stability.
It said the surge in buy-to-let mortgage lending could exacerbate any housing crisis as these types of borrowers take out bigger loans during a boom, and tend to sell more quickly during a bust.
Buy-to-let lending has rocketed by 40 per cent since 2008 — faster than any other type of loan.
Demand is being partly fuelled by thousands of middle-class savers who have turned to buy to let to boost their income in retirement. Many have opted to try becoming a landlord in a bid for better returns for their cash than average high-street savings rates of barely 0.67 per cent. Rock-bottom payouts for those swapping a pension pot for an annuity also mean they get as little as £5,000 a year for a £100,000 lump sum.
‘These changes will force landlords to raise their rents to make ends meet or they’ll sell up and create a glut of buy-to-let properties on the market. To dissuade any form of entrepreneurship and progress financially, it seems a strange decision.’
George Osborne announced that, from today, tenants of five housing associations can register to buy the home they are renting.
It is a major extension of Margaret Thatcher’s Right to Buy scheme that let council tenants buy their home for a fraction of its normal price.
The Government is extending the scheme to 1.3million renting from housing associations.
Housing associations are not-for-profit bodies — regulated by th e state — that privately run social housing for households on low incomes.
The Joseph Rowntree Foundation said there will be 75,000 fewer low-cost homes available to let over the next five years as a result of the scheme.
They blame a lack of good affordable property on landlords who have snapped them up to rent out.
In reality, though, this measure will do nothing to tackle the real villains in the market — super-rich foreign investors.
⇧ China’s Earliest Monthly Economic Indicators Flash Warning Sign – Bloomberg Business
China’s economy is still showing a muted response to waves of monetary and fiscal easing as of the half-way mark for the last quarter of the year, some of the earliest indicators suggest.
A privately compiled purchasing managers’ index and a gauge based on search engine interest in small and medium-sized businesses deteriorated this month, while a sentiment indicator dropped sharply from October. Combined, the reports make gloomy reading ahead of official releases, the earliest of which will be manufacturing and services PMI reports due Dec. 1.
Six interest-rate cuts in a year and expedited fiscal spending have yet to revive growth as overcapacity and weakness in old drivers like manufacturing and residential construction weigh on the world’s second-biggest economy. If official data confirm the sluggishness, Premier Li Keqiang’s growth goal may be missed for a second-straight year.
⇧ Why the ECB isn’t happy with (rising) core inflation | Economic Research | Bloomberg Professional
The reason for weak wage growth is the excess slack in the labor market. The euro-area unemployment rate, while declining gradually since 2013, remained at 10.8% of the working population at the end of the third quarter. That’s more than twice the jobless rate of the U.S. or the U.K. and well above the level consistent with stable inflation in the medium term. Even in these economies, where the recovery is more advanced, wages have only started to pick up. With abundant slack being taken up slowly, the road to normal inflation rates is still long for the euro area. That’s probably what Draghi meant when he said that “the economy needs to move back to full capacity as quickly as possible” for wages to pick up.
⇧ Growth for Residential AD&C Loans | Eye On Housing
The volume of residential construction loans outstanding expanded 3.9% during the third quarter of 2015, marking the tenth consecutive quarter of growth.
The tight availability of acquisition, development and construction (AD&C) loans has been a factor holding back a stronger rebound in home construction.
⇧ Openness and Inequality: Distributional Impacts of Capital Account Liberalization | iMFdirect – The IMF Blog
Flies in the face of the libertarian mantra:
Davide Furceri and Prakash Loungani:
Using a data set for nearly 150 countries from 1970 to 2010, we show that increases in capital account liberalization are followed by increases in inequality, as measured by the Gini coefficient. However, we also show two channels where evidence of this association is limited: First, the impact of liberalization on inequality is smaller for countries with higher levels of financial development and inclusion. Second, the impact is also smaller in cases where the liberalization is not followed by a crisis.
Why is openness associated with a rise in inequality? We suggest two possibilities. First, it is commonly argued that the benefits of capital account liberalization depend on the quality of financial institutions. Where institutions are weak and the access to credit is not inclusive, liberalization may exacerbate inequality by increasing the bias in financial access in favor of the privileged. Indeed, we find that the increase in inequality in the aftermath of liberalization is higher in countries where financial inclusion is lower.
⇧ The 5 Things You Must Do Before Discharging an Employee – Technology, Manufacturing & Transportation Industry Insider
Carrie Claiborne and Joe Guffey:
Employment litigation is one of the fastest growing sectors of litigation. Employers have done a good deed by educating workers about their rights; unfortunately, this can sometimes result in more claims. Approximately one out of five lawsuits nationwide is filed by a current or former employee. Among the employment cases, retaliation claims specifically continue to grow. In a retaliation claim, the focus shifts to how the company reacted to the original employee complaint, and away from the original complaint.
So, if you are terminating an employee, make sure you follow some basic points: …
⇧ A Hard Look at a Soft Global Economy by Michael Spence – Project Syndicate
… impediments to higher and more efficient public- and private-sector investment must be removed. And governments must implement measures to redistribute income, improve the provision of basic services, and equip the labor force to take advantage of ongoing shifts in the economic structure.
Generating the political will to get even some of this done will be no easy feat. But an honest look at the sorry state — and unpromising trajectory — of the global economy will, one hopes, help policymakers do what’s needed.
⇧ Morning Agenda: Treasury Secretary Warns Foes of Dodd-Frank – The New York Times
TREASURY SECRETARY WARNS FOES OF DODD-FRANK | Last year, Congress passed a measure dismantling a piece of the Dodd-Frank Act that governed swaps by attaching the new legislation to a wider spending bill. On Tuesday, Treasury Secretary Jacob J. Lew warned critics of Dodd-Frank against trying the same tactic again, saying he would push back against any attempts to weaken financial regulation through amendments to the spending bill, which Congress must pass by Dec. 11 to avert a government shutdown, Peter Eavis reports in DealBook. “I have publicly made clear that my recommendation to the president would be that if there are legislative measures that will roll back the clock, that would take us back toward where we were before the financial crisis, I would recommend a veto,” Mr. Lew said via email.
I agree. That’s what should have happened last time.
⇧ China’s Macro Disconnect by Stephen S. Roach – Project Syndicate
Stephen S. Roach:
Early indications from the Fifth Plenum of the 18th Central Committee of the Communist Party of China, held in late October, suggest that the next plan will focus on the missing piece of consumer-led rebalancing: a strong social safety net.
A proposed consolidation of rural and urban plans for pensions and critical health care is particularly important in this regard, as is the authorities’ commitment to allowing workers to transfer their hukou (residency permits) — and the associated social welfare benefits — wherever they move. For China’s 270 million migrant workers, benefit portability could be decisive in shifting the balance from fear and precautionary saving to security and discretionary spending. Equally significant was the Fifth Plenum’s emphasis on using state capital to fund a more robust safety net through an increase in taxes on state-owned enterprises that was proposed a couple of years ago.
The tax aspect is an unnecessary, circular idea, but the rest makes reasonable sense.
⇧ Why are China’s cities becoming less crowded? – Agenda – The World Economic Forum
Cities in East Asia are becoming more crowded, but in many of China’s urban centres population density is actually decreasing.
The World Bank estimates that by 2030, a billion people will be living in Chinese cities and that China’s urban population grew by over 130 million people from 2000-2010. So how is this declining density possible?
The answer lies, according to Pew Research Center, in the Chinese building boom.
⇧ Burn Bans | Puget Sound Clean Air Agency
When pollution rises, burn bans are an important part of keeping our air clean and healthy for everyone. Air quality burn bans are issued and enforced by the Puget Sound Clean Air Agency when air pollution levels rise to unhealthy levels, typically during colder fall and winter months. We use current and forecasted conditions and pollution levels to decide when a burn ban is needed. Once conditions improve, burn bans are removed.
⇧ Osborne’s Three Card Trick – marked OBR, ONS, BoE — Prime Economics
In my view, the most important takeaways from Jeremy Smith’s detailed article against George Osborne’s speech and actions:
… they have increased GDP precisely because of the government cutting less next year — explicitly recognition that there is indeed a multiplier effect — that government cuts do indeed reduce economic activity!
… interest rates are now assumed to be so low — for 5 years ahead — that the (already economically silly) case for “paying down the debt” totally disappears since there is no gain to the public finances from so doing. The government can borrow at almost zero per cent rates, and annual interest payments as a percentage of GDP have hardly ever been as low as the OBR assumes.
⇧ Portugal’s anti-austerity Left take power in watershed moment for the euro – Telegraph
They will reverse wage cuts and a pension freeze for state workers. The minimum wage will be lifted to €600 a month, plus two months’ bonus. Electricity will be subsidized for poor families. VAT be will cut for restaurants. They will halt privatization of the water group EGF and the airline TAP, and suspend plans to open transport in Lisbon and Oporto to private competition.
The country has tried to restore viability within EMU by means of an “internal devaluation” and wage cuts, but the election of an anti-austerity front shows the political limits of this strategy. It is, in any case, extremely difficult to deflate a high-debt economy, since the debt ratio rises automatically if nominal GDP growth stalls.
⇧ Portugal’s new finance minister is no Varoufakis — POLITICO
As the Socialists’ likely finance minister, Centeno will have to convince German Finance Minister Wolfgang Schäuble and other Eurogroup austerity hawks that the incoming government’s promises to reduce taxes on the needy, while reversing cuts to pensions and public sector salaries, won’t lead to Portugal missing eurozone deficit- and debt-reduction targets.
Traditional business attire isn’t going to shield Mario Centeno from anything. Schauble didn’t care how Yanis was dressed. He cared that Yanis was speaking truth to greedy, selfish power.
⇧ ECB alternatives could include penalties on banks hoarding cash | afr.com
Draghi has made it clear that he would be willing to extend ECB money printing, now used to buy chiefly government bonds, as well as increase the charge on banks holding money at the ECB – known as the negative deposit rate.
In order to soften the impact of this on banks, officials are discussing a split-level rate, a contested step that would impose a higher charge on banks depending on the amount of cash they deposit with the ECB.
“It could be combined with a ceiling, so that from a certain point onwards liquidity can only be parked overnight at a stronger rate,” said a second official. “Whether and how to shape a deposit rate cut in December is in discussion.”
Any such staggered approach would blunt a straightforward increase in the charge, which would particularly hit banks from Germany or France, who park most with the ECB. Banks hold roughly €170 billion with the ECB in this way.
⇧ The UK productivity puzzle: The Trojan horse | VOX, CEPR’s Policy Portal
Slightly to the left of the mainstream:
… Prominent business surveys have pointed to a skills shortage cramping growth.
So, the government’s focus is in the right direction, but somewhat skewed. Perhaps because of the ambition to rebalance the economy towards making things once again, the focus on infrastructure first targets the ‘hard’ investments when ‘soft’ is just as important.
Raising incomes doesn’t just depend on higher productivity, but raising productivity is the sustainable way to raise incomes rather than relying on debt to grow.
This is why productivity matters even if the recent drop is less of a worry.
The causes of low productivity are not entirely unknown, but the consequences affect our future standards of living. So, if the productivity puzzle has risen higher on the policy agenda due to the crisis, then any reason is a good one to focus on this crucial issue.
⇧ Ian Bell: Osborne’s plans to eradicate budget deficit dissolve into puddle of excuses (From Herald Scotland)
Ian Bell pulls no punches against George Osborne:
… the Chancellor has taken to saying that you can’t have national security without economic security. It isn’t a new proposition, but Mr Osborne tried it for size again during his latest chat with the BBC’s Andrew Marr. Convoluted logic had him claiming, in essence, that you can’t fight terrorism unless he “balances the books”. It was a bold claim, not least because you could turn it on its head.
Various police chiefs have stepped up to say that another round of Mr Osborne’s cuts will leave them ill-prepared to deal with events of the sort witnessed in Paris. How’s that for a “long-term economic plan”? The funding for defence the Chancellor has meanwhile just discovered in the Treasury accounts in large part reinstates cash he has already cut. How’s that for shrewd economic management?
The point is that the observation does not just apply to defence. Mr Osborne is improvising, even as his plans to eradicate a budget deficit — it was supposed to be gone by now — dissolve into a pile of excuses.
… For the record, yet again: this Chancellor has missed every economic target he ever proclaimed.
⇧ Evidence that low real rates will persist | VOX, CEPR’s Policy Portal
John C. Williams, President, CEO, Federal Reserve Bank, San Francisco:
… a macroeconomic model that explicitly takes into account the combined behaviours of inflation, output, and interest rates in estimating the trend in real interest rates. In the Laubach-Williams (LW) model, the trend, or ‘natural,’ real interest rate is implicitly defined as that which occurs when the economy is operating at its full potential and there are no inflationary pressures in either direction. This model assumes that the trend real interest rate depends on the estimated trend growth rate of real GDP and other unspecified influences.
The model is estimated using the Kalman filter. The Kalman filter operates on the principle that one should partially adjust one’s estimate of the unobserved variables —the trend natural rate of interest, the level of potential output, and its trend growth rate — based on the discrepancies between the model’s predictions for real GDP and inflation, and the actual data. In particular, if real GDP is lower than the model predicts, the estimate of the natural rate of interest is reduced by a small fraction of the forecast error. The output gap estimate, in turn, is based on a Phillips curve relationship between inflation, the output gap, and other variables. If, for example, inflation turns out lower than predicted, the level of potential output is revised up (that is, for a given level of real GDP, the output gap is revised down) by a small fraction, as is the estimate of the trend growth rate of potential output.
Why are we focused on the minutia of interest rates, letting the banks and their rates determine economic growth? Everything should be debt- and tax-free fiscal, obviously zero monetarism. That would put John C. Williams out of his current position, but we could certainly find him more productive things to do. I say that while knowing Williams is a dove (rather than a dreaded hawk) within the Fed.
⇧ MacroMania: Lift off in a world of excess reserves
David Andolfatto has the mechanics down pat, with one exception.
… there is no way for the banking system collectively to “get rid” of these excess reserves. In particular, the banking system as a whole cannot “lend out reserves.”)
That’s incorrect. The Fed could void the assets it holds. The bond issuers would not have to pay interest to the Fed. It would simply instantly unwind QE.
Instead, the Fed, as I had suggested as a possibility before even hearing the Fed’s thoughts on the matter, is apparently leaning toward simply letting the bonds run their course and where the Fed will not reinvest in more of the same.
Much will depend upon how well reverse repos and changing rates on excess reserves works out.
Lending reserves or lending against reserves is irrelevant. However, in the interest of greater clarity, in the US, commercial banks lend against excess reserves, which process moves those reserves from excess to regular reserves, which cannot then be lent to other banks for settlement purposes.
David Andolfatto is Vice President of the Federal Reserve Bank of St. Louis. ( https://research.stlouisfed.org/econ/and olfatto/sel/ )
Yes, I know. Who do I think I am saying he’s wrong about Fed mechanics?
⇧ CORRECTED-Big banks accused of interest rate-swap fixing in class action suit | Reuters
A class action lawsuit, filed Wednesday, accuses 10 of Wall Street’s biggest banks and two trading platforms of conspiring to limit competition in the US$320 trillion market for interest rate swaps.
It will be interesting to watch this case unfold. I’m wondering how much money it’s all about. $320 trillion is a huge market. Just 1% of that would be $3.2 trillion. We’re not talking about nearly that much; but still, it could be significant.
⇧ British Columbia, Alaska sign pact on protecting shared waterways | Reuters
“Alaska has … signed non-binding agreements with British Columbia that offer no visible means of holding Canada, or the mining companies, accountable for mitigating our losses should accidents like the one at Mount Polley occur in the region,” said Dale Kelley, executive director of the Alaska Trollers Association.
⇧ A Tax on Carbon Pollution Can Benefit Business – Scientific American
… stop spending tax dollars on subsidies for fossil fuels. More than half a trillion dollars are spent around the world making coal, gas and oil cheaper for businesses to find or consumers to burn, according to the International Monetary Fund.
⇧ Europe Chokes on [obNOxious] Emissions … Bloomberg View
Leading the charge against what he calls major weaknesses in regulation is Axel Friedrich, a chemist and activist who has spent the last 35 years agitating for cleaner auto emissions. Friedrich, with help from environmental group Deutsche Umwelthilfe (DUH), says the NOx emissions testing scandal extends well beyond VW. Vehicles from General Motors’s European division Opel and French automaker Renault have been tested under his guidance and found wanting: Opel’s Zafira 1.6 CDTi emitted up to 17 times the legally allowed levels of NOx in DUH tests, and Renault’s Espace 1.6 dCi exceeded the Euro 6 level by as much as 25 times.
Friedrich seems almost bemused by this chaotic response, arguing that the U.S. Environmental Protection Agency didn’t need access to VW’s engine codes to discover that the automaker was cheating emissions tests. “I have no interest in the code,” he said. “It’s not important. If [the exhaust] is dirty, it’s dirty.”