zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Fri 2010-07-30 15:41 EDT

China Has Been Covertly Funding A Housing Bubble Five Times Larger Than That Of The US: 65 Million Vacant Homes Uncovered

...a report [Fitch] released today titled Informal Securitisation Increasingly Distorting Credit Data, uncovers that China has in fact been massively underrepresenting the actual amount of new loans in the first half of 2010, courtesy of precisely the kinds of securitization deals that blew up half of our own banking system... [moreover, Yi Xianrong,] an economist at the Chinese Academy of Social Sciences noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country... China's banks are increasingly becoming more opaque in data presentation, which one can assume is due to their unwillingness to reveal the true state of affairs... [According to] Xianrong ``investment in the domestic property market has completely overturned China's traditional concepts of wealth management and investment and its price formation system'' [Chinese real estate bubble]

65; China; covert funding; dropped; housing bubble; long; survival rate; Time larger; Timeline; Vacant Homes Uncovered; zero; Zero Hedge.

Credit Writedowns Thu 2010-07-29 17:00 EDT

James Montier does MMT

It seems that a lot of analysts have caught onto the MMT framework popularized by the late economist Wynne Godley and made topical in this downturn by Rob Parenteau of the Richebacher Letter...Now, it's James Montier's turn...He concluded: ``There is a danger the proposed fiscal tightening in the eurozone will lead to further deflation and economic collapse. The Spanish government faces what Mr Parenteau calls ``the paradox of public thrift'': the less it borrows, the more it will end up owing. It is unfortunate that it has taken a severe global recession to vindicate Prof Godley's macroeconomic analysis. If economic policymakers start to pay more attention to financial balances, they might forestall the next crisis. European politicians might also understand the potentially dreadful consequences of their new-found frugality.'' ...A downward shift in the government's net fiscal deficit means a downward shift in the private sector's net fiscal surplus -- totally doable except for this little thing called debt in places like Spain, the US, Ireland or the UK. Moreover, the savings rate is already incredibly low in countries like the U.S. and the U.K. If the government tries to pare its fiscal deficit, the result will not be less private sector savings to meet the lower public sector deficit, but rather lower aggregate demand and a larger deficit -- that's the paradox of thrift...

credit writedowns; James Montier; MMT.

Sat 2010-07-24 15:55 EDT

The Path of Unemployment

Dean Baker

...The US, unlike most western European countries, is not set up to sustain long periods of high unemployment. Its system of social welfare is very much centered on work. This is most evident with health care. The vast majority of non-elderly people get their health care through employer provided health insurance. Individual policies tend to be very expensive, especially for people with any history of medical problems. When people lose their jobs, they generally lose their health care coverage as well...While the downturn has led to high and prolonged unemployment in the US, it has not had quite the same effect in Europe...several European countries, most notably Germany and the Netherlands, have adopted a policy of work sharing to limit unemployment...Under work-sharing schemes, instead of just paying workers for being completely unemployed, the government pays workers for being partly unemployed...Germany has been able to use this system to keep its unemployment rate from rising at all in the recession...In the US workers are seeing near double-digit unemployment with the implied loss of income and benefits, as well as the loss of self-esteem and social status that is associated with long-term unemployment. By contrast, workers in Germany and the Netherlands are adjusting to the falloff in demand with shorter workweeks and longer vacations...

path; unemployment.

naked capitalism Fri 2010-07-23 17:08 EDT

Deficits Do Matter, But Not the Way You Think

L. Randall Wray

In recent months, a form of mass hysteria has swept the country as fear of ``unsustainable'' budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government's stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still -- likely -- years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson's well-funded public relations campaign, fronted by President Obama's National Commission on Fiscal Responsibility and Reform -- a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness...[however] the notion of ``fiscal sustainability'' or ``solvency'' is not applicable to a sovereign government -- which cannot be forced into involuntary default on debts denominated in its own currency...If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Unemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve...

Deficit; matter; naked capitalism; Think; way.

Thu 2010-07-22 10:39 EDT

A Dual Mandate for the Federal Reserve, The Pursuit of Price Stability and Full Employment

Willem Thorbecke (2000)

Federal Reserve currently has two legislated goals--price stability and full employment--but a debate continues about making price stability the Fed's primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. Economic performance under the dual mandate has been excellent, with low unemployment and low inflation, while many European countries whose central banks focus solely on inflation are experiencing double-digit unemployment. The costs of unemployment are high, but the costs of even moderate inflation are estimated to be low. Central bankers, who tend to be inflation-averse, need to be prodded to consider goals other than inflation. And, if the Fed pursues price stability exclusively, the price level is not free to increase in the event of an adverse supply shock to prevent large increases in unemployment. A dual mandate allows the Fed to focus on one goal or the other as conditions demand and to balance policy effects.

dual mandate; Federal Reserve; full employment; priced stabilize; pursuit.

China Financial Markets Thu 2010-07-22 10:17 EDT

Do sovereign debt ratios matter?

Michael Pettis

...No aspect of history seems to repeat itself quite as regularly as financial history. The written history of financial crises dates back at least as far back as the reign of Tiberius, when we have very good accounts of Rome's 33 AD real estate crisis...we have only begun the period of sovereign default. The major global adjustments haven't yet taken place and until they do, we won't have seen the full consequences of the global crisis...there is no threshold debt level that indicates a country is in trouble. Many things matter when evaluating a country's creditworthiness...there are at least five important factors in determining the likelihood that a country will be suspend or renegotiate certain types of debt...With inverted debt, the value of liabilities is positively correlated with the value of assets, so that the debt burden and servicing costs decline in good times (when asset prices and earnings rise) and rise in bad times...Inverted debt structures leave a country extremely vulnerable to debt crises...

China Financial Markets; sovereign debt ratios matter.

Wed 2010-07-21 10:28 EDT

I Would Do Anything For Stimulus, But I Won't Do That (Wonkish) - Paul Krugman Blog - NYTimes.com

...there's a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he's not alone...OK, I don't think that's right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough...

com; NYTimes; Paul Krugman Blog; stimulus; wonkish.

naked capitalism Mon 2010-07-19 17:00 EDT

Satyajit Das Examines Eurozone Stability Fund Three Card Monte

...Central banks and governments have developed an alarming fondness for the very sort of fancy financial structures that investment banks used to camouflage and transfer risk and engage in regulatory arbitrage prior to the crisis...The Eurozone has taken this affinity for financial structuring legerdemain even further, drawing on the most abused structure of the crisis, collateralized debt obligations, to create (as before) super duper AAA credits from less promising material...Das has exposed one major source of vulnerability, that of the impact of ratings downgrades. Auerback points out another: a revolt by workers in the Austerian nations, who will recognized, intuitively, perhaps explicitly, that the sacrifices demanded of them are a transfer to bankers in other countries...

card monte; naked capitalism; Satyajit Das Examines Eurozone Stability Fund.

New Economic Perspectives Mon 2010-07-19 13:51 EDT

The Myths About Government Debt and Deficit as Told By Carmen Reinhart and Kenneth Rogoff

Yeva Nersisyan

...with nearly 10% of the US labor force unemployed and another 7% underemployed, the public debate is now focused on the false issue of deficits and debt. A case in point is a recent book by Carmen Reinhart and Kenneth Rogoff, ``This Time is Different'' that has become a bestseller...The media as well as academia have fawned all over this book...The crux of the book is that each time people think that ``this time is different'', that crises cannot occur anymore or that they happen to other people in other places. True. This is exactly what Hyman Minsky was arguing more than 40 years ago. Reinhart and Rogoff don't really explain why this perception leads to crises...The book is mostly on crises driven by government debt...[however] Aggregating data over different monetary regimes and different countries cannot yield any meaningful conclusions about sovereign debt and crises. It is only useful if the goal is to merely validate one's preconceived myth about government debt being similar to private debt...As far as I can tell Rogoff and Reinhart haven't identified a single case of government default on domestic-currency denominated debt with a floating exchange rate system...Professional economists are a major impediment on the way to using our economic system for the benefit of us all. And Reinhart and Rogoff are no exception.

Carmen Reinhart; Deficit; government debt; Kenneth Rogoff; myth; New Economic Perspectives; told.

New Deal 2.0 Fri 2010-07-16 18:16 EDT

The G20 Plan for Prosperity: Rubber Bullets and Shredded Social Safety Net

Paul Jay

The Toronto G-20 summit sent a message to poor and working people in Europe and North America. ``You will pay for the global financial crisis through cuts to your social safety nets. There will be no taxing of those who actually caused the crisis and made fortunes in the various bubbles over the last decades.'' ...This was bad enough. But there was another message, too, sent through the Canadian police: ``If you don't like it, how about a rubber bullet?'' It looks like G-20 countries will deal with opposition to their plans through martial law and police brutality...

0; G20 planned; new dealing 2; prosperity; rubber bullets; Shredded Social Safety Net.

billy blog Thu 2010-07-15 16:28 EDT

Trichet interview -- the cult master speaks!

The centre-left Parisian daily newspaper Libération recently published (July 8, 2010) an -- Interview with Jean-Claude Trichet, President of the ECB. The questions...probed some of the key issues facing the EMU... ...the likely response in the EMU will be to further constrain fiscal policy. The glaring design flaw in the monetary system is the lack of a supranational fiscal authority that can spend like a sovereign government and address asymmetric demand shocks. Trichet's solution is to worsen this design flaw by penalising nations that encounter deficits outside of the fiscal rules. The reality is that the automatic stabilisers have driven the budgets in many countries beyond the SGP rules given how severe the collapse in economic activity has been following the sharp decline in aggregate demand. Further constraining the fiscal capacity to respond to these negative spending shocks will entrench higher levels of unemployment and poverty...

Billy Blog; cult master speaks; Trichet Interview.

The Money Game Wed 2010-06-09 18:11 EDT

How Deficit Hawks Will Keep Cutting Spending Until We're All On Food Stamps

Marshall Auerback

...Sovereign debt is not a problem as long as the nation's debt contracts is denominated in the nation's currency -- and the nation has control over its own currency (in contrast to the euro zone). The Greek problem is the equivalent of the California problem, where California does not print its own currency...Apparently, we do not yet have the guts to shift from the neo-classical orthodoxy. Chicago school economics is still too much our religion. It persists until we all go on food stamps. The country that detests ideology is too ideological to manage any kind of serious change prior to crisis. As a result, a new crisis is almost certain to come, which will force the change that our elites still refuse to contemplate.

deficit hawk; food stamps; Keep Cutting Spending; Money game.

billy blog Mon 2010-06-07 19:00 EDT

Central bank independence -- another faux agenda

There are several strands to the mainstream neo-liberal attack on government macroeconomic policy activism. They get recycled regularly. ...Today, I am looking at another faux agenda -- the demand that central banks should be independent of the political process...The agenda is also tied in with the growing demand for fiscal rules which will further undermine public purpose in policy...I find it ironical that the freedom mongers have very limited appreciation of what freedom actually is. Allowing the unemployed to be ``bullied'' by amorphous bond markets is not a path to freedom...inflation targeting countries have failed to achieve superior outcomes in terms of output growth, inflation variability and output variability; moreover there is no evidence that inflation targeting has reduced inflation persistence...Central banks operating under this charter have forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities have further worsened the situation with complementary austerity...The conclusion that I have reached from studying this specific literature for many years is that there is no robust relationship between making the central bank independent and the performance of inflation...From a MMT perspective, the concept of CBI is anathema to the goal of aggregate policy (monetary and fiscal) to advance public purpose. By obsessing about inflation control, central banking has lost sight of what the purpose of policy is about...under the CBI ideology, monetary policy is not focused on advancing public purpose. Fighting inflation with unemployment is not advancing public purpose. The costs of inflation are much lower than the costs of unemployment. The mainstream fudge this by invoking their belief in the NAIRU which assumes these real sacrifices away in the ``long-run''...

Billy Blog; Central bank independence; faux agenda.

Thu 2010-06-03 17:42 EDT

World Order, Failed States and Terrorism, Part 3: The Business of Private Security

Henry C K Liu

...Social order is the main component of domestic security. Social security is the foundation of social order. Henry J Aaron of the Brookings Institution calls the US Social Security system "the great monument of 20th-century liberalism". Privatization of social security is not a solution; it is an oxymoron. It merely turns social security into private security. Neo-liberal economics theory promotes as scientific truth an ideology that is irrationally hostile to government responsibility for social programs. Based on that ideology, neo-liberal economists then construct a mechanical system of rationalization to dismantle government and its social programs in the name of efficiency through privatization. Privatization of social security is a road to government abdication, the cause of failed statehood...In the era of financial globalization, nations are faced with the problem of protecting their economies from financial threats. The recurring financial crises around the world in recent decades clearly demonstrated that most governments have failed in this critical state responsibility. The economic benefits associated with the unregulated transfer of financial assets, such as cash, stocks and bonds, across national borders are frequently not worth the risks, as has been amply demonstrated in many countries whose economies have been ravaged by external financial forces. Cross-border capital flows have become an increasingly significant part of the globalized economy over recent decades. The US depends on it to finance its huge and growing trade deficit. More than $2.5 trillion of capital flowed around the world in 2004, with more than $1 trillion flowing into just the US. Different types of capital flows, such as foreign direct investment, portfolio investment, and bank lending, are driven by different investor motivations and country characteristics, but one objective stands out more than any other: capital seeks highest return through lowest wages. The United States is not only losing jobs to lower-wage economies, the inflow of capital also forces stagnant US wages to fall in relation to rising asset values.

business; failed state; Part 3; private security; terror; World ordering.

Tue 2010-06-01 16:23 EDT

billy blog >> Blog Archive >> In the spirit of debate ...

Bill Mitchell

Readers of my blog often ask me about how modern monetary theory sits with the views of the debt-deflationists (and specifically my academic colleague Steve Keen). Steve and I have collaborated in the last few days to foster some debate between us on a constructive level with the aim of demonstrating that the common enemy is mainstream macroeconomics and that progressive thinkers should target that school of thought rather than looking within...hopefully, this initiative will broaden the debate and bring more people up to speed on where the real enemy of full employment lies...The modern monetary system is characterised by a floating exchange rate (so monetary policy is freed from the need to defend foreign exchange reserves) and the monopoly provision of fiat currency. The monopolist is the national government. Most countries now operate monetary systems that have these characteristics...the monetary unit defined by the government has no intrinsic worth...The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.The analogy that mainstream macroeconomics draws between private household budgets and the national government budget is thus false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts)... Taxation acts to withdraw spending power from the private sector but does not provide any extra financial capacity for public spending...As a matter of national accounting, the federal government deficit (surplus) equals the non-government surplus (deficit). In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending...contrary to mainstream economic rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings...Unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour unable to find a buyer at the current money wage. In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending. Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save...Unlike the mainstream rhetoric, insolvency is never an issue with deficits. The only danger with fiscal policy is inflation which would arise if the government pushed nominal spending growth above the real capacity of the economy to absorb it...government debt functions as interest rate support via the maintenance of desired reserve levels in the commercial banking system and not as a source of funds to finance government spending...there is no intrinsic reason for...

Billy Blog; blogs Archive; Debate; Spirit.

New Economic Perspectives Mon 2010-05-24 10:52 EDT

The Coming European Debt Wars

Michael Hudson

Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive. Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia's debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private sector debts to foreign banks, not to finance a domestic budget deficit as in Greece...No one wants to accept the fact that debts that can't be paid, won't be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies...The question is, who will bear the loss?...There is growing recognition that the post-Soviet economies were structured from the start to benefit foreign interests, not local economies. For example, Latvian labor is taxed at over 50% (labor, employer, and social tax) -- so high as to make it noncompetitive, while property taxes are less than 1%, providing an incentive toward rampant speculation...Future relations between Old and New Europe will depend on the Eurozone's willingness to re-design the post-Soviet economies on more solvent lines -- with more productive credit and a less rentier-biased tax system that promotes employment rather than asset-price inflation that drives labor to emigrate...

Coming European Debt Wars; New Economic Perspectives.