quick macro update


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Market functioning has finally returned, helped by the Fed slowly getting around to where it should have been even before all this started- lending unsecured to its banks, setting its target rate and letting quantity adjust to demand. It’s not technically lending unsecured, but instead went through a process of accepting more and varied collateral from the banks until the result was much the same as lending unsecured.

A couple of years back (has it been that long?) when CPI and inflation expectations were rising, the Fed said it was going to restore market function first, and then work on inflation. It’s taken them this long to restore market functioning (eventually implementing in some form the proposals I put forth back then regarding market functioning) and with the inflation threat subdued by the wide output gap it looks like they are on hold for a while, though they would probably like to move to a ‘more normal’ stance when it feels safe to do so. That would mean a smaller portfolio (not that it actually matters) and a modest ‘real rate of interest’ as a fed funds target is also based on their notion of how things work.

It is more obvious now that the automatic fiscal stabilizers did turn the tide around year end, as the great Mike Masters inventory liquidation came to an end, and the Obamaboom began. The ‘stimulus package’ wasn’t much, and wasn’t optimal for public purpose, but it wasn’t ‘nothing,’ and has been helping aggregate demand some as well, and will continue to do so. It has restored non govt incomes and savings of financial assets to at least ‘muddle through’ levels of modest GDP growth, and we are now also in the early stages of a housing recovery, but not enough to keep productivity gains from continuing to keep unemployment and excess capacity at elevated levels.

This also happens to be a good equity environment- enough demand for some top line growth, bottom line growth helped by downward pressures on compensation, and interest rates helping valuations as well. There will probably be ups and downs from here, but not the downs of last year.

There also doesn’t seem to be much public outrage over the unemployment rate, with GDP heading into positive territory. Expectations of what government can do are apparently low enough such that jobs being lost at a slower rate has been sufficient to increase public support of government policies.

The largest macro risk remains a government that doesn’t understand the monetary system and is therefore unlikely to make the appropriate fiscal adjustments should aggregate demand suddenly head south for any reason.

And here’s a new one, just when I thought I’d heard it all:

‘Black Swan’ Author Taleb Wants His Vote for Barack Obama Back

By Joe Schneider

Sept. 16 (Bloomberg)— U.S. PresidentBarack Obama has failed to appoint advisers and regulators who understand the complexity of financial systems,Nassim Taleb, author of “The Black Swan,” told a group of business people in Toronto.

“I want my vote back,” Taleb, who said he voted for Obama, told the group.

The U.S. has three times the debt, relative to the country’s economic output, or gross domestic product, as it had in the 1980s, Taleb said. He blamed rising overconfidence around the world. U.S. Federal Reserve Chairman Ben Bernanke, who was appointed to a second term last month by Obama, contributed to that misperception, Taleb said.

“Bernanke thought the system was getting stable,” Taleb said, when it was on the verge of collapse last year.

Debt is a direct measure of overconfidence, he said. The national debt, according to the U.S. Debt Clock Web site, is at $11.8 trillion.

The nation must reduce its debt level and avoid “the moral sin” of converting private debt to public debt, he said.

“This is what I’m worried about,” Taleb said. “But no one has the guts to say let’s bite the bullet.”

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to protect investors from market declines while profiting from rallies. He now advises Universa Investments LP, a $6 billion fund that bets on extreme market moves.


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Unemployment


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Agreed.

Hence the need for a full payroll tax holiday and per capita distributions to the States

Those simple pen strokes/data entry on the government’s computer will reverse the lost aggregate demand in short order.

The homicide rate is going up as well.

The deficit myths have all but completely taken over.

Employment Report: 216K Jobs Lost, 9.7% Unemployment Rate

By CalculatedRisk

Nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 216,000 in August. The economy has lost almost 5.83 million jobs over the last year, and 6.93 million jobs during the 20 consecutive months of job losses.

The unemployment rate increased to 9.7 percent. This is the highest unemployment rate in 26 years.

Year over year employment is strongly negative.

The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP).

However job losses have really picked up over the last year, and the current recession is now the 2nd worst recession since WWII in percentage terms (and the 1948 recession recovered very quickly) – and also in terms of the unemployment rate (only early ’80s recession was worse).

The economy is still losing jobs at about a 2.6 million annual rate, and the unemployment rate will probably be above 10% soon. This is still a weak employment report – just not as bad as earlier this year. Much more to come …


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Levy Policy Brief

The Levy Economics Institute of Bard College
Public Policy Brief
No. 103, 2009

FINANCIAL AND MONETARY ISSUES
AS THE CRISIS UNFOLDS
James K. Galbraith

Beginning page 9:

Warren Mosler picked up on the theme of human resource
utilization and full employment in a particularly useful way.
Mosler suggested that stabilization of employment and prices is
akin to a buffer stock—something to which surpluses can be
added when demand is low, and drawn down when it is high.
Normally, a buffer stock works on a price signal: the authorities
agree to buy when market prices are below the buffer and to sell
when they are above. In this way, prices stabilize at the buffer
price. The Strategic Petroleum Reserve is potentially a good
example, though political decisions have prevented it from being
used as it should be.

The problem with most commodity buffers is elasticity of
supply: create a buffer stock in wool, and suddenly it pays to raise
sheep. But this problem is cured if the buffer stock is human
labor, which cannot be reproduced quickly. A program that provides
a public job at a fixed wage for all takers functions exactly
like a buffer stock, stabilizing both total employment and the
bottom tier of the wage structure. People can move in and out of
the buffer as private demand for their services varies. Meanwhile,
the work done in the buffer—the fact that people are working
rather than receiving unemployment insurance—helps keep the
buffer “fresh.” Private employers like hiring those who already
work, and will prefer hiring from the federal jobs program rather
than from among those who remain unemployed.

The point is: the problem of unemployment is easily cured,
without threat of inflation. It is merely sufficient to provide jobs,
at a fixed wage, to whoever wants them, and to organize work
that needs to be done. Such work should be socially useful and
environmentally low impact: from child care to teaching and
research, to elder care to conservation to arts and culture. Where
possible, it should contribute to global public and knowledge
goods. It should compete as little as possible with work normally
done in the private sector; for instance, by serving those who
cannot afford private sector provision of teaching and care. The
point is not to socialize the economy but to expand the range of
useful activity, so that what needs doing in society actually gets
done. The barrier to all this is simply a matter of politics and
organization, not of money.

The effect, nevertheless, would be to raise all private sector
wages to the buffer-stock minimum (say, $8/hour in the United
States), while eliminating the reserve of unemployed used to
depress wages in low-skilled private sector industries. There will
be no pressure to raise wages above the buffer threshold, since private
employers providing higher wages can draw on an indefinitely
large workforce willing, for the most part, to move from the
buffer to the private sector in return for those wages. Hence, the
program is not inflationary. There is therefore no excuse for waiting
a year or two years on the assumption that unemployment
will cure itself, and every reason to believe that at the end of such
a policy of “hopeful waiting,” the discovery will be made that the
problem has not been cured.

French Non-Farm Payrolls Fall Less Than Expected


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Proactive fiscal measures, exports, and very ugly automatic stabilizers seem to have slowed the decline in employment, coupled with productivity increases that are supporting output with lower levels of employment.

French Non-Farm Payrolls Fall Less Than Expected as Slump Eases

August 14 (Bloomberg) — French companies cut fewer jobs than expected in the second quarter as the euro area’s second-largest economy exited its worst recession since World War II.

Payrolls, excluding government employees, farm workers and the self-employed, dropped by 74,100, or 0.5 percent, to 15.65 million, the Paris-based Labor Ministry said today. That was less than the 0.8 percent drop forecast by three economists in a Bloomberg News survey, and compared with a loss of 168,300 jobs in the first quarter.

“The current weakness of domestic demand and excess production capacity account for both the weakness in companies’

pricing power and the continued deterioration of the labor market,” said Caroline Newhouse-Cohen, an economist at BNP Paribas, in a report yesterday. “A lot of uncertainties are still weighing on the French economy.”

The French economy returned to growth in the second quarter as exports rose and 30 billion euros ($42.8 billion) in government spending and tax cuts introduced by President Nicolas Sarkozy helped consumer spending. Companies cut investment at a slower pace than in the two previous quarters.

Rising joblessness in France is curbing government revenue and boosting welfare spending, pushing up the budget deficit.

The budget shortfall will soar to 8.3 percent of gross domestic product next year, more than the 7 percent to 7.5 percent the government expects, according to the Organization for Economic Cooperation and Development.

France’s jobless rate hit a three-year high of 9.4 percent in June, the European Union statistics office said on July 31.

On Aug. 11, Adecco SA, the world’s largest supplier of temporary workers, reported a surprise second-quarter loss and said it will deepen cost cuts as sales decline because fewer companies are hiring. The company, based in Zurich, cut about 2,000 jobs in the quarter and told workers in France that an additional 350 jobs will be cut and 100 branches merged in 2009.

The number of temporary workers in France fell 3.7 percent in the second quarter from the first and 32.1 percent from a year earlier to 419,600, the Labor Ministry said. French monthly wages rose 0.4 percent in the second quarter from the first, when they climbed 0.8 percent, the Labor Ministry also said today. From a year ago, wages rose 2.2 percent.


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Retail Sales/Claims/Import Prices/Walmart


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Karim writes:
Data supportive of the ‘low for long’ camp:

Retail Sales

  • One of biggest misses in awhile; -0.1% vs expex of +0.8%
  • Ex-autos -0.6%
  • Control group -0.2%
  • Look for early markdowns of Q3 GDP estimates

Claims

  • Initial claims up 4k to 558k
  • Continuing down 141k (prior week revised up 33k); net of extended and emergency claims -11k

Import Prices

  • -0.7% m/m and -19.3% y/y (record drop)
  • Ex-petroleum -0.2% m/m and -7.3% y/y

Walmart- Beats earnings estimates but misses on revenue

  • “We are acclerating our focus on reducing our expenses”-CEO
  • WAL-MART CEO SAYS THERE IS A `NEW NORMAL’ IN CONSUMPTION
  • WAL-MART CEO SAYS PEOPLE ARE SAVING MORE, CONSUMING LESS
  • WAL-MART U.S. COMP SALES IN 2Q BELOW PLAN
  • WALMART REDUCED U.S. INVENTORIES FASTER THAN SALES DECLINE


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ECB statements


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ECB’s Stark Says Economy May Recover Sooner Than Forecast

Stark Says State Debt May Boost Long-Term Market Rates, BZ Says

*ECB’S STARK SEES `NO BIG PROBLEMS’ UNWINDING ASSET PURCHASES

*ECB’S STARK COMMENTS IN INTERVIEW WITH BOERSEN-ZEITUNG

*ECB’S STARK SAYS RISING GOVT DEBT MAY BOOST LONG-TERM MKT RATES

*STARK SAYS ECB CONSIDERS RISK OF DEFLATION `VERY SMALL’

*ECB’S STARK SAYS MUST NOT OVERESTIMATE SIZE OF OUTPUT GAP

Higher levels of unemployment will be needed for long term price stability

*ECB’S STARK SAYS POTENTIAL GROWTH RATE HAS PROBABLY DECLINED

Higher levels of unemployment will be needed for price stability

*ECB’S STARK SAYS OUTPUT GAP MAY BE SMALLER THAN SOME THINK

Higher levels of unemployment will be needed for price stability.

*ECB’S STARK SAYS MUST BE CAUTIOUS ABOUT INFLATION OUTLOOK

*STARK: STIMULUS, INVENTORIES WON’T CREATE SUSTAINABLE GROWTH

*ECB’S STARK SAYS ECONOMY MAY RESUME GROWTH SOONER THAN EXPECTED

*ECB’S STARK SEES SIGNS ECONOMY IS STABILIZING

*ECB’S STARK SAYS RATES ARE `APPROPRIATE’


Karim writes:

Stark is also engaging in classic Fed bashing; knowing full-well that the output gap is the key driver of the Fed’s inflation model while the ECB looks at a broader series of measures and places much more emphasis on monetary aggregates


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New Deal 2.0


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Excellent!

http://www.newdeal20.org/?p=3388

By Mario Seccareccia
Professor of Economics, Ottawa University
Editor, International Journal of Political Economy

July 23 —
Over the last couple of months, especially as there have been some signs of economic “green shoots,” there have also been growing pressures coming from conservative policy analysts that the Obama administration ought to be planning its “exit strategy,” that is, a plan that would eliminate the deficit over the medium term.

These pressures are based on fears that the large federal deficit, standing at 13.1 percent of GDP, together with the huge reserves that are sitting within the banking system as a result of the Fed’s monetary policy of quantitative easing, will soon metamorphosize into runaway inflation. Just recently, Fed Chairman Ben Bernanke added his voice to the chorus of those who are calling for an exit strategy.

Politically, all of this talk of exit strategy has served to weaken the Obama administration’s capacity to get important legislation passed. For instance, these fears of the deficit bogey have recently prompted the president to commit himself not to sign on to legislation that will add to federal deficits over the longer term.

Such stark commitments will only tie his hands politically and give credibility to a conservative policy view on the negative consequences of deficits that has been completely disproved by the facts. For instance, under the Bush administration, when unemployment rates were much lower than they are presently, we saw a rate of inflation that sat steadily at low levels, despite growing deficits. Moreover, Chairman Bernanke knows fully well that there is no positive relation between the volume of excess reserves in the banking system and credit expansion. The latter is driven by demand from creditworthy borrowers and not by the volume of excess reserves sitting in the banking system. Hence, the real fear should not be inflation but growing unemployment and wage deflation.

All of this talk of exit strategy has served to divert attention from the really important problem of rising unemployment whose official rate may well surpass the double digit threshold soon. Fortunately, there are some connected with the administration who are leery of this talk of exit strategy. For instance, in an article last month, Cristina Romer, chairwomen of the Council of Economic Advisers and scholar of the 1930s Great Depression, recounts how a similar debate over fears of inflation under the FDR administration led to both restrictive monetary and fiscal policies that engineered a second severe slump in 1937-1938 almost a decade after the 1929 crash. Romer cautions that such errors should not be repeated.

It is hoped that clearer heads will prevail in the current administration and that policy will remained focused on combating unemployment. What is needed is not an exit strategy but a full employment strategy. An exit strategy could abort a recovery and could mean that those green shoots will quickly dry up. As Paul Krugman so correctly pointed out in a recent op-ed: “government deficits … are the only thing that has saved us from a second Great Depression.”

Roosevelt Braintruster Mario Seccareccia is editor of the International Journal of Political Economy.


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Job sector trends


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Right, if you look at unemployment and the output gap in general as a % of the non government sectors
The drop is probably close to double the headline numbers.

This was a serious collapse of aggregate demand left to run it’s own course and reversed around year end only
due to the automatic stabilizers doing their thing the very ugly way.

A proactive fiscal adjustment — payroll tax holiday, per capita distribution to the states, etc. could have averted most of the economic losses that were allowed to happen.


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China pushing domestic consumption


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Looks like they are moving towards higher levels of domestic consumption to sustain output and employment.

(must be reading my blog…)

China’s Central Bank Pledges to Keep Money Flowing

China to Start Trial Rural Pension System to Boost Consumption

China’s Central Bank Pledges to Keep Money Flowing

June 25 (Bloomberg) — China’s central bank pledged to keep
pumping money into the financial system to support a recovery in
the world’s third-biggest economy.

The economy is in a “critical” stage and the central bank
will maintain a “moderately loose” monetary policy, the
People’s Bank of China reiterated in a statement on its Web site
today after a quarterly meeting.

The central bank triggered an explosion in credit by
scrapping quotas on lending in November to back the government’s
4 trillion yuan ($585 billion) stimulus plan. Record lending is
stoking concern that a recovery may come at the expense of asset
bubbles, bad debts for banks and inflation in the long term.

Banks are set to lend more in June than in May, the same
newspaper reported June 22, citing unidentified sources. Last
month, new loans more than doubled from a year earlier.

China to Start Trial Rural Pension System to Boost Consumption

June 25 (Bloomberg) —China, home to 700 million rural
residents, approved a pilot pension program as the government
tries to encourage farmers to spend more
to help revive economic
growth.

The new system, which aims to cover 10 percent of rural
counties this year, will help narrow a wealth gap with cities
and spur domestic demand, according to a statement today from
the State Council, China’s cabinet.

China has expanded its social safety net to reduce
precautionary saving by citizens planning for ill health and old
age. Premier Wen Jiabao has pledged to boost domestic
consumption to help the world’s third-biggest economy recover
from its deepest slump in a decade and lessen dependence on
exports and investment.

“The rural pension system has been almost non-existent,”
said Kevin Lai, an economist with Daiwa Institute of Research in
Hong Kong. “Once you build a stronger social safety net, people
will be more inclined to spend without having to worry about the
future.”

The government in late January also announced it would
spend 850 billion yuan ($124 billion) over three years to ensure
that at least 90 percent of its 1.3 billion citizens have basic
health insurance by 2011.

China’s economy grew 6.1 percent in the first quarter, the
slowest pace in almost a decade.


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