China, Germany, Productivity, NFIB Index, Redbook, Wholesale Trade


A few thoughts:

China’s US Tsy holding had been falling perhaps because they were selling $ to buy Yuan to keep it within in the prior band.

Pretty much all exporting nation’s currencies have already weakened vs the $, including the Yen and Euro, so this is a bit of a ‘catch up.’

In a weakening global economy from a lack of demand (sales) and ‘western educated, monetarist, export led growth’ kids now in charge globally, the path of least resistance is a global race to the bottom to be ‘competitive’. And the alternative to currency depreciation, domestic wage cuts, tends to be less politically attractive, as the EU continues to demonstrate.

The tool for currency depreciation is intervention in the FX markets, as China just did, after they tried ‘monetary easing’ which failed, of course. Japan did it via giving the nod to their pension funds and insurance companies to buy unswapped FX denominated securities, after they tried ‘monetary easing’ as well.

The Euro zone did it by frightening China and other CB’s and global and domestic portfolio managers into selling their Euro reserves, by playing on their inflationary fears of ‘monetary easing’-negative rates and QE- they learned in school.

The US used only ‘monetary easing’ and not any form of direct intervention, and so the $ remains strong vs all the rest.

I expect the Euro to now move ever higher until its trade surplus goes away, as global fears of an inflationary currency collapse are reversed and Euro buying resumes as part of global export strategies to export to the Euro zone. And, like the US, the EU won’t use direct intervention, just more ‘monetary easing’.

Ironically, ‘monetary easing’ is in fact ‘fiscal tightening’ as, with govts net payers of interest, it works to remove interest income from the global economy. So the more they do the worse it gets.

‘No matter how much I cut off it’s still too short’ said the hairdresser to the client…

The devaluations shift income from workers who see their purchasing power go down, to exporters who see their margins increase.
To the extent exporters then reduce prices and those price reductions increase their volume of exports, output increases, as does domestic employment. But if wages then go up, the ‘competitiveness’ gained by the devaluation is lost, etc., so that’s not meant to happen.

Also, the additional export volumes are likewise reductions in exports of other nations, who, having been educated at the same elite schools, respond with devaluations of their own, etc. etc. in a global ‘race to the bottom’ for real wages. Hence China letting their currency depreciate rather than spend their $ reserves supporting it.

The elite schools they all went to contrive models that show you can leave national deficit spending at 0, and use ‘monetary policy’ to drive investment and net exports that ‘offset’ domestic savings. It doesn’t work, of course, but they all believe it and keep at it even as it all falls apart around them.

But as long as the US and EU don’t have use of the tools for currency depreciation, the rest of the world can increase it’s exports to these regions via currency depreciation to lower their $ and Euro export prices, all of which is a contractionary/deflationary bias for the US and EU.

Of further irony is that the ‘right’ policy response for the US and EU would be a fiscal adjustment -tax cut or spending increase- large enough to sustain high enough levels of domestic spending for full employment. Unfortunately, that’s not what they learned in school…

The drop in expectations is ominous, particularly as the euro firms:

Germany : ZEW Survey
er-8-11-1

Highlights
ZEW’s August survey was mixed with a slightly more optimistic assessment of the current state of the economy contrasting with a fifth consecutive decline in expectations.

The current conditions gauge was up 1.8 points at 65.7, a 3-month high. However, expectations dipped a further 4.7 points to 25.0, their lowest mark since November 2014.


The drop in unit labor costs and downward revision of the prior increase gives the Fed cause to hold off on rate hike aspirations:

United States : Productivity and Costs
er-8-11-2

Highlights
A bounce back for output gave first-quarter productivity a lift, up a quarter-to-quarter 1.3 percent vs a revised decline of 1.1 percent in the first quarter. The bounce in output also held down unit labor costs which rose 0.5 percent vs 2.3 percent in the first quarter.

Output in the second quarter rose 2.8 percent vs a depressed 0.5 percent in the first quarter. Compensation rose 1.8 percent, up from 1.1 percent in the first quarter, while hours worked were little changed, up 1.5 percent vs 1.6 in the first quarter.

Looking at year-on-year rates, growth in productivity is very slight at only plus 0.3 percent while costs do show some pressure, up 2.1 percent in a reading, along with the rise in compensation, that will be welcome by Federal Reserve officials who are hoping that gains in wages will help offset weakness in commodity costs and help give inflation a needed boost.


Up a touch but the trend remains negative:

er-8-11-3


Redbook retail sales report still bumping along the bottom:

er-8-11-4


A decline in sales growth and rise in inventories is yet another negative:

United States : Wholesale Trade
er-8-11-5

Highlights
A build in auto inventories as well as for machinery drove wholesale inventories up a much higher-than-expected 0.9 percent in June. Sales at the wholesale level rose only 0.1 percent in the month, in turn driving the stock-to-sales ratio up 1 notch to a less-than-lean 1.30. This ratio was at 1.19 in June last year.

Geithner plan: Let them clip coupons


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The Geithner plan is the latest move in what is shaping up to be the largest upward distribution of real wealth in US history.

Its stated purpose is to provide high enough risk adjusted returns to attract ‘private capital’ at a time where risk perceptions are elevated.

This means ‘market forces’ will offer ultra high returns for the investor class and the financial sector in general to attract the desired private sector participation.

High unemployment will ensure real wages remain ‘well-anchored’.

This means that as productivity and output increases, those gains in real consumption necessarily flow upward.

As the populist administration ironically moves to support investors and the financial sector at the expense of those working productively for a living.


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Big think: Q and A’s

Response to questions from big think.

Is fiscal responsibility essential to creating a stronger, more prosperous nation, or is the matter overhyped?

Worse, the matter is totally confused. By identity, government budget deficits = ‘non-government’ accumulation of financial assets denominated in that currency.

That means net savings desires of the non-government sectors can only be accommodated by the government’s fiscal balance. (Deficit to add financial assets; surplus to reduce financial assets.)

Therefore, if government deficit spending is insufficient to satisfy the total net savings desires of the non-government sectors, the evidence is unemployment and excess capacity in general, which is also known as a lack of aggregate demand.


There are a plethora of reasons for Americans to work later in life today. It is difficult to live off of Social Security benefits alone, we are living longer and 401(k) plans are far less reliable than traditional retirement plans. So do older members of our society get a fair shot when it comes to employment? What about younger workers? Does youth and inexperience repel employers?

Employers attempt to maximize their profits. That means ‘hiring off the top.’ In other words, they try to hire the best first, and the seemingly less attractive workers get hired last.


What is the most exciting thing going on in business today?

The combination of weak demand, due to world budget deficits being too small, and rising prices of food and fuel, due to the Saudis acting as the swing producer (they are a monopoly supplier at the margin), is creating a highly disruptive ‘stagflation’ condition much like the 70’s.


Where is capitalism failing today?

Capitalism is functioning within the given institutional structure, which includes tax laws, labor laws, govt. spending decisions, contract law, etc.

What needs to change in the system?

The system changes continually with changes in the application of the institutional structure and with the advancement of knowledge on how to use any given structure.

Currently, we have a floating exchange rate system in place, which is capable of sustaining full employment and price stability. This is a major advancement over the previous gold standard, which necessarily resulted in periodic recessions and depressions and allocated real resources to the production and accumulation of gold.

However, we continue to fail to recognize how to sustain sufficient demand for full employment and we fail to utilize techniques of government spending that will promote price stability; so, the promise of floating exchange rates has yet to be realized.


Everyone deserves a fair price for their work,

As a matter of ‘game theory’ if a person has to work to eat and survive, but business only has to hire if it determines it can sufficiently profit by adding employees, it is an ‘unfair game’ biased against workers, and we should expect real wages to stagnate over time.

And this is exactly what we observe.

but should there be caps on CEO salaries?

The corporate structure is part of the general institutional structure, which is producing the seemingly higher than necessary CEO salaries. Simple caps would have other consequences.

More fundamental changes to the institutional structure are needed to put incentives in place for alternative distributions of incomes.

Is it fair to lay off workers when your own salary is worth tens of millions of dollars.

At the macro level, with sufficient aggregate demand to ensure full employment, efficiency increases total output. Therefore layoffs without production cuts potentially benefit the entire population.

However to get that outcome, the current institutional structure has to be adjusted to include the necessary incentives.

Or, does the market require high salaries to retain the highest quality leaders and the lifestyle they must lead in their high risk jobs?

No. The reason for the high CEO salaries is a function of the corporate structure that includes the legal arrangements between shareholders, board of directors, and management. It is the resulting interaction that will continue to push up CEO salaries.


Is war the biggest growth economy? It pours unknown amounts of wealth from around the world into technology, man power and manufacturing as well as using up, or destroying a great deal of natural resources.

Again, this is the result of institutional structure which is currently providing the incentives that give us the observed results.

And the situation is actually much worse than described above.

Current tax and other elements of fiscal policy are supporting biofuels. The result is that we are directly and indirectly burning up our food supply for fuel. This is already creating food shortages which have the potential to kill more people than were killed in World War II over the next few years.

How many people have an income either directly or indirectly derived from armed conflict? Since the industries that profit from the various aspects of war have become so vast and dependent on world wide struggles, will they ever let the world create peace?

First, biofuels will kill tens of millions over the next few years if nothing is done to stop that process. That is far higher than any of the current wars.

Second, the lack of understanding of the application of fiscal policy to ensure full employment and price stability is contributing to
regional conflicts.

Third, profiting from war is an example of how institutional structure functions channel economic resources. The outcomes are a function of the structure.


Are you worried about America’s economy?

Yes, I see weaker demand, supported by rising exports that diminish demand in the rest of the world, while inflation accelerates due to imperfect competition in the production of crude oil.


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