Tag: Economics

Everyone one of these Democrats should lose the support of the DCCC and be primaried.

Blue Dogs backing corporate tax holiday

House Blue Dogs are on board with a temporary corporate tax holiday they argue will boost economic growth.

The group joined a growing bipartisan chorus pressing the congressional deficit-reduction committee to give U.S. multinational corporations a tax break in exchange for investing at home.

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The Blue Dog Coalition is backing a bipartisan bill sponsored by Reps. Jim Matheson (D-Utah) and Kevin Brady (R-Texas) that would remove a barrier keeping upwards of $1.4 trillion in American private-sector money overseas, which is similar to a Senate bill introduced last week by Sens. Kay Hagan (D-N.C.) and John McCain (R-Ariz.).

I have no idea what experts they are citing the article doesn’t say. I do know the history if the last time this was done in 2004 when they gave 92% of the money to themselves. Nor did the law which stated the money could not be used to raise dividends or to repurchase shares, stop them.:

There is no evidence that companies that took advantage of the tax break – which enabled them to bring home, or repatriate, overseas profits while paying a tax rate far below the normal rate – used the money as Congress expected.

“Repatriations did not lead to an increase in domestic investment, employment or R.& D., even for the firms that lobbied for the tax holiday stating these intentions,” concluded the study by three economists, including a former official of the Bush administration who took part in the discussions leading to enactment of the plan in 2004.

The study, titled “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” was released this week by the National Bureau of Economic Research. It was written by Dhammika Dharmapala, a law professor at the University of Illinois; C. Fritz Foley, an associate professor of finance at Harvard Business School; and Kristin J. Forbes, a professor of economics at the Massachusetts Institute of Technology who was a member of the president’s council of economic advisers from 2003 to 2005.

“The restrictions on how the money will be spent seem to have been completely ineffective,” Ms. Forbes said in an interview this week.

“Dell was a great example,” she added, referring to Dell Computer. “They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.”

The give away also cost the country more than 500,000 jobs:

Following a tax holiday on repatriated foreign earnings in 2004, 58 corporations that benefitted from the holiday slashed a total of nearly 600,000 jobs. These 58 giant corporations accounted for nearly 70 percent of the total repatriated funds and collectively saved an estimated $64 billion from what they otherwise would have owed in taxes.

According to the Joint Committee on Taxation this current clamor by for a tax holiday by the multinational corporations that barely pay any taxes now, would cost the US $80 billion and would do nothing to reduce the deficit and wouldn’t protect or create jobs:

Representative Lloyd Doggett, a Texas Democrat who is a senior member of the Ways and Means Committee, yesterday circulated an estimate from the Joint Committee on Taxation pegging the cost of a repatriation bill at $78.7 billion. An unsuccessful effort to create a similar holiday in 2009 would have cost the U.S. government about $30 billion over a decade in forgone revenue.

“This means we will have to borrow more from foreign creditors or shift a greater burden to American small businesses and families,” Doggett said. Congressional estimators projected that companies would repatriate about $700 billion if offered a 5.25 percent rate, compared with $300 billion during the tax holiday enacted in 2004.

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Democrats also maintain that the bill does too little to protect jobs at companies that repatriate overseas funds. They have pointed to such examples as Hewlett-Packard Co. (HPQ), which returned $14.5 billion to the U.S. at a low rate in 2004 and cut its workforce by 14,500 employees in 2005.

Primary these idiots

Monday Business Edition

We’ve seen this play before.  All of a sudden trillions of dollars of ‘notional’ value turn into meaningless scraps of paper (or ephemeral photons if you prefer) suitable for lining litter boxes or wrapping fish.

Except it’s not even very good at that.

The biggest losers in the casino will turn to taxpayers to make good their losses or simply pretend that they don’t exist.  Markets plunge because the trust in magic evaporates and suddenly skeptical children refuse to clap for dying confidence fairies anymore.

Folks, it’s just a fucking light bulb on a string.

Sooner rather than later people are going to take their Greek bets off the table, followed shortly by Spain, Italy, France, and Germany.  The Euro will collapse, no longer a threat to the Dollar as a reserve currency.  Countries will struggle to rebuild ‘national’ financial systems.

This is all because governments, led by the United States, refused to force banks to deleverage and accept their losses in a timely fashion.

There won’t be another 2008 bailout.  In Europe, where there is already violent rioting, Bankers and Ministers will be hung from lamp posts first.  In the United States the suicide would be political.

Austerity will not make the losses good either, everything everyone in the bottom 50% owns is a mere $1.4 Trillion.  Taking it all won’t solve the problem.  Our elites are faced with a decline in their own standard of living that squeezing the poor can’t mitigate.

Good say I.

What will work is more Socialist than Keynesian.  Mark to market and vaporize ‘notional’ value.  Seize assets and aggressively tax wealth to force investment.  Stimulate production by increasing demand.

Real estate values in Greenwich are going to decline and yachts rust in the harbor, but you know, it’s better than selling apples on a street corner worrying that someone is going to cut you for your fancy ass Rolex and that’s next.

The euro zone shuns Geithner

Felix Salmon, Reuters

Sep 16, 2011 16:55 EDT

(I)n sunny Wroclaw, (Geithner) fell spectacularly flat. He waltzed into a meeting of euro zone finance ministers (he took a private car, they shared a bus), and informed them that they should follow his lead and leverage the money in the EFSF. In unison, the finance ministers responded by saying “why, Mr Geithner, that’s a simply spectacular idea, we’re shamefaced to admit that we didn’t think of it ourselves. Thanks for your advice, we’ll follow it, to the letter, forthwith!”

Or, not so much(.)

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I’m not sure that Geithner was the right person to send to Poland to try to knock European heads together. As the biggest shareholder of the IMF, he would probably have been better off conferring with Christine Lagarde and getting her to make his point for him. The Europeans were never likely to take well to the Americans telling them what to do, especially when their gentle attempts to ask something of Geithner (maybe you might consider getting on board with a financial transactions tax?) were unceremoniously dismissed out of hand by the Treasury secretary.

In any case, Geithner seems to have failed in whatever it was that he was trying to achieve: the only unanimity he managed to foster was in the belief that he had no business telling the euro zone what to do.

EU finance ministers break no new ground on debt crisis

By Jan Strupczewski and Gareth Jones, Reuters

Sat Sep 17, 2011 4:08pm EDT

“He (Geithner) conveyed dramatically that we need to commit money to avoid bringing the system into difficulty,” Austrian Finance Minister Maria Fekter told reporters after the meeting.

“I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, they tell us what we should do.”

Geithner also pointed out that euro zone finance ministers could boost the firepower of their bailout fund, the 440 billion euro European Financial Stability Facility, through leveraging.

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Leveraging would mean that the EFSF could guarantee to cover potential losses of the European Central Bank on purchases of bonds of distressed euro zone sovereigns, boosting the fund’s intervention potential even fivefold, officials said.

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EU finance ministers also agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests, as a report said a “systemic” crisis in sovereign debt now threatened a new credit crunch.

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The agreement does not mean European banks are likely to get large, additional capital injections from public coffers — it is just an acknowledgement of the results of the European bank stress tests in July.

The tests showed a financing gap for banks of only 6 billion euros — a sum many investors believe could be much higher if the debt crisis worsens, and which is to be primarily covered by private capital.

Meetings on European Debt Crisis End in Debate, but Little Progress

By STEPHEN CASTLE, The New York Times

Published: September 17, 2011

The meetings were highlighted by the appearance by Timothy F. Geithner, the United States treasury secretary, whose advice, and warnings, drew a tepid reaction from the euro zone’s finance ministers. And Mr. Geithner’s rejection Friday of a European idea for a global tax on financial transactions prompted a debate about whether Europe should go ahead on its own.

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“The problem is that the politicians seem to be behind the curve all the time,” added Anders Borg, Sweden’s finance minister. “We really need to see some more political leadership,” he said, citing a “clear need for bank recapitalization.”

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One European official, not authorized to speak publicly, said the ministers “seemed to come to no operational decisions at all.” The only positive news was an outline agreement on new laws to tighten the rulebook for the euro – though that was struck in Brussels.

Saturday’s meeting ended promptly around noon, allowing ministers to leave before a demonstration in Wroclaw against austerity measures in Europe.

Euro Bulls Capitulate After Trichet Turnaround Cuts Forecasts

By Liz Capo McCormick, Lukanyo Mnyanda and Allison Bennett, Bloomberg Business Week

September 18, 2011, 11:22 AM EDT

French President Nicolas Sarkozy and German Chancellor Angela Merkel said Sept. 14 they are “convinced” Greece, which saw yields on its two-year note rise above 80 percent last week, will stay in the currency union, and central banks agreed a day later to lend the region’s financial institutions dollars. While those moves bolstered the euro, the region’s economy has turned weaker, leading traders to bet that the European Central Bank may lower interest rates over the next year instead of raising them, removing a key support for the currency.

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Mario Blejer, who managed Argentina’s central bank in the aftermath of the world’s biggest sovereign default, said Greece should halt payments on its debt to stop a deterioration of the economy that threatens the EU.

“This debt is unpayable,” Blejer, who was also an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview last week in Buenos Aires. “Greece should default, and default big. A small default is worse than a big default and also worse than no default.”

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Even as Europe’s sovereign-debt crisis worsened this year, the euro received support from prospects that the ECB would raise interest rates further to contain inflation. Now, that is looking less likely after ECB President Jean-Claude Trichet said at a press conference in Frankfurt on Sept. 8, after the central bank left its benchmark rate at 1.5 percent, that threats to the euro region have worsened and inflation risks have eased.

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Officials have contributed to investor skepticism. Bank of France Governor Christian Noyer said on Sept. 12 that French lenders are capable of facing any Greek response to sovereign- debt difficulties and have no liquidity or solvency problems. Two days before Moody’s cut its long-term debt rating by one level Societe Generale’s Chief Executive Officer Frederic Oudea told reporters on Sept. 12 that French banks “have no capital problem.”

“Policy makers and bank leaders have all come out and said ‘everything is fine,’ but clearly everything is not fine,” Louise Cooper, a market analyst at BGC International in London, said in an interview on Sept. 14. “The gap between the rhetoric and what the markets are saying about the level of the crisis is huge.”

Financial Crisis: can the euro hope to survive?

By Martin Vander Weyer, The Telegraph

7:00AM BST 18 Sep 2011

(T)he market bounce was itself an irrational, wishful-thinking response – a misreading of an unprecedentedly dangerous situation. There is a far more persuasive argument that what we have just seen was another week of denial of the reality and imminence of the eurozone’s existential meeting with destiny; another week, to use a currently popular cliché, of kicking the can down the road, rather than facing Europe’s big issues head-on.

Look behind each of the week’s news items and it’s hard not to feel a sense of despair. Geithner was in Wroclaw not to slap his European counterparts on the back for their efforts to date, but to warn them to stop bickering and address the “catastrophic risk” inherent in a widespread state of unsustainable debt and fiscal delinquency.

It is apparent not only that US banks have lost confidence in their European counterparts and have started shutting them out of inter-bank funding markets, but also that US officials are busy making matters worse by seeking to shift blame for America’s dire domestic performance on to influences from this side of the Atlantic. “Seventy-five per cent of the dark things happening in the world economy are because of the eurozone,” one of Geithner’s team said at Marseille.

And it is because of that widely held sentiment in the US financial community – the belief that European banks are sitting on crippling losses on their government bond holdings, and could go down like dominoes if Greece and others default – that the central banks’ dollar funding scheme was necessary to stave off the onset of another credit crunch. Another freezing-up of the international banking system is the quickest possible way to turn current near-zero growth performance in the industrialised world into a global double-dip recession, with the second dip likely to be deeper, longer and more painful than the first.

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Markets are convinced of several things: that Greece is politically incapable of meeting the austerity demands imposed by the EU and the IMF, and is now locked into a spiral in which its debt position can only become worse as its economy deteriorates; that a default on Greek sovereign debt is therefore inevitable sooner rather than later, and will impose losses on European banks, including the likes of Société Générale and Crédit Agricole of France, which may in turn need to be bailed out by their governments; and that the eviction of a bankrupt and incorrigibly irresponsible eurozone member is not only a technical possibility but an economic necessity if the single currency is to survive at all.

The best hope now is for a managed Greek default and departure. As German transport minister Peter Ramsauer said this week, before Angela Merkel urged him to silence, “it might be risky and painful for Greece to leave the euro, but it would not be the end of the world”.

At the other end of the spectrum, the worst fear is of a final, chaotic Greek episode provoking defaults by Ireland, Portugal and, conceivably, Italy and Spain in its wake. That would be Armageddon – and no one knows what appalling political consequences might follow.

Greek PM cancels U.S. trip as debt crisis deepens

By George Georgiopoulos and Dina Kyriakidou, Reuters

Sun Sep 18, 2011 9:32am IST

Finance Minister Evangelos Venizelos rushed to allay fears the cancelled trip signalled imminent default, saying such talk was “ridiculous”, but the conservative opposition seized the opportunity to demand snap elections, fanning fears Greece lacks the will needed for tough measures ahead.

“The comments and analyses about an imminent default or bankruptcy are not only irresponsible but also ridiculous,” Venizelos said in a statement.

“Every weekend Greece … is subject to this organised attack by speculators in international markets.”

Papandreou was in London, en-route to United Nations and International Monetary Fund (IMF) meetings, when he decided to turn back after discussing developments with Venizelos, government officials said.

From the Desk of Peter Tchir: "Is September 20th Greek Default Day?"

Daniel Alpert, Economonitor

September 17th, 2011

“If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day.

Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro.  So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it.  The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment?

The Fed Scheduled their meeting for 2 days.  It now starts on September 20th.  Maybe a co-incidence, but what better way to be prepared for new emergency policies?

CDS “rolls” on the 20th.  On the 21st, all Sept 2011 CDS will have expired.  My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system.  As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.

Suddenly, Over There Is Over Here

By GRETCHEN MORGENSON, The New York Times

Published: September 17, 2011

Billions of dollars in swaps have been written on sovereign debt, guaranteeing that those who bought the insurance will be paid if Greece or other countries default. As of Sept. 9, some $32 billion in net credit insurance exposure was outstanding on debt of Greece, Portugal, Ireland and Spain, according to Markit, a financial data provider. An additional $23.6 billion has been written on Italy’s debt. Billions more in credit insurance have also been written on European banks, many of which hold huge positions in troubled sovereign obligations.

But since these instruments trade in secret, investors don’t know who would be on the hook – as A.I.G. was in its ill-fated mortgage insurance – should a government default or a bank fail.

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Even after what we went through with A.I.G., the huge market in credit default swaps remains unregulated and still operates in the shadows. You can thank big banks that trade these instruments – and their lobbyists – for that.

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“We’re seeing a lot of the same things in the markets that we saw in the Lehman era,” Mr. Weinberg said, referring to that awful episode three years ago. “I can’t tell you specifically and exactly how the fallout from Europe will pass through to us, but I certainly can’t tell you it won’t.”

Lots of people think, as I did until recently, that ETFs are relatively low risk, low cost investments that track well understood and popular market indexes like the S&P 500 without forcing individual investors to actually assemble a portfolio of the underlying assets.

Not so much.

Terry Smith has put together a list of 4 problems with ETFs as they are traded today of which I think #3 is the biggest-

Because you can exchange trade these funds, they are used by hedge funds and banks to take positions and they can short them. Because they can apparently rely upon creating the units to deliver on their short, there are examples of short interest in ETFs being up to 1000% short i.e. some market participant(s) are short 10 times the amount of the ETF. If the ETF is in an illiquid sector, can you really rely upon creating the units as you may not be able to buy (or sell) the underlying assets in a sector with limited liquidity? The danger of allowing short sales which are a multiple of the value of a fund in an area where it may not be possible to close the trades by buying back the stocks are clear, but amazingly, during the debate in which I have been engaged by various cheer leaders for ETFs, they have claimed that there is no such risk in shorting ETFs. They clearly do not understand the product they are peddling, and if they can’t what chance has the retail investor got?

In other words leverage is creating notional supply in excess of the actual supply of an asset which leads to illiquidity when the demand exceeds it.

I’m sorry, you can’t buy anymore X at any price.

Now economists would argue that there is always a price at which a supply of X is available and on certain theoretical levels they are correct, but there is a practical level at which the price becomes too expensive and someone, somewhere is either deprived of the item they had a contract to purchase OR is forced to spend lots of money making good those promises.

This is apparently what happened at UBS.

The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass

Matt Taibbi, Roling Stone

POSTED: September 15, 8:39 AM ET

Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking – historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there – turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way. If you’re not a person who can doze through a two-hour foot massage while your client (which might be your own bank) is losing ten thousand dollars a minute on some exotic trade you’ve cooked up, then you won’t make it on today’s Wall Street.

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In the financial press you’re called a “rogue trader” if you’re some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you’re a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.

In other words, “rogue traders” are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.

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Sooner or later, this is going to blow up in our faces, and it won’t be one lower-level guy with a $2 billion loss we’ll be swallowing. It’ll be the CEO of another rogue firm like Lehman Brothers, and it’ll cost us trillions, not billions.

‘Rogue trader’? That’s the same as ‘rogue reporter’

The ‘rogues’ are those who get caught while people presiding over systems that go wrong say: ‘How deplorable’

Michael White, The Guardian

Friday 16 September 2011 06.40 EDT

A “rogue trader” in a City of London bank is really like a “rogue reporter” on the News of the World. He’s the one who gets caught and sent to jail when the people who presided over the system that allowed him to lose $2bn – or, in Clive Goodman’s case, to hack some royal phones – say “how deplorable” before business as usual is restored.

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Have we learned nothing? Apparently not. Adoboli is 31, with less visible expertise and experience than his evident ambition to make money. Who left him in charge of the tea money? Yet he was able to lose $2bn in a corner of the investment market known as exchange traded funds (ETFs), which even the FT is having a struggle explaining to its more ignorant readers (bank chairmen, people like that) in today’s edition.

Apparently, they’re the hottest thing since the collateralised debt products that blew up Lehman and others in 2008. The FT columnist Gillian Tett says she wrote a column in May warning that ETFs were heading for a scandal, but not quite this soon.

A rogue trader at UBS or a rogue bank?

by John Gapper, Financial Times

September 15, 2011 3:45 pm

Given the recent history of UBS, it is fair to ask if Kweku Adoboli is a rogue trader or his employer is a rogue bank.

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(T)he bank’s entire senior layer of management was forced out following its involvement in the 1998 collapse of Long-Term Capital Management, the US arbitrage hedge fund run by John Meriwether. UBS had pressed to be closely associated with an operation it regarded as smartly and safely run.

There are similarities between the products relating to the LTCM case and the trading desk on which Mr Adoboli worked. As Izabella Kaminska of FT Alphaville points out, banks’ Delta 1 desks traded and hedged exchange-traded derivatives in  ways that involve complex – and difficult to monitor – risk-taking. Mr Kerviel worked on SocGen’s Delta 1 desk.

Edgar Allen Poe–

We estimated the entire contents of the chest, that night, as a million and a half of dollars, and upon the subsequent disposal of the trinkets and jewels (a few being retained for our own use), it was found that we had greatly under-valued the treasure.

When, at length, we had concluded our examination, and the intense excitement of the time had, in some measure, subsided, Legrand, who saw that I was dying with impatience for a solution of this most extraordinary riddle, entered into a full detail of all the circumstances connected with it.

Herr Doktor Professor–

So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resources because they are rewarded with a rising price. Abstracting from storage costs, this says that the real price must rise at a rate equal to the real rate of interest.

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The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.

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(T)his is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap – an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

And if you view the gold story as being basically about real interest rates, something else follows – namely, that having a gold standard right now would be deeply deflationary. The real price of gold “wants” to rise; if you try to peg the nominal price level to gold, that can only happen through severe deflation.

The robust economy of Germany is starting to feel the effects of the economic crisis of its partner nations in the Eurozone and is showing signs of drastic slowing

Growth in the German economy slowed sharply between April and June and was weaker at the start of the year than previously thought, figures show.

The (German) economy grew by just 0.1% in the quarter, according to figures from the national statistics office. Growth in the eurozone as a whole also slowed.

Germany had been driving the economic recovery in the eurozone.

The figures come as German Chancellor Angela Merkel and French President Nicolas Sarkozy begin crunch talks.

The two leaders are discussing ways to solve the eurozone debt crisis that has threatened to engulf Italy and Spain and has sparked turmoil on global stock markets.

Figures also released on Tuesday showed that eurozone economic growth slowed to 0.2% in the second quarter, down from 0.8% in the previous three months.

The slow down has had its effect on markets in Europe and early trading in the US:

The news led European indexes lower. Germany’s DAX fell 2.6 percent, the FTSE in Britain was 1.3 percent lower, and in France the CAC 40 was down 1.9 percent.

In early trading, the Dow Jones industrial average was down 80.68 points, or 0.70 percent, at 11,402.22. The Standard & Poor’s 500-stock index was down 11.02 points, or 0.91 percent, at 1,193.47, and the Nasdaq composite index was down 26.38 points, or 1.03 percent, at 2,528.82.

“German G.D.P. data is the catalyst this morning that got us off to a bad start,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vt.

The German chancellor, Angela Merkel, and President Nicolas Sarkozy of France were to meet later Tuesday to discuss measures to contain Europe’s fiscal crisis. A joint news conference was scheduled at noon E.D.T.

Another component of the down turn is the idea of issuing bonds backed by all Eurozone nations to ease the crisis has been poo-pooed by both German Chancellor Angela Merkel and French President Nicholas Sarkozy but they may have no other choice:

The euro bond concept is gaining traction among economists and other outside experts like George Soros, the billionaire investor, as a way of preventing borrowing costs for Italy and Spain from rising so much that the countries become insolvent, an event that could destroy the common currency.

Debt issued and backed by all 17 members of the euro zone, euro bond proponents say, would be regarded as ultrasafe by investors and could rival the market for United States Treasury securities. The weaker euro members would benefit from the good standing of countries like Germany or Finland and pay lower interest rates to borrow than if left to face investors on their own.

“It may well be in order to calm markets right now,” said Jakob von Weizsäcker, an economist for the German state of Thuringia who has proposed a way to structure euro bonds so that countries would be encouraged to reduce their debt.

On the “bright side”, there is Nouriel Roubini:

.Karl Marx was right that globalization, financial intermediation, and income redistribution could lead capitalism to self-destruct

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.

Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions-officials tried them all. Now they have run out of rabbits.

Fiscal policy currently is a drag on economic growth in both the eurozone and the United Kingdom. Even in the United States, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments. Soon enough, they will be raising taxes.

Monday Business Edition

That, dear readers, is the interest rate the United States is paying on it’s 10 year Treasuries today after the downgrade.  This is LESS than we were paying on Friday.

Frankly it could and should be 0%.  Far from being a neoliberal, I fall on the modern monetarist side of the fence and can find no rational explanation that we issue debt at all except outdated emotional attachments to a Gold Standard that hasn’t existed for almost 40 years and a conscious, if unspoken, government policy of subsidizing the extremely wealthy.

Our Masters of the Universe aren’t particularly bright.  I find their constant caterwauling about “uncertainty” particularly revealing.  Far from being brave risk takers, they’re cowardly morons miserably longing for the days of the “carry trade” when you could get Yen at 0% interest, convert it, and park it in Treasuries at 5% with zero risk.

They only like fixed games and the natural and desired state of capitalism is government sanctioned mercantilist monopolies using the military and police power of the nation to eliminate competition.

East India Company anyone?  There’s your real Tea Party.

What the market is telling us today is that there is in fact NO risk that the United States will not pay off its debts in dollars, the currency in which they’re incurred.  The market is also telling us that the almighty Dollar has NO SUBSTITUTE as the International Reserve Currency.  It is the only one that exists in sufficient quantity to do the job and we are the only nation that is willing to accept the penalty in terms of a permanent trade deficit.  Last week both China (incidentally lower rated than the U.S.) and Switzerland explicitly acted to limit the use of their currency for this purpose, because they aren’t willing to cede control of it to the market.

In fact what was the strongest candidate to replace the Dollar, the Euro, is taking a pummeling today despite the European Central Bank finally deciding to use their market power to limit the allowable decline in value (and consequent rise in interest) of Spanish and Italian bonds.

Yup, they’ve decided to “print” their way out and despite immediate negative impact there is no doubt that over the short and medium term the bond vigilantes, particularly those who have taken leveraged short positions, are going to get a buzz cut if not a shaving.  In other words a thoroughgoing asskicking.

Marshall Auerbeck–

Even with our existing legal constraints (predicated on a now non-existent gold standard system in which we are forced to sell bonds before Treasury spends), Treasury/Fed have other tools to counteract the alleged effect of this downgrade.  Mr. Bernanke can simply call up the NY Fed and gives Mr. Dudley instructions to buy all the 10-year UST on offer to keep the US 10 year at, say 2.5%. It is an open market operation, which the Fed performs all the time. And the banks cannot lend out these reserves, so it’s not inflationary (see here for more explanation). Then, as Rob Parenteau and I have noted before, every time some so-called “bond market vigilante” tries to push it above 2.5% by shorting Treasuries, the Fed can slam their face into the concrete by having the open market desk buy the hell out of UST until the 10 year yield is back to 2.5%. Burn Fido enough times, yank his chain enough times, and like the Dog Whisperer, he gets it and stops.

Credibility, Chutzpah And Debt

By PAUL KRUGMAN, The New York Times

Published: August 7, 2011

(T)he rating agencies have never given us any reason to take their judgments about national solvency seriously. It’s true that defaulting nations were generally downgraded before the event. But in such cases the rating agencies were just following the markets, which had already turned on these problem debtors.

And in those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S.& P. downgraded back in 2002. Well, nine years later Japan is still able to borrow freely and cheaply. As of Friday, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.

…

These problems have very little to do with short-term or even medium-term budget arithmetic. The U.S. government is having no trouble borrowing to cover its current deficit. It’s true that we’re building up debt, on which we’ll eventually have to pay interest. But if you actually do the math, instead of intoning big numbers in your best Dr. Evil voice, you discover that even very large deficits over the next few years will have remarkably little impact on U.S. fiscal sustainability.

…

The truth is that as far as the straight economics goes, America’s long-run fiscal problems shouldn’t be all that hard to fix. It’s true that an aging population and rising health care costs will, under current policies, push spending up faster than tax receipts. But the United States has far higher health costs than any other advanced country, and very low taxes by international standards. If we could move even part way toward international norms on both these fronts, our budget problems would be solved.

What the market is also telling us is that our economy sucks.  That these huge corporate earnings are largely illusionary in the absence of demand and that Washington’s austerity policy, endorsed by Barack Obama and the Democratic Party, is a flat, abject failure.

Why do you think stocks are going down and (downgraded) bonds are going up?  It’s because they are less attractive investments than the 2.48% Treasuries in a continuing Depression.

Monday Business Edition

G.D.P. Shocker: U.S. on Verge of Double-Dip Recession

Posted by John Cassidy, The New Yorker

July 29, 2011

When healthy, the American economy grows at an annual rate of close to three per cent. The Commerce Department’s latest report on the gross domestic product (pdf) shows that between April and June, it expanded at an annual rate of 1.3 per cent, and between January and March it grew at an annual rate of just 0.4 per cent. The first-quarter figure is particularly stunning. Previously, the Commerce Department had estimated growth in the period at 1.9 per cent. What is to prevent a similar downward revision to the second-quarter figures? Nobody can say.

Consumer spending, which is the driving force of the American economy-it makes up more than two thirds of G.D.P.-has stalled badly. After expanding at an annual rate of more than two per cent for the previous year and a half, it was essentially flat in the second quarter. Unless consumers spend more readily in the second half of the year, there is no prospect of an economic rebound. But with gas prices still high, unemployment ticking up again, and their elected representatives in Washington paralyzed, it seems unlikely that American families will be flocking back to the malls anytime soon.

…

Retail sales hardly grew at all in June. Wall Street analysts who had been predicting growth of close to three per cent for the rest of the year are now busy trimming their estimates. Industrial production, the other item that the N.B.E.R. watches closely, has also been showing weakness. The Fed’s index of industrial production declined slightly in April and May, before rising slightly in June. Manufacturing, the biggest component of industrial production, had its weakest quarter since the previous recession ended in mid-2009.

…

In one sense, the new G.D.P. figures are even worse than they seem. Bear in mind that they are all annualized. This means the government statisticians take the actual growth rate in the quarter and (roughly speaking) multiply it by four. Reversing the process (dividing by four) reveals that the economy expanded by just 0.1 percent in the first quarter and by roughly 0.3 per cent in the second quarter. These figures are so small as to be trivial.

Zandi (no Keynsian he) has predicted a loss of 1.1 million jobs from current policy, an analysis reinforced by Goldman Sachs.

We know what happens from implementing austerity policies in a Lesser Depression from the examples in Britain-

British Economy, After Austerity, at Zero Growth in the Past Nine Months

By: David Dayen, Firedog Lake

Tuesday July 26, 2011 8:15 am

What’s amazing about this debt limit debate, and the headlong rush to austerity, is that we have empirical evidence of what can result, in this kind of economy, when you massively roll back spending. We even know what happens when you do that amid the threat of a debt downgrade rather than the fundamentals of the financial markets. All you have to do is look to Britain, which has never been the same since their austerity package was unveiled by the Tories.

…

Britain rolled back demand during a time when the economy was already weak, and they are suffering through the consequences. Instead of looking at this as a problem to be avoided, US policymakers are on the verge of emulating it. And not even in a good way: the British plan was at least somewhat balanced, with tax increases along with the spending cuts. This shows that the idea of a “balanced approach” is still flawed, because either way, you’re reducing demand during a time with a demand shortfall.

And in States–

Conservative Budget Cuts Bad for State Economies

• Bigger State Spending Cuts == Higher Unemployment Rates
• Each 10% Cut == .04% Increased Unemployment
• Bigger State Spending Cuts == More Private Employment Losses
• Each 10% Cut == 1.6% Lost Private Employment
• Bigger State Spending Cuts == Weaker Economies
• Each 10% Cut == 1.6% Economic Contraction

State spending data are adjusted for inflation using the GDP price index. National changes have been removed from data on state unemployment rates, private payroll employment, and inflation-adjusted GDP growth to more clearly identify state-level economic performance. The analysis in the three charts weights each state’s data by population size to give a better reflection of a national average effect of cutting state government spending on economic performance. Weighting the analysis as such does not materially change the significance or size of the effect of cutting state spending.

AUSTERITY DOES NOT REDUCE THE DEFICIT OR DEBT!

Sure Cure for the Debt Problem: Economic Growth

By CATHERINE RAMPELL, The New York Times

Published: July 30, 2011

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

…

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

…

While it may be difficult or impossible to grow our way out of debt, the G.D.P. figures announced on Friday suggest that we could quite possibly shrink our way into bankruptcy. The austerity measures that Congress is debating would almost certainly slow growth further. That, in turn, might actually worsen the debt problem – the exact opposite of what their proponents suggest.

…

The problem is that reducing spending or raising taxes just now would hurt the already fragile economy. Another recession would not only be painful for ordinary Americans but would actually worsen the debt problem by reducing tax revenue.

Don’t believe it? Consider this: Of the $12.7 trillion in additional federal debt that was accumulated over the last decade, about a third came from the souring economy.

Back in the Great Depression, Washington tightened its belt with disastrous results. Congress severely reduced spending in 1937, plunging the economy back into the hole. Ultimately, that meant even more federal borrowing.

Leaving aside the moral bankruptcy of starving the poor and elderly to death while leaving the wealthiest one tenth of one pecent untouched and accelerating their robbery of the middle class, this is bad, bad, bad economic policy.

And Barack Obama and the Democrats know it.  The People know it too.

Obama Approval Drops to New Low of 40%

Similar to his approval rating for handling the debt ceiling negotiations

by Jeffrey M. Jones, Gallup

PRINCETON, NJ — President Obama’s job approval rating is at a new low, averaging 40% in July 26-28 Gallup Daily tracking. His prior low rating of 41% occurred several times, the last of which was in April. As recently as June 7, Obama had 50% job approval.

…

Though Americans rate Obama poorly for his handling of the situation, they are less approving of how House Speaker John Boehner and Senate Majority Leader Harry Reid are handling it. Gallup does not include ratings of Congress or congressional leaders in its Daily tracking, and thus, there is no overall job approval rating of Boehner, Reid, or Congress directly comparable to Obama’s current 40% overall job approval rating.

Obama’s job approval rating among Democrats is 72%, compared with 34% among independents and 13% among Republicans. In the prior three weeks, his average approval rating was 79% among Democrats, 41% among independents, and 12% among Republicans.

Americans’ Ratings of the Economy Also More Negative Amid Stalemate

The debt crisis may be contributing to a generally sour mood for Americans that stretches beyond political ratings. For example, Gallup’s Economic Confidence Index, which is also tracked daily, averaged 49 July 2628, down 8 points in the last week and down 19 points since early July. The current index score is the worst Gallup has measured since March 2009.

The index consists of two questions, measuring Americans’ ratings of current economic conditions and their assessments of whether the economy is getting better or worse. Currently, 52% say economic conditions are poor, the highest since August 2010. And 75% of Americans say economic conditions are getting worse, a level not seen since March 2009.

Electoral victory my ass.

Monday Business Edition

Economy Faces a Jolt as Benefit Checks Run Out

By MOTOKO RICH, The New York Times

Published: July 10, 2011

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

…

“If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm.

Job growth has remained elusive. There are 4.6 unemployed workers for every opening, according to the Labor Department, and Friday’s unemployment report showed that employers added an anemic 18,000 jobs in June.

…

Consumers account for an estimated 60 to 70 percent of the country’s economic activity, but two years into the official recovery, businesses are still complaining that people simply are not spending enough.

…

Because benefit payments tend to be spent right away to cover basic needs like food and rent, they provide a direct boost to consumer spending. In a study for the Labor Department, Wayne Vroman, an economist at the Urban Institute, estimated that every $1 paid in jobless benefits generated as much as $2 in the economy.

Government Aid Dissipating, Damaging Economic Performance

By: David Dayen, Firedog Lake

Monday July 11, 2011 6:55 am

The Times story tells a simple tale, one rooted in elementary macroeconomic theory, and one which has escaped everyone in Washington. If you reduce benefits on those who have the highest propensity to spend money, that money gets taken out of the economy, and GDP suffers. And GDP has a direct bearing on unemployment. Our automatic stabilizers actually worked decently during the Great Recession. In fact, most of the stimulus went to tax cuts and beefing up those stabilizers, through aid to states and expanded benefits (in fact, too much so, as public investment in jobs was barely a sliver of the total stimulus). No doubt Republicans will see this article as some evidence of lazy Americans living on the dole, but it’s a direct result of an intelligently designed system to provide a safety net when the bottom drops out of the economy.

Herr Doktor Professor–

Regular readers of this blog know that I make a big deal of the failure of interest rates to rise despite massive government borrowing. There’s a reason for that: what happens to interest rates is a key indicator of which economic model, and hence which economic policies, are right.

The Very Serious position has been that government borrowing will drive up rates, crowd out private investment, and impede recovery. A Keynes-Hicks analysis, by contrast, says that when you’re in a liquidity trap, even large government borrowing won’t drive up rates – and hence won’t crowd out private investment. In fact, it will promote private investment by raising capacity utilization and giving firms more reason to expand.

…

What we usually get in response to this seemingly decisive data are a series of excuses – most recently, that rates were low because the Fed was buying all the bonds. Well, that program has ended, and interest rates are still low.

More Herr Doktor Professor on excuses–

The fact is, the United States economy has been stuck in a rut for a year and a half.

…

The truth is that creating jobs in a depressed economy is something government could and should be doing.

…

Our failure to create jobs is a choice, not a necessity – a choice rationalized by an ever-shifting set of excuses.

Excuse No. 1: Just around the corner, there’s a rainbow in the sky.

• Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend – and Lucy keeps snatching the football away. Yet these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.

Excuse No. 2: Fear the bond market.

• Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.

  But basic economics said that rates would stay low as long as the economy was depressed – and basic economics was right. The interest rate on 10-year bonds was 3.7 percent when The Wall Street Journal issued that warning; at the end of last week it was 3.03 percent.

Excuse No. 3: It’s the workers’ fault.

• (I)f there really was a mismatch between the workers we have and the workers we need, workers who do have the right skills, and are therefore able to find jobs, should be getting big wage increases. They aren’t. In fact, average wages actually fell last month.

Excuse No. 4: We tried to stimulate the economy, and it didn’t work.

• Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.
  
  …
  
  What happened to the stimulus? Much of it consisted of tax cuts, not spending. Most of the rest consisted either of aid to distressed families or aid to hard-pressed state and local governments. This aid may have mitigated the slump, but it wasn’t the kind of job-creation program we could and should have had. This isn’t 20-20 hindsight: some of us warned from the beginning that tax cuts would be ineffective and that the proposed spending was woefully inadequate. And so it proved.

Neoliberal Economics has as much credibility as Stalinist Genetics.

I often quote Herr Docktor Professor when I agree with him because he’s got a Nobel Prize and I…

Well, I have many accomplishments I’m quite proud of but a Nobel Prize in Economics is not among them.

Recently he’s published two summaries of his pieces on macroeconomics that I’d like to draw to your attention before they scroll away and get hard to find-

Macro Readings, Self-Referential Edition, June 10, 2011

• The humbling of the Fed (wonkish), September 22, 2008
• Macro policy in a liquidity trap (wonkish), November 15, 2008
• Optimal fiscal policy in a liquidity trap (ultra-wonkish), December 29, 2008
• A Dark Age of macroeconomics (wonkish), January 27, 2009
• Liquidity preference, loanable funds, and Niall Ferguson (wonkish), May 2, 2009
• China’s Water Pistol, March 15, 2010
• Myths of Austerity, July 1, 2010
• Self-defeating Austerity, July 7, 2010
• More On Friedman/Japan, October 29, 2010
• The Instability of Moderation, November 26, 2010
• Reposted: Sam, Janet, and Debt, June 8, 2011

Macro Readings Update, June 13, 2011

(note: He includes some duplicates I have omitted.  Also I have arranged them chronologically.)

• A history lesson for Alan Meltzer, May 4, 2009
• America’s Chinese disease (not quite what you think), October 19, 2009
• Core Logic, February 26, 2010
• Japan 1998, August 31, 2010
• The Doctrine of Immaculate Transfer, January 12, 2011
• "Currency Wars" and the Impossible Trinity (Wonkish), May 9, 2011

Now just because I’m drawing them to your attention does not constitute endorsement.  I think Krugman’s criticisms of Modern Monetary Theory miss the mark almost entirely and he makes frequent category errors, too charitably ascribing to ignorance positions that are mercenary at best and motivated by pure evil in other cases.

Still, it’s not every Nobel Prize winning professor who gives away his lectures for free.

The big business news that hit the “airways” yesterday was the announcement that AT&T’s plan to gobble up T-Mobile for a mere $39 billion which would create the largest wireless carrier in the US and leave just three major cellular companies in the country: AT&T, Verizon and the much smaller Sprint Nextel. Hold on, was I dreaming, or did we taxpayers spent a fortune of are hard earned tax dollars to break-up AT&T? Are those ten years of litigation and the consequent pain in the royal tuchas for consumers that it created a mere practical joke?

The deal still must pass muster with the from both the Justice Department and the Federal Communications Commission. as has been pointed out in the NYT:

Unlike the merger of Comcast and NBC Universal, which consolidated a transmission company and a content provider, the proposed AT&T and T-Mobile deal is a “horizontal merger” that would combine two companies that had been direct competitors.

As part of their assessment, antitrust lawyers must determine whether the deal might undermine efforts to encourage broadband service competition between wireless and landline providers. AT&T and Verizon both control a major segment of the landline market, so by allowing them to dominate wireless services as well, the merger could effectively hurt competition for broadband delivery options.

All in all, the consumer is the one who bears the brunt of these mega-mergers with increased rates and diminished service. Remember AT&T’s penchant for hidden charges?

How about jobs? What happens to all those T-Mobile employees? The newly merged company would save $3 billion a year with the expected  closing of hundreds of retail outlets in areas where they overlap, as well as the elimination of overlapping back office, technical and call center staff.

Everything old is new again.