Here's my Top 10 links from around the Internet at 10 am today in association with NZ Mint.
As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
See all previous Top 10s here.
My must read today is #3 on the end of growth by Satyajit Das.
1. The basic problem - The latest round of figures showing what is happening in real economies -- as opposed to stock, bond and property markets -- show they're struggling to get going despite all the stimulus that has been pumped in.
Everyone is racking their brains to try to work out why the engine isn't firing. Why isn't the 'wealth effect' not translating into consumer demand?
Why aren't cashed up companies investing heavily in new production, jobs and wages? Why aren't consumers spending their perceived capital gains on actual stuff and services.
Can the structural issues of ageing populations, weak middle class incomes and high household debt be solved with yet more money printing?
Here's former US Labor Secretary Robert Reich with his take, which I agree with:
We’re now witnessing what happens when all of the economic gains go to the top, and the rest of the population doesn’t have enough purchasing power to keep the economy going.
Four years into a so-called recovery and we’re still below recession levels in every important respect except the stock market. A measly 88,000 jobs were created in March, and total employment remains some 3 million below its pre-recession level. Labor-force participation is its lowest since 1979.
Businesses won’t hire and expand unless they have more customers, but most Americans can’t spend more. Last Friday’s retail sales report showed sales down .4 percent in March. Consumer sentiment has fallen to its lowest level in nine months.
The underlying problem is the vast middle class is running out of money. They can’t borrow more — and shouldn’t, given what happened after the last borrowing binge.
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2. And the solution? - Here's Reich again with his ideas on how to get those middle classes spending again. A couple of the solutions look suspiciously like interest free student loans and Working For Families, which I'm not thrilled about.
Widening inequality is not inevitable. If we wanted to reverse it and restore middle-class prosperity, we could.
We could award tax cuts to companies that link the pay of their hourly workers to profits and productivity, and that keep the total pay of their top 5 executives within 20 times the pay of their median worker. And impose higher taxes on companies that don’t. We could raise the minimum wage to half the average wage.
We could increase public investment in education, including early-childhood. We could eliminate college loans and allow all students to repay the cost of their higher education with a 10 percent surcharge on the first 10 years of income from full-time employment. We could expand the Earned Income Tax Credit.
And we could pay for all this by adding additional tax brackets at the top and increasing the top marginal tax rate to what it was before 1981 – at least 70 percent.
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3. The end of growth? - Satyajit Das also muses here at Economonitor on the decoupling we're now seeing between asset prices and the real economy.
Driven by massive monetary stimulus from central banks, the performance of financial markets, especially stocks, have decoupled from that of a moribund real economy. Financiers assume that the strong rise in equity markets anticipates a strong economic recovery. However, there are fundamental reasons why the world may be entering a period of low or no growth. If that turns out to be the case, then the optimism of financial markets may prove premature.
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4. And here's how to fix it - Das goes on to suggest some solutions.
A return to economic growth requires a return to real engineering rather than reliance on financial engineering. It must reverse the trend to a state where the real economy simply supports trading and investment in claims on underlying resources.
Traditional growth relies on increasing population, sustainable and affordable resources, new markets as well as improved productivity and innovation.
While global population is increasing, much of the growth is in poorer nations. The population in more affluent developed nations is shrinking, with birth rates falling below replacement levels. In many nations, the working age population is declining as the generation born immediately after World War 2 reaches retirement age. However, with increased life expectancy, the size of this aged group creates demand for health and retirement income which must be supported by a dwindling number of workers. In developed countries, the aging population will constrain growth.
5. The end of a European era - The word on the street in Europe is that the powers-that-be who have spent the last three years preaching austerity are now realising the political will to support it has gone. Here's EU Commission President Barroso admitting the inevitable. The growth figures overnight suggest the jury is back in. The austerity expansionism didn't work.
With budget cuts blamed for a second straight year of recession, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.
"While I think this policy is fundamentally right, I think it has reached its limits," he told a conference. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."
6. The death of expansionary austerity - L Randall Wray talks here about the death of the idea that goverments could be austere and drive growth at the same time. It might have worked if households and companies were leveraging up at the same time. When they do it at the same time you get a recession or worse. That's what is happening in Europe.
Q: Why did so many economists and politicians believe in the first place in expansionary austerity which is causing human suffering without an end in Europe today?
A: They wanted to believe it. It fit with their neoliberal ideology. Of course, this happens all the time. They should now be embarrassed. There is no such thing as expansion through fiscal austerity. It has never worked; there is no evidence to support the theory. I do believe that in some cases countries can still grow IN SPITE OF fiscal austerity. But they do not grow BECAUSE OF fiscal austerity. And, finally, R&R have not shown that high debt ratios by sovereign governments that issue debt in their own currency lead to fiscal crises. There isn’t evidence in support of this neoliberal belief, and everyone should be skeptical of the claims of deficit hysterians.
7. And here's how to fix it - Wray has a few ideas involving the government spending a lot of money on job creation.
Q: What is the single most effective tool to support aggregate demand and tackle the mass unemployment in a depressed economy?A: As Yeva and I argued in another piece (http://www.levyinstitute.org/pubs/ppb_111.pdf), in a depressed economy, you need fiscal expansion. By that I do not necessarily mean “priming the pump”—generalized spending. I think it is much better to aim the spending where it is most needed, and that usually means more jobs. Hence, I favor spending directly on job creation.
Here’s the problem. You do need fiscal policy space to engage in stimulus. Countries with their own floating currency have that space, so they can always choose to spend more to stimulate demand. Countries that peg to gold or other currencies may not have the space. And unfortunately, European countries that dropped their own currencies in order to adopt the foreign Euro currency do not individually have the policy space. So for the EMU, the fiscal expansion can only come from the center. And that is the big problem that has not been resolved. To make matters worse, the Troika still believes in expansionary austerity—a non sequitur. And so they will continue to impose austerity and suffering on the population.
The United States is an unequal society. According to the Congressional Budget Office, the top 20 percent get about half the nation’s income, compared to the 5 percent of all income shared among the bottom fifth of households. The top 10 percent of the population controls about 70 percent of the wealth. Among rich countries, America’s inequality is certainly extreme. But the world as a whole is an incredibly unequal place. Norway—held up as a model of equality—still sees the bottom fifth of households with incomes less than a third (PDF) those of the top fifth.
Why is there such inequality? The choices we make as individuals can put us considerably above or below our peer average in terms of income or happiness or status. But our peer average itself is set by forces beyond our control—factors such as to whom we were born. And our peer average explains our relative standing against national averages far more than our own choices.
Take the importance of family. In the U.S., about 50 percent of variation of wealth and about 35 percent to 43 percent of variation in income of children can be explained by the relative wealth and income (PDF) of their parents, suggest economists Samuel Bowles and Herbert Gintis. One reason for this tight relationship is that parents who were educated are far more likely to educate their own kids.
9. Paying people to invest - Bloomberg reports on how investment banks pay up front to encourage investors in Asia to buy US$ bonds. Sigh. 1% returns. No wonder foreigners are flooding cash into New Zealand with its outrageously high returns of over 4% pseudo-guaranteed in term deposit accounts here.
Borrowers in Asia have stepped up the use of rebates to get wealthy individual investors to buy their dollar-denominated bonds, underscoring weakness in the market as returns dwindle to an 18-month low.
At least 24 percent of the deals in the region last quarter provided a monetary incentive for private banks whose clients bought the offerings, more than double the same period of 2011, according to FIL Ltd., a global fund manager known as Fidelity Worldwide Investment that oversees $248.2 billion. While the practice is legal, it’s only common in Asia, lawyers say.
The sweeteners helped push dollar offerings in the region to a record $44.9 billion last quarter, according to data compiled by Bloomberg, even as returns slowed to about 1 percent, the least since the three months ended September 2011 as measured by Bank of America Merrill Lynch indexes. Citigroup Inc. and Barclays Plc predict demand will continue to wane.
10. Totally Jon Stewart on CNN's Boston bombing performance.
23 Comments
#1 Good quote. "We’re now witnessing what happens when all of the economic gains go to the top, and the rest of the population doesn’t have enough purchasing power to keep the economy going."
Makes me think of a situation where electricity prices are kept at an artificial high by government policy, perhaps twice what they would be, with resultant share prices twice what they should be. The middle class and small businesses paying over the top to keep big business and the financial services sector artifically afloat.
Now let me think where that was.
#8 - At our 'elite' boarding school in the USA, we scholarship students called them 'the Lucky Sperm Club.'
Texas alums such as James Baker, the Hunt Brothers, the Hutchinsons, then the NYers: Toppings, Tones, Trumps, etc. But some, such as Oliver Stone, overcame that.
Re austerity, many European economies pre-GFC growth was fueled by debt, the powers that be are right to say they should pay down this debt by cutting spending. Yes, this is a slow and painful process, a bit like a hangover, but it must be done because you can't just keep borrowing and you can't expect that your economy will remain at the same level without the debt. To use the hangover analogy it's like waking up with a hangover and 'curing' it by drinking alcohol again; your hang over will be twice as bad when you are eventually are forced to stop drinking.
They just have to suck it up, there is no quick fix.
lets ignore some really good economic theory that has had real world proof
How many oxymorons can you get into one sentence?
Economic theory needs to be thrown out the window and we need to start applying laws of nature to human existance if we want to have any hope for the future.
Its really amazing actually how far from its roots this argument has shifted. I found this interesting article on Mises.org recently discussing the question, was Keynes a Classical Liberal, and I think its accurate.
The conclusion (as I read it) is that he was a Classical Liberal in every sense but one, he obviously doesn't fit because he didn't have the appropriate religion, he was willing to turn away from the position that Markets were self correcting if it wasn't scientifically justified.
this renowned economist "would have us believe that the Mercantilists were right and their Classical critics were wrong"
Amusingly the next sentence reads,
Hutt was writing from the viewpoint of economic science.
Or the next paragraph,
According to his supporters and himself, Keynes's turn to neomercantilism was necessitated by his discovery of fundamental flaws in classic economics. The classical theory, the claim goes, proved impotent to explain the causes of either Britain's chronic high unemployment in the 1920s or the Great Depression, whereas in the General Theory Keynes did both. He accomplished this feat by exposing the inherent gross defects of the undirected market economy, thereby effecting a "revolution" in economic thought.
By todays standards Hayek would be called a socialist probably, e.g from the Road to Serfdom,
Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance - where, in short, we deal with genuinely insurable risks - the case for the state's helping to organize a comprehensive system of social insurance is very strong... Wherever comunal action can mitigate disasters against which the individual can neither attempt to guard himself nor make the provision for the consequences, such communal action should undoubtedly be taken.
I think that's clearly a statement about providing a decent level of public health care, notice this position is to the far left of both US political parties at present, and probably to the left of both parties in New Zealand as well. Its also to the far left of anything you will get from the so-called followers of Hayek though.
As Hayek points out, there are some events which are so problematic that having a provision to mitigate their impact doesn't provide any incentive to encourage these events. eg nobody wants to get sick, no matter how cheap the treatment of the illness might be to them.
#3-4 Stunning piece. Globally, we're having this conversation without the politicians.
Somebody :) should put the Energy Minister on the spot. Labour too. Both lots have their hacks here, waffling on about how sustainability involves an endless surplus, or how the power of the human brain will somehow pull us through.
Somebody - and I'll do it if senior Journo's continue to be missing in action much longer - has to challenge our 'pollies, that these are non-truths. Lies, not to put too fine a point on it. We can debate whether they are lying to themselves, or knowingly - I suspect a mix - but that's what it is, at this point.
The change, of course, is happening from the bottom up, while our conventional media - my local rag has 'truth' in it's mission statement! - do a good impression of turning a blind eye.
They who will inherit the earth - not that you'd envy them.
Austerity is a Consequence, Not a Punishment.
Austerity has come to have a rather bad name of late. The complaint is that it just doesn’t work. Which is somewhat like complaining that the roof is leaking because someone else hassn’t fixed it. If by “working” we mean that austerity is supposed to produce growth, then of course it doesn’t work. By definition, austerity means you are reducing a fiscal deficit, and doing so will reduce growth in the short term. That begs the question, why would you want to do that? Don’t we want growth? Let’s look at why a country might need to endure austerity.
“Austerity” is now the name we give to the situation where a government has to limit its spending during an economic downturn or recession. The governments of the developed world amassed huge sovereign debts in the course of what is known as the Debt Supercycle. As interest rates fell, borrowing to finance consumption and spending became easy. But now that decades-long supercycle has ended.
Austerity is a consequence, not a punishment. A country loses access to cheap borrowed money as a consequence of running up too much debt and losing the confidence of lenders that the debt can be repaid. Lenders don’t sit around in clubs and discuss how to “punish” a country by requiring austerity; they simply decide not to lend. Austerity is a result of a country’s trying to entice lenders into believing that the country will change and make an effort to restore confidence.
The US is also approaching an uncomfortably high debt level. It was less than ten years ago that I was writing about what the US investment market would look like with no government debt. Yes, that possibility now seems a distant memory, but we were paying down the US debt that fast. And then came the Iraq war and larger deficits and a Republican Congress that got drunk on spending increases. Cheney told them that deficits don’t matter, and they took it to heart. They doubled down on debt.
If the US had entered the 2008 crisis with little or no debt, we could have spent that $1 trillion a year (or even several trillion and made Krugman and McCulley ecstatic), and no one would have really cared, from a total debt perspective. (We would have cared what the money was spent on). But we didn’t. We squandered our surplus with new programs and spending. We borrowed and consumed. We wasted the good times by running up even more debt. And now we are close to paying a price.
Any Government who gets into bed with big business and/or provides heaps of funding to lower income earners is going to struggle from the situation when the proverbial hits the fan and it doesn't have to be a GFC event that causes the problems.
SME's cannot sustain the economy when Governments continue to place an unreasonable burdon on their shoulders. Free up SME''s from the burdon that has been placed on them and then watch the changes that will occur.
Governments and their Agencies should never have the right to compete against and unfairly penalise SME's. No Government or its Agencies should be in bed with Big Business. Government cannot both be a Regulator and a business Partner.
Middle Class is not spending as they have either dropped in the ranks or they are trying to position themselves more favourably.
Wow, this paragraphs manages to completely contradict recorded facts, like what the interest rates are and were!
Using interest.co.nz data, we notice that the NZ government bond rates all peak prior to 2008, that's only a direct contradiction to what was written
http://www.interest.co.nz/charts/interest-rates/government-bond-rates
Recent peaks,
1 years: 9.81% 31-Aug 2007
2 years: 7.82% 31-July 2007
5 years: 7.42% 25-July 2007
10 years: 6.89% 18-July 2007
Then we observe a pretty staggering plunge in the government bond rates, and a series of recent lows.
Recent troughs,
1 years: 2.55% 25-May 2012
2 years: 2.10% 5-June 2012
5 years: 2.63% 5-June 2012
10 years: 3.22% 25-July 2012
Looks like Austerity is the wrong policy for NZ then (by the paragraphs own statements that is). The question at this point is why is this relevant then?
Hopefully the person who posted this message uses the same logic with their children,
Your grounded, that's a consequence, go to your room, that's not a punishment, its a consequence, nothing I can do about it, I am not telling you your grounded, its a consequence, now go to your room!
Maybe the appropriate response to this comment is for interest to silently censor the comment, without acknowledging why it was censored, or that it was censored, after all its a consequence not a punishment. Nothing interest can do about it, they just had to censor it, so they can't explain why it had to be censored, its a consequence not a punishment!
It appears the original article is takling about the US, well let's compare the US rates,
Recent peaks, all prior to 2008,
1 years: 5.10% 13-Feb 2007
2 years: 5.10% 14-Jun 2007
5 years: 5.18% 12-Jun 2007
10 years: 5.26% 12-Jun 2007
Recent troughs, all post 2008
1 years: 0.10% 13-Jan 2012
2 years: 0.21% 17-Jan 2012
5 years: 0.73% 14-May 2012
10 years: 1.50% 7-Dec 2012
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/
Oh dear, it appears that the original article was entirely a work of fiction!
In future 'meh' might be a little more careful than presenting works of fiction as fact. Seems the US governments credit is good! and improved since the funancial crisis, in the eyes of the bond market!
Well at least the bond markets appraisal of austerity is clear! Austerity is, probably the most stupid thing to do to your depressed economy, either its pointless or counter-productive!
#1 Not really a mystery if you know your 18th C history and understand what a miracle - albeit fragile miracle - the modern economy is.
There was no market economy or growth or increased living standards until a delicate dance was done to (i) manufacture something everyone needed to buy from someone else (woollen goods as it turned out) and (ii) get money into the hands of the working class to pay for these goods. Break that delicate exchange by, for instance, taking money out of the hands of working people and pre-modern serfdom is the default option waiting for most of us.
Given that my 1970's high school economics textbook laid this out very clearly the only mystery is why supposedly professional economists claim they can't understand what's going on today.
"The euro has a “limited chance of survival” and may only endure another five years, Kai Konrad, one of the German government’s closest economic advisers, has claimed".
http://www.telegraph.co.uk/finance/financialcrisis/10015593/Euro-may-only-last-five-years-says-senior-German-government-advisor.html
Pause here...ask yourself what the shockwaves will look like!
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