Euro zone may struggle with its own Lost Decade
Additional Reporting by Andy Bruce and polling by Rahul Karunakar and Sumanta Dey.
As Europe’s crisis drags on, the prospect of a Japanese-style lost decade of economic malaise is becoming increasingly real, according to a new poll. Half of the bond strategists and economists surveyed by Reuters are now expecting just such an outcome.
Many market participants have dismissed the fall of two-year German bond yields below their Japanese counterparts as being merely a result of a crisis-fueled flight to quality bid. Two-year German yields are now close to zero, offering returns of only 0.02 percent. By contrast, equivalent Japanese bonds are yielding 0.11 percent.
But a significant portion of analysts in a Reuters poll see something more sinister in the rapid narrowing of the premium investors require to hold German debt over Japanese bonds. One half of those polled – 12 out of 24 – said it is likely the euro zone is close to entering a period of prolonged low or no growth and inflation and low interest rates, with the other half saying it was unlikely.
According to Stephen Lewis, chief economist at Monument Securities:
I don’t really see an early end to the financial crisis in the euro zone. I think it’s very unlikely that Germany and the other countries will see eye to eye in the course of this year. That’s going to keep the euro zone economy looking very weak for the next several quarters.
Europe’s economy stagnated in the first quarter of 2012 and is expected to shrink 0.4 percent this year, according to another recent Reuters poll. Data on Thursday certainly pointed in that direction, suggesting even wealthier countries like France and Germany are also starting to feel the pinch.
Manifest currency? U.S. dollar’s global dominance not set in stone
Incumbency, it is often said, confers many advantages.
Sitting U.S. presidents certainly have reaped its benefits – in the past 80 years, only three have been unseated.
Most economists believe the same benefits apply to reserve currencies. Yes, the U.S. dollar may one day be supplanted as the leading international currency, the thinking goes, but that day is many decades away.
Then again, maybe not.
A new working paper from the National Bureau of Economic Research that looks more closely at the dollar’s own rise to the top in the 20th century suggests, among other things, that “the advantages of incumbency are not all they are cracked up to be.”
By looking at the currency denomination of foreign public debt issued by 33 countries from 1914 to 1946, the authors – University of California-Berkeley professor Barry Eichengreen and Livia Chitu and Arnaud Mehl of the European Central Bank – find that dollar-denominated bonds were nearly equal to those priced in sterling by the late 1920s. That’s about two decades earlier than the date assumed by previous scholars.
When stripping out Commonwealth countries that had strong commercial and political links with Britain, the dollar overtook sterling in 1929.
It seems unlikely any other nation of the world would want to have it’s currency and people abused as much as the dollar is, in our current status as reserve currency. Name one country that could withstand that kind of abuse, and survive, or benefit? None.
Asian Americans hit hardest by long-term unemployment
Asian Americans have the highest rate of long-term joblessness of any ethnicity in the United States, according to a report from the Economic Policy Institute, a liberal think tank in Washington.
Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010. In both of these years, the Asian American share slightly exceeded the African American share.
Federal Reserve Chairman Ben Bernanke and other central bank officials have argued long-term unemployment is an enormous challenge, but have been reluctant to apply additional monetary stimulus to the problem. In March, Bernanke said:
Although most spells of unemployment are disruptive or costly, the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning.
In QE3 waltz, Fed again steps toward easing
On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.
Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.
According to the minutes:
Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.
To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:
Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.
Writes Mulraine:
Last week, the Brits reached the same conclusion I did a year ago: that we’ve reached the point of diminishing returns with QE. The pain from QE-motivated inflation is as damaging as the benefit from stocks rising (wealth effect?)
Hence: There should not be a QE3.
What happens when Operation Twist ends in June 2012? Will Ben launch QE3 during this year’s Jackson Hole conference? I sincerely hope not.
In this country, the central bank (The Federal Reserve) has a dual mandate (since 1978):
full employment
stable prices (read as low inflation)
That’s a short list. Conspicuously absent from that list is a mandate to:
-encourage speculation,
-drive the stock market higher,
-punish investors reliant upon income or that are otherwise unwilling to place a large portion of their life savings in the Vegas-like machine that is the US stock market,
- foment international unrest from a drop in value of the US dollar.
It is true that QE1 played a very significant role in stopping an economic collapse in 2009, and that it spurred another sugar-rush unsustainable stock market rally (is that what prosperity is?). But there was no free lunch. QE1 managed to reverse the deflationary forces taking hold of the economy, but it also significantly debased the value of the US dollar. This in turn meant the most significant export of the United States became inflation.
QE2 took over where QE1 left off:
-another risk-on unsustainable purely speculative stock market rally,
-high quality bonds lost value again (penalizing those that were defensive and conservative),
-interest rates rose on consumer loans and mortgages,
-food and fuel inflation spiked in the US and globally. In no small part, QE2 helped induce the “Arab Spring”.
Launching QE3 might provide yet another sugar-rush stock market rally (though probably smaller). But whatever the perceived gain might be, it would be counter-balanced by the detrimental effects of heightened food and fuel inflation, and higher interest rates courtesy of foreign buyers of US Treasury bonds balking at our printing press efforts. Surely the point of diminishing returns was reached with QE2.
Conventional monetary policy tools seem to have worked in rectifying previous recessions. A case could potentially be made to launch QE3 if it were obvious we were in a classic business cycle recession and that one more dose of monetary steroids might cure the ailment (not merely mask the symptoms). But it is clear we were not (2007-2009) and are not now in a business cycle recession. Rather, we have been and are in a much more challenging type of recession: a balance sheet recession. The best that can be hoped from monetary policy tools in a balance sheet recession is they act as an expensive snooze button. The systemic economic issues don’t go away. They merely wait to be addressed. But the cost of the most recent monetary policy tools (QE1 & QE2) are such that they’ve added to the systemic problem by increasing our public debt. It turns out you can’t solve a debt problem with more debt.
Let’s briefly look at what joint myopic monetary and fiscal policy intrusion has delivered over the past 12 years:
A recession in year 2000. 18 years of overspending and irresponsible myopic fiscal policy was beginning to take a toll. Arguably, we should have taken our medicine then. But no. Monetary and fiscal steroids were the prescription. The S&P500 lost 47% as demand collapsed. The Fed dropped short term rates to 1% in response. The US Congress & White House gave us unfunded tax cuts for a decade and introduced a massive new unfunded healthcare liability (medicare part D). The result was predictable: an artificial bubble in risk and leveraged assets (the stock market, the housing market). A colossal mis-allocation of resources and waste of several years. The problem was made larger and delayed for someone else to deal with (kick the can).
A recession recurred in 2008-2009 when the eventual housing and stock market bubble burst. The S&P500 lost 57%. This time it took 0% interest rates, QE1, QE2, $ Trillions in US bailouts and Keynesian fiscal policy stimulus (spending beyond our means), and a stream of sovereign bailouts in Europe that remains unresolved. The snooze button again.
Another US recession will likely begin in mid 2012 (June?). Early 2012 sees the S&P500 all the way back up to where it was 12 – 13 years ago. Worse, there is a very good chance stock markets will fall through the March 2009 lows. Why shouldn’t they ? Are the economic prospects that much better than they were 4 years ago?
There should not be a QE3 or any other monetary policy intrusion. Our three decade debt binge needs to be worked off. This position necessarily means the US and most world economies will head into the worst recession since the 1930s. But more monetary policy tricks will only add to the problem.
The last time we saw a balance sheet recession was the 1930s. We know what came next: WWII. Let us try to avoid the same mistakes. Ben, avoiding WWIII may not be part of the Fed’s mandate. But it should be.
Jobs or inflation — Is the Fed distracted?
The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.
The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.
But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.
“Is it a problem?” asked Minnesotan Keith Ellison. “To the degree that we have problems with monetary policy, is the dual mandate the cause?”
Ellison said that far from distracting the Fed, the lofty 8.1 percent unemployment rate should get greater attention. “This is a national disgrace,” he said.
Ron Paul, a presidential candidate who chairs a subcommittee on domestic monetary policy, held a hearing to discuss several pieces of legislation changing the Fed’s mandate. Two of these would limit the Fed’s focus to price stability.
With partisan divisions and other priorities, Congress is unlikely to make any changes to the Fed’s mandate this year. But the effort could gain momentum if Republicans control both houses of Congress after November.
The Feds don’t control credit unions, that’s why I moved my money. That and the fact that they actually pay you interest on your savings!
The U.S. productivity farce
Economists don’t agree on much but they do tend to converge on one idea – productivity improvements are the key to long-term prosperity. Except that who benefits from productivity increases matters as much as the efficiency gains themselves, according to two reports from the liberal Economic Policy Institute in Washington.
The first finds that rising income inequality in the United States means that the benefits of better productivity are accruing mainly to the very wealthy. The EPI offers this startling nugget of data as basic food for thought: U.S. productivity grew 80.4 percent from 1973 to 2011, while average hourly compensation rose just 39.2 percent in the same period, and median compensation, which excludes outliers, gained a paltry 10.7 percent.
Writes Lawrence Mishel, EPI president and author of the reports:
Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth.
John Tasini, a labor activist who made an unsuccessful bid for the U.S. Senate in 2006, puts the disparity in perspective by calculating what the minimum wage would be if its rise had kept up with productivity growth, as it did before the mid-1970s.
The minimum wage today, if it reflected productivity gains over the last 30 years, should be between $19-$20 an hour. Raising the minimum wage, then, to $8.50 an hour seems like a big deal – except when you understand that it hides the vast robbery that has taken place of the past 30 years and it certainly will not make it possible for people to live with dignity and respect.
As a grocery store cashier for Stop and Shop, I make a little over minimum wage. My salary is $8.30 an hour and for the amount of work that I do, I feel that I am underpaid. It is back braking work where you are on your feet for hours per shift. You are constantly asked to do more than your job requires. If you work a six hour shift, you ONLY get a 15 minute break. There have been times where I have worked over 7 hours and have ONLY gotten a 15 minute break. Our store does over a million in sales per week and I would love it if they were to up our salaries.
Mary MacElveen
China bear Pettis says world coming around to his view
Few mainstream economists have been quite as downbeat on China as Peking University professor and noted China watcher Michael Pettis. Pettis has long held that the world’s No. 2 economy will grow at a maximum of 3.5 percent a year for the rest of the decade, well below a consensus call that appears to have settled into the 5-7 percent range. “And honestly, I think if I’m wrong, it will be to the downside rather than the upside,” he told Reuters.
Lately, though, Pettis says that many people inside China and in some of the countries whose fortunes are tightly tied to its economy are starting to come around to his point of view. At a recent lunch with visiting European Union officials, Pettis said the mood among the attending Chinese economists, academics, think-tankers and policy advisors was universally gloomy. “I’m used to being the most pessimistic guy in the room, but in this case, they were much worse than I.”
Pettis says that’s because the Chinese understand, far better than the average Western investor or economist, just how tough it’s going to be to rebalance from investment to consumption and shift wealth from the state to Chinese households.
There are many ways China can rebalance, but none is without difficulty. A steady, gradual rise in the exchange rate, interest rates and wages would help enrich households and wean exporters off their generous state subsidies but could also stoke inflation. Moving more swiftly could sink the economy as exporters go out of business and people lose their jobs.
Mass privatization, Pettis said, would help revitalize the economy but would likely face stiff political resistance.
How about having the state take over private sector debt, keeping companies humming along and people employed? Pettis points to Japan, which followed that route in the 1990s and today faces a crushing public debt burden at 200 percent of GDP.
When people ask me if China will have a hard landing or a soft landing, I find that whole discussion useless. What I think we’ll have is a long, bumpy landing. If growth rates slow too much, they will step on the credit accelerator. But then they’ll get the wrong kind of growth and they’ll apply constraints to slow it down again. So my guess is we’ll get this very jagged growth, with the peaks lower each time and the troughs lower each time. I don’t expect it to be a straight line.
Dr. Doom goes to Beverly Hills
When it comes to predicting a dark future, Nouriel Roubini – the NYU economist who earned the moniker Dr. Doom after he correctly predicted the financial crisis – is not about to let anyone get in his way.
Even if it’s his host. And even, or maybe especially, when there are 500 witnesses.
That’s precisely what happened Wednesday morning, when Michael Milken – the former junk-bond king – shared the stage with Roubini at Milken’s Global Conference. What was billed as an interview in one of the Beverly Hilton’s grand ballrooms had the feel of a pitched battle.
Roubini warned of a massive oil shock following a potential clash between Iran and Israel – or possibly the United States, sometime after the November presidential elections. He talked about geopolitical instability in the Middle East. “It’s a mess,” he said.
Milken countered with a graph showing the U.S. has bigger fossil fuel reserves than any other country in the world, and suggested that natural gas, extracted from shale reserves that are largely outside the Middle East, will eventually make Arab clashes irrelevant to energy.
Roubini: “I think people are a bit too optimistic about how fast the shale revolution is going to occur…. I think people believe that in five years from now we are going to be energy independent – I think they are deluding themselves… I think it’s more like a 10-20 year process.”
Milken: “I think I want to answer that with leadership.”
This is a fight between bubble economies and non-bubble economies. When the top marginal income tax is high, say 74% under LBJ/Nixon/Ford/Carter, bubbles are unlikely; the OPEC blockade was external. Otherwise, you get bubbles in defense in the 80s or dot-coms in the 90s or housing in the 00s. Milikien’s 80s fortune was from his junk-bond business that earned $500M/year, easily double that in 2012 dollars. Maybe if Stephanie/Thom/Randi were allowed to compete with Beck/Rush/Hannity on the radio this would be common knowledge.
Ferguson’s fury: Harvard historian decries female welfare recipients
Another panel, another group of rich guys talking about income inequality in America.
That seemed to be a running theme of the Milken Global Conference by the time Tuesday afternoon rolled around in Los Angeles – particularly when the well-known and notably tart Harvard historian Niall Ferguson took to the stage to decry single welfare moms as lazy drags on society.
Ferguson was responding to comments made by Jeff Greene, the billionaire real estate investor and Democrat who lost (badly) a 2010 bid to represent Florida in the Senate.
Greene recalled a single mother with five children he met on the campaign trail. She was fat (“over 300 lbs”) and depended on a welfare check of just over $600 to put food on the table for her kids, once numbering five. But one kid died in a gang fight, another was locked up and two others were involved in gangs and the drug trade, Greene recalled.
“She could barely take care of herself, much less her kids,” he said, resigned to the idea that this unnamed woman would never work or even attempt to work, much less wean herself off welfare.
While Greene was busy commenting on how society needed to change for the sake of those kids and other members of the future workforce, Ferguson cut him short.
Why, he wondered, was Greene letting this lady off the hook? Why doesn’t she get up off her fat lazy butt and get a job?!, he demanded, with his Scottish brogue in full Braveheart mode.
Ferguson has a bit of an identity crisis. First he names two of his books/TV programs after Clarke and Bronowski, so we’re all under no mistake as to who he wants to be twinned with. Second, he omits that he was the recipient of much welfare through his university…where all fees were paid for by the state to those in need (aka welfare).
Europe in recession – an interactive map
Spain has become the latest European country to slip into recession joining the Belgium, Cyprus, The Czech Republic, Denmark, Greece, Italy, The Netherlands, Ireland, Portugal, Slovenia and the United Kingdom.
Click here to view an interactive map.
*Updated to include Romania and Bulgaria
Thanks for comments – Will update with Romania and Bulgaria
