Wednesday, July 21, 2010

Ron Paul - The State of US Coins and Currency 20th July, 2010



Ron Paul questioning US Mint on Planchett's and their lack of supply as an excuse for not minting proof eagles in 2009.

Monday, July 19, 2010

With the US trapped in depression, this really is starting to feel like 1932 Economics Theory


"Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing," he said.

California is tightening faster than Greece. State workers have seen a 14pc fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19bn (£15bn) deficit.

Can Illinois be far behind? The state has a deficit of $12bn and is $5bn in arrears to schools, nursing homes, child care centres, and prisons. "It is getting worse every single day," said state comptroller Daniel Hynes. "We are not paying bills for absolutely essential services. That is obscene."

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.

Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weniger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m."

Republicans on Capitol Hill are filibustering a bill to extend the dole for up to 1.2m jobless facing an imminent cut-off. Dean Heller from Nevada called them "hobos". This really is starting to feel like 1932.

Washington's fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.

The housing market is already crumbling as government props are pulled away. The expiry of homebuyers' tax credit led to a 30pc fall in the number of buyers signing contracts in May. "It is cataclysmic," said David Bloom from HSBC.

Federal tax rises are automatically baked into the pie. The Congressional Budget Office said fiscal policy will swing from
a net +2pc of GDP to -2pc by late 2011. The states and counties may have to cut as much as $180bn.

Investors are starting to chew over the awful possibility that America's recovery will stall just as Asia hits the buffers. China's manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.

On Friday, Jacques Cailloux from RBS put out a "double-dip alert" for Europe. "The risk is rising fast. Absent an effective policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011," he said.

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2.

Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

View Source

Saturday, July 17, 2010

Can Malaysia's Islamic gold dinar thwart capitalism? Economics Theory


Muslim advocates of the dinar believe it will stop the excesses of capitalism, but it is just another avenue for exploitation

Imagine a world trading solely in gold and silver coins. Imagine the size of your wallet.

Yet this is the ideal world envisaged by some of Malaysia's activists championing the Islamic gold dinar and silver dirham as a new form of legal tender to replace paper money – a utopia that could see the light of day as early as the middle of next month.

This is when one such group, Muamalah Council, plans to implement the dinar system in Malaysia's northern state of Kelantan. If information on its website is to be believed, the council has the blessing of the state's Islamist government, Parti Islam SeMalaysia (Pas), to kickstart the dinar in three moves.


First, the state will pay a quarter of its public servants' salaries using the dinar. Second, all state companies will accept dinar payments. Lastly, some 600 commercial enterprises will also embrace this currency.


Inspired by selective religious sources and backed by historical precedents within the annals of Islamic history, the gold dinar system is touted by certain fiercely proud Muslims as the Islamic answer to thwart capitalism's woes.


The idea was first mooted by Malaysia's former prime minister, Mahathir Mohamad, in the aftermath of the 1997 Asian financial crisis. He argued that the coins would never hang their possessor out to dry in the same way that paper money had. As precious metals with intrinsic value, gold and silver are more resistant to market fluctuations and devaluation compared to the US dollar – an argument he took to the Organisation of the Islamic Conference as a tool to battle western hegemony.


Today, Islamic gold dinar advocates would cite the recent credit crunch as proof. Indeed, the rocketing price of gold – possibly transcending a record high of $2,000 an ounce – can only strengthen their pitch.


While Mahathir's grand plan for Malaysia to implement the dinar system by 2003 may have been unceremoniously scrapped by his successor, Abdullah Badawi, the idea has since gained currency beyond Malaysia's shores.


In neighbouring Indonesia, for instance, an outfit known as Wakala Induk Nusantara (WIN) had begun minting Islamic gold coins for use in Australia, Malaysia and Singapore. Its spokesman, Riki Rokhman Azis, claims that the number of dinars used in the world's most populous Muslim nation has more than doubled in 2009 to 25,000 pieces.


What is perhaps more striking is the UK connection to the increasingly globalised Islamic gold dinar movement. The Indonesian grouping is adhering to a fatwa issued by the South African-based cleric Sheikh Abdalqadir as-Sufi, a Muslim convert in Cape Town formerly known as Ian Dallas of Scotland.


Then there is Dinar Exchange, the British equivalent of Indonesia's WIN. As the "official certified supplier of Islamic gold dinar and silver dirham in the United Kingdom", the company had just concluded a month-long series of roadshows in May that saw it promoting the gold dinar to Muslims in key UK cities such as London, Birmingham and Edinburgh. The group is inviting more to spread this Islamic vision as dinar agents. For a fee, of course.


As the dinar movement gathers momentum, its propagators – which include some of the Muslim world's most polemical figures such as the Trinidad-born cleric Imran Hosein – would doubtless dismiss Antony Lerman's recent suggestion in the Guardian that no credible anti-capitalist doctrine exists today. To them, the Islamic gold dinar is perhaps mankind's best-formulated answer to beat capitalism's excesses.


Yet, as an anti-capitalist weapon, the Islamic gold dinar is far from mint.


It is motivated by politics more than benign religious values. The Kelantan example is instructive. Implementing the Islamic dinar serves as a political statement to Muslim voters that Malaysia's Islamist opposition party, Pas, is more Islamic (and hence more legitimate) compared with its competitor, the United Malays National Organisation. Even in its pristine form, the idea as it is originally propagated by Mahathir could be read as a radical attempt at power politics.


But a more serious flaw lies in its contradiction. At the heart of the dinar system can still be found the same capitalistic spirit of commodification.


It lacks the egalitarian spirit embodied in socialism's virtue of the common good. Its advocates say that the poor could never be taken advantage of because the coins they own have intrinsic value. But Britain's recent gold-rush dilemma suggests that the poor do not always get their money's worth – even when trading gold.


Like paper money, gold is also vulnerable to the manipulations of valuers, our gatekeepers of wealth. And let's be honest, how many of the poor have stacks of gold already in their possession? Gold is a precious metal precisely because it is so rare.


On a wider scale, who is to prevent gold-rich nations from banding together as a cartel to fix prices at exorbitant amounts in the same way that the oil-producing nations of OPEC did?

Or multimillion corporations from exploiting poor but gold-rich nations? This is best exemplified in the case of Pacific Rim, a Vancouver-based firm that has filed an appeal via the Central American Free Trade Agreement (Cafta) to bypass local legislation so they can mine for gold in El Salvador despite local objections. In a world mired by climate change troubles, one also needs to mind the environmental cost of gold mining – an operation that involves huge amounts of water and toxic chemicals.

The Islamic gold dinar could not thwart capitalism's excesses. It is only providing one more avenue for exploitation. For this reason alone, it will not have my buy-in.

Stocks Snap Back to Reality as Earnings Weigh


The stock market has come tumbling back to earth.

The Dow Jones Industrial Average's precipitous drop Friday has pulled blue-chips lower for the week, swiftly ending hopes that U.S. stocks were ready to rally. Stocks have lost the momentum built since hitting their lowest point of the year two weeks ago, and are now stalling just as second-quarter earnings season heats up.

The retreat comes as investors grapple with two uncomfortable prospects: lackluster corporate earnings and a cooling economy. Nowhere is that clearer than in financial stocks, which many traders use as a leading indicator for how the broader market will perform.

"People are looking at bank earnings and they are not seeing any growth," said Charles Mercer, portfolio manager of the Aston/Todd-Veredus Select Growth Fund. "They're not seeing any expansion of these banks' balance sheets that points toward any loan demand. That is one the factors that's been a scare in the market here since April."

Stocks suffered a bruising second quarter, with the Dow falling nearly 10% and the Standard & Poor's 500 giving up close to 12%, as fears of the impact of a euro zone sovereign debt crisis and the prospect of a slowing global economy swirled. The end of the second quarter also coincided with a ratcheting up of fears about a potential slowdown in the U.S. economy.

Stocks rebounded last week and early this week, as initial optimism about second-quarter earnings briefly wiped the economic concerns from the radar. But weakness in earnings from large banks -- along with more downbeat economic data -- has brought those fears roaring back.

The market's plunge came after Citigroup Inc. and Bank of America Corp. issued disappointing quarterly reports, and forecast the future will remain turbulent. Investors are also worried about how big banks will profit if their trading operations are hurt by new federal financial regulations.

Bank of America dropped over 9% in late-afternoon trading, and was the biggest decliner of the Dow's 30 components. The blue chip index, which ended down 261.03 points, or 2.5%, at 10097.97, is down 1% for the week, though it's still up 3.3% for the month.

The earnings reports startled investors who just last week were betting that earnings would come in largely better than expected. Initial reports from Alcoa and Intel seemed to support that. Investors hoped that a strong batch of earnings would overshadow any concerns about the economy -- but some of the reports have proven too difficult to ignore.

Economic data in the past week have shown that consumers are gloomy, manufacturing is slowing, and the Federal Reserve trimmed its outlook for 2010.

Other markets are flashing warning signals too. Interest rate futures markets are signaling an increasing shift in expectations that the economy could fall back into recession after a brief recovery, with the September and December Eurodollar futures contracts heading for a rare inversion. That has in the past indicated a contracting economy.

The Treasurys market continues to flag a slowdown in the economy, with the 10-year Treasury yield trading below 3% after falling there around the end of the second quarter.

In contrast with stocks, bonds are up for the week with the 10-year yield down more than 0.1 percentage point. Bond yields move inversely to prices.

In the currency markets too, the dollar has been under pressure for some time - the euro briefly breached the key $1.30 level on Friday - as concerns about the U.S. economy dominate just as investors have become less worried about the euro zone.

Source: JOE BEL BRUNO

Wednesday, July 7, 2010

Rethinking the Global Money Supply - Economics Theory


The People’s Bank of China jolted the financial world in March with a proposal for a new global monetary arrangement. The proposal initially attracted attention mostly for its signal of China’s rising global economic power, but its content also has much to commend it.

A century ago almost all the world’s currencies were linked to gold and most of the rest to silver. Currencies were readily interchangeable, gold anchored exchange rates and the physical supply of gold stabilized the money supply over the long term.

The gold standard collapsed in the wake of World War I. Wartime financing with unbacked paper currency led to widespread inflation. European nations tried to resume the gold standard in the 1920s, but the gold supply was insufficient and inelastic. A ferocious monetary squeeze and competition across countries for limited gold reserves followed and contributed to the Great Depression. After World War II, nations adopted the dollar-exchange standard. The U.S. dollar was backed by gold at $35 per ounce, while the rest of the world’s currencies were backed by dollars. The global money stock could expand through dollar reserves.

President Richard Nixon delinked the dollar from gold in 1971 (to offset the U.S.’s expansionary monetary policies in the Vietnam era), and major currencies began to float against one another in value. But most global trade and financial transactions remained dollar-denominated, as did most foreign exchange reserves held by the world’s central banks. The exchange rates of many currencies also remained tightly tied to the dollar.

This special role of the dollar in the international monetary system has contributed to the global scale of the current crisis, which is rooted in a combination of overly expansionary monetary policies by the Federal Reserve and lax financial regulations. Easy money fed an unprecedented surge in bank credits, first in the U.S. and then elsewhere, as international banks funded themselves in the U.S. money markets. As bank loans flowed into other economies, many foreign central banks intervened to maintain currency stability with the dollar. The surge in the U.S. money supply was thus matched by a surge in the money supplies of countries linked to the U.S. dollar. The result was a temporary worldwide credit bubble, followed by a wave of loan defaults, falling housing prices, banking losses and a dramatic tightening of bank lending.

China has now proposed that the world move to a more symmetrical monetary system, in which nations peg their currencies to a representative basket of others rather than to the dollar alone. The “special drawing rights” of the International Monetary Fund is such a basket of four currencies (the dollar, pound, yen and euro), although the Chinese rightly suggest that it should be rebased to reflect a broader range of them, including China’s yuan. U.S. monetary policy would accordingly lose its excessive global influence over money supplies and credit conditions. On average, the dollar should depreciate against Asian currencies to encourage more U.S. net exports to Asia. The euro should probably strengthen against the dollar but weaken against Asian currencies.

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself within minutes by underscoring that the U.S. dollar would remain the world’s reserve currency for the foreseeable future.

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly, but the changes ahead are not under the sole control of the U.S. We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

See Source Article

Tuesday, July 6, 2010

Saturday, July 3, 2010

The current economic contraction longest since 1929 Economics Theory



The current economic contraction began in December 2007 with unemployment at 5.0 percent. Joblessness climbed slowly month after month until it peaked at 10.1 percent in October 2009. Today, according to the June report from the Bureau of Labor Statistics, unemployment stands at 9.5 percent. Congress, the White House, and the media have hammered away at this near double-digit jobless rate for months in part because President Obama insisted that joblessness would not climb above 8 percent if his stimulus package were approved. Thus, most Americans including those who have not been personally touched by the economic slump are aware that the last time joblessness reached 10 percent was in the early 1980s. However, the public probably does not know that the current contraction very likely is the longest on record since the 43-month contraction in August 1929-March 1933.

The official agency that dates the business cycle in the United States is the Business Cycle Dating Committee of the National Bureau of Economic Research. Unlike many others, the Committee does not define a recession as two consecutive quarters of a decline in GDP. Instead it defines a contraction as a significant decline in economic activity across the economy that lasts more than a few months as indicated by real GDP, real income, employment, industrial production, and wholesale-retail sales. It has not yet determined the date of the trough in economic activity that identifies the end of the current contraction.

If the Committee determines that the trough came in May 2009 the current contraction would have lasted 17 months and would become the longest on record since 43-month contraction in August 1929-March 1933. Longer than the 16-month contractions in November 1973-March 1975 and July 1981-November 1982.

Since the jobless rate to date has not fallen below the May 2009 rate of 9.4 percent, Mayo Research Institute expects the Dating Committee to fix the end of the contraction sometime later in 2009, possibly October when joblessness hit 10.1 percent. An October 2009 trough would make for a contraction that lasted 22 months. What sets this contraction apart from the other 12 contractions since 1929-1933 is a combination of a very high unemployment rate and a nearly two-year duration.

Concerns about the size of the federal deficit and the public debt, the still fragile housing and commercial real estate markets, continuing bank failures, cash-laden investors shying away from shaky financial markets, sagging consumer confidence, the weakening of the euro, the future of deepwater drilling, contagion related to the sovereign crisis in Greece that may spill over to Italy, Spain, Portugal, and Ireland, already scheduled higher tax rates starting in 2011, not to mention geopolitical instability in Mideast, make for fears that any economic expansion following the current contraction will be cut short. In other words, we may be headed toward a double-dip recession.

There are two instances of double-dip recessions since the end of World War II: the April 1958 trough that was followed by an expansion phase that lasted only 24 months; the July 1980 trough followed by an even shorter 12-month expansion phase. In sharp contrast the last three expansion phases lasted 92, 120, and 73 months.

With the two double-dip recessions, tax cuts were the prescribed remedy though in the first case President Kennedy’s Keynesian economic advisers justified the cuts in the early 1960s as necessary to strengthen aggregate demand. In the second case President Reagan’s supply-side advisers, having lost confidence in Keynesian economics, argued the need in the early 1980s to bolster aggregate supply.

Is the United States headed toward a double-dip recession? NO, if the necessary market corrections already have taken place and prices across the board have declined sufficiently to clear away surpluses in labor, resource, product, and financial markets. YES, if those surpluses remain in place and further corrections are necessary.

It could be argued that the very duration of the current contraction has provided all the correction needed. But keep in mind that the huge contraction that ended in March 1933 did not provide all of the correction necessary to haul the U.S. economy out of the Great Depression. That 43-month contraction was followed by a 13-month contraction that got underway in May 1937.

Even the best economic analysts see the future as if “through a glass, darkly.” Even so, Mayo Research Institute hazards two forecasts, both based on the historical record. First, whether a double-dip recession is in our immediate future or not, we can say with considerable confidence that the jobless rate will remain high for several more years because economic history demonstrates that labor markets respond slowly to market corrections. To illustrate, it took 14 years for the August 1983 jobless rate of 9.5 percent to drop to 4.9 percent.

Second, whether there is a double-dip recession in our immediate future or not, we can say with even more confidence that there is another contraction further down the road. Leaving aside the war years of the early to mid 1940s, we experienced two contractions in the 1940s, two in the 1950s, one in the 1960s followed by another that began at the very end of the decade and extended into the next, one other in the 1970s, two in the 1980s, one in the 1990s, and two others more recently.

What we don’t know with any measure of certainty is when that contraction will take occur. Mayo Research Institute is inclined to think that next expansion phase will not run as long as the last three which averaged 8 years because all three were driven by the job-creating, entrepreneurial energy of the ICT revolution. Based on the 9 other expansions since the end of World War II, our best guess is that the coming expansion will peak in approximately 4 years. If as we suggested earlier the latest trough is dated sometime around May-October 2009, it follows that the coming expansion phase will top out sometime in 2013.

The historical record establishes clearly that economics has not yet figured out how to prevent a contraction. Further, economics is split on how best to cure a contraction with Keynesians, monetarists, supply-siders, and neoclassicals offering different remedies. At best we are able to alleviate some of its effects through programs like unemployment insurance until the slump ends and expansion sets in. Some argue, however, that by putting off the necessary market corrections alleviative measures such as extending the maximum duration of unemployment insurance benefits from 26 to 99 weeks make the contraction even worse.

View Source

So what exactly is a 'double-dip' recession? Economics Theory



Concerns are rising that the economy is at risk of slipping into a "double-dip" recession.

High unemployment, Europe's debt crisis, a slowdown in China, a teetering housing market and sinking stock prices are all weighing on a fragile U.S. recovery.

So what exactly is a double-dip recession?

Robert Hall has an idea of what one looks like but no precise definition. He's chairman of the National Bureau of Economic Research, a group of academic economists that officially declares the starts and ends of recessions.

In Hall's view, a double dip is akin to a continuous recession that's punctuated by a period of growth, then followed by a further decline in the economy.

The NBER doesn't define a double dip any more specifically than that, says Hall, an economics professor at Stanford University.

In econo-speak, Hall explains: "The idea — hypothetical because it has yet to happen — is that activity might rise for a period, but not far enough to complete a cycle, then fall again, and finally rise above its original level, only then completing the cycle."

Hall says the closest the United States has come to a double dip was in 1980 and 1981. But the NBER concluded that those were two distinct, though closely spaced, recessions — "not a double dip," he says.

Not so, says Sung Won Sohn, professor at California State University, Channel Islands. Sohn says the back-to-back recessions of the early '80s fit his definition of a double dip: A recession followed by a short period of growth followed by a recession.

Brian Bethune, economist at IHS Global Insight, has a view similar to Hall's: A period in which the economy shrinks, starts growing again and then shrinks again — for at least six months.

"There is no mathematical formula; it's a judgment call," Bethune says.

The NBER has declared the economy fell into a recession in December 2007. It hasn't yet pinpointed an end to the recession. It said in April that it would be "premature" to do so.

Many other economists say the recession ended in June or July of last year. The economy returned to growth again in the third quarter of 2009, after four straight quarters of declines. More recently, the economy has added jobs in each of the first five months of this year.

Still, the threats to the recovery from overseas and at home are growing. So are the risks that the recovery will fade out. Economists say the odds of that remain low but have crept up since a couple of months ago. Analysts are downgrading their growth forecasts for the second half of this year.

In determining the starts and stops of recessions, the NBER reviews data that make up the nation's gross domestic product. The GDP measures the value of goods and services produced in the United States. The NBER also reviews incomes, employment and industrial activity.

The panel, based in Cambridge, Mass., tends to take its time in declaring when a recession has started or ended.

It announced in December 2008 that the recession had actually started one year earlier — in December 2007.

And it declared in July 2003 that the 2001 recession was over. It had actually ended 20 months earlier — in November 2001.

In President George W. Bush's eight years in office, the United States fell into two recessions. The first started in March 2001 and ended that November. The second started in December 2007; its end date is pending the NBER's determination.

The timing of the NBER's decision likely means little to ordinary Americans now muddling through a sluggish economic recovery and weak job market.

Many will continue to struggle. Unemployment usually keeps rising well after a recession ends. After the 2001 recession, for instance, unemployment didn't peak until June 2003 — 19 months later.

View Source

Falling unemployment fails to quell US recovery fears



The US unemployment rate fell to 9.5 percent last month as more than half a million people abandoned the job hunt, fueling doubts about the economic recovery.

The Labor Department reported on Friday a net loss of 125,000 jobs last month even as unemployment fell to its lowest rate in almost a year.

The falling jobless rate -- down from 9.7 percent in May -- offered some succor to President Barack Obama, who is running out of time to put the economy firmly back on track before congressional elections in November.

"Make no mistake, we are headed in the right direction but... we are not headed there fast enough for a lot of Americans. We are not headed there fast enough for me either," Obama said.

The White House has warned that unemployment will remain high for the rest of the year, while polls show it is a crucial issue with voters.

Most analysts had expected the ranks of jobless Americans to swell well beyond 15 million in June, pushing the unemployment rate up to 9.8 percent.

In the end the number of unemployed fell to 14.6 million in June as 652,000 Americans left the job market and more than 20,000 took up temporary posts.

"The unemployment rate dropped because the labor force shrank even more rapidly as discouraged workers stopped looking for work," said analysts at Societe Generale.

The report was akin to a Rorschach test for Wall Street, with some seeing the evidence of a slow recovery and others an ominous sign of problems ahead.

The Dow Jones Industrial Average closed down 46 points, or around half a percentage point, after the news.

The biggest cause for concern had been the weakness of the private sector, which created a modest 83,000 jobs in June, well up from May's revised total of 33,000.

Faced with an uncertain outlook and poor access to credit, US firms have been reluctant to rehire workers.

The June figures also showed the evaporation of hiring for the 2010 Census, which had accounted for around 95 percent of new jobs in May. Census hiring fell back by 225,000.

Obama's Republican foes said the report was further evidence of a stalled recovery.

"Today's report reinforces that the vast majority of new jobs added to the economy over the last several months have been temporary or government jobs," said Congressman Eric Cantor.

But not everyone was so gloomy.

"Despite the slightly larger drop in payroll numbers, there were some positive signs in this report," said Jason Schenker of Prestige Economics.

"A recovery is clearly underway, although it will be a slow one for the job market," he added.

Either way the report looked unlikely to turn the page on a tortuous few months for the top 30 US companies, which lost more than 10 percent of their collective value last quarter.

The continued weakness of the private sector has sparked calls for Obama to provide more government spending to restart the recovery.

"The private sector is not yet poised to take over and sustain a robust recovery," said Heidi Shierholz of the Economic Policy Institute, a Washington-based think tank.

But proponents of such a plan admit it will be nearly impossible as Washington zeroes in on elections in which government spending is likely to feature prominently.

Congress is currently locked in a bitter debate over extending unemployment insurance for over one million workers and is likely to balk at a wider spending package.

"This is one of those cases where the political realities are completely at odds with economic sense," she said, advocating fresh stimulus of around 400 billion dollars.

"I don't know what is going on in the heads of these people, the economic case is so cut and dry, it is so clear what needs to be done."

Friday, July 2, 2010

How to fix US deficit: Stick to the law


I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts which highlight the difference between CBO’s current-law baseline, and their “alternative fiscal scenario” which is more of a “policy-extended” baseline–similar to the one the Obama Administration uses as the baseline relative to which they measure the costs (or savings) of their budget proposals.

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues. That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”–because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

So CBO is showing us we don’t have to do anything to achieve fiscally-responsible policy over the next 25 years. It’s already set by laws we’ve already passed. Congress can go home. They don’t need to pass any deficit-reducing legislation, and President Obama doesn’t have to sign it.

Well, unfortunately life is not so simple. As Ezra warns:

But current law is not likely to advance unmolested. You’ll notice, for instance, that there’s a big jump in current-law revenues next year. That’s because the Bush tax cuts are slated to expire totally. But few expect Congress to allow them to expire totally. They’re likely to preserve the bulk of the cuts, rejecting only some of the cuts that helped out the rich.

Ah, but here’s where the President’s fiscal commission can help us stick to the “simple” solution of holding onto current law. They can make it simpler to hold onto this fiscally-responsible, current-law policy over the longer run by giving their blessing to letting go of current law (only) temporarily–letting Congress and President Obama enact a (popular) tax cut to help the recovering-but-still-weak economy: an only temporary extension of the bulk of the Bush tax cuts. In exchange, the commission could require that the federal government get back on track in a couple years, recommitting to the picture above by getting back to the current-law baseline level of revenues. That doesn’t have to mean sticking to current tax law, but it does mean that any deviations from that “script” will have to be revenue-neutral. And that sounds a lot like an exercise in fundamental tax reform, which could boost the strength and sustainability of our federal revenue system even beyond the next 25 years.

In fact, this was a strategy that Bob Bixby, the Concord Coalition’s executive director (and my boss), recommended to the President’s commission today. From his written testimony:

That leaves us with tax policy. Sticking to the CBO current-law baseline on taxes, 19.7 percent of GDP, gets the budget deficit to the commission’s target. Legislatively, that represents the easiest option, as policymakers simply need to do nothing and let current law play out.

However, that does not mean current law represents the most desirable policy path to achieve the baseline level of revenues. If reverting to the pre-2001 era tax policy (with its higher marginal tax rates) at the beginning of 2011 is deemed undesirable for political reasons, or out of economic concern for raising marginal tax rates during the early stages of economic recovery, tax policy could be reformed to achieve the same revenue levels without raising marginal tax rates.

The commission might find fertile common ground on steps to improve the tax code in ways that would increase efficiency and thus increase revenues. A thorough scrubbing of the system to identify preferences that serve no compelling use or that could be altered in a resetting of priorities is long overdue.

The fact that the commission’s short-term goal is to achieve a lower deficit by 2015 and not sooner suggests a tax policy strategy that could acknowledge the concern of many economists about the dangers of “unwinding” our currently stimulative fiscal stance too quickly. The 2001 and 2003 tax cuts that President Obama has proposed to permanently extend could instead be extended only temporarily. If done for one or two years, this would be long enough not just to allow for a more solid economic recovery, but also long enough to develop a more fundamental reform of the federal tax system that could more efficiently achieve current-law revenue levels by 2015.

This would provide an opportunity to enact a tax policy that meets the commission’s 2015 goal, while earning bipartisan support, while also building a tax system capable of remaining adequate and economically efficient over the longer term — boosting our chances for economic growth and a more sustainable fiscal future.

And so, Ezra’s take-away lesson from the CBO report is (emphasis added):

Either Congress can pass and implement policies that will bring the long-term deficit under control or it can’t. Those are the only two choices here. But there’s no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them.

I’ll have some of my own analysis of the CBO long-term outlook report later this week. There have been some changes to the two baselines CBO defines, some of those changes a bit puzzling and even intriguing.

(My Concord colleague, Josh Gordon, blogged more comprehensively about the CBO report and Bob’s testimony on Concord’s Tabulation blog today. As he emphasizes, our recommendations for achieving longer-term fiscal sustainability are not just “stick with current tax law” or the “stick with the current-law revenue baseline.” The largest longer-term challenge remains health care spending. But the biggest and most reliable “2015 lever” is clearly tax policy, and no matter how great the health-reform lever eventually works decades from now, we’ll still need the tax system to support that not-so-outrageous-but-still-expensive health care system over the longer run.)

A look at global economic developments Economic Theory


A look at economic developments and activity in major stock markets around the world Thursday:

SHANGHAI — Slowing global demand and a retreat from stimulus policies led to a weakening in China's manufacturing in June for a third month.

Reports from Market Economics also indicated that manufacturing sector growth in India, South Korea, Australia and Taiwan was slowing.

In Asian markets, Japan's benchmark Nikkei 225 stock index closed down 2 percent, South Korea's Kospi index shed 0.7 percent, Australia's S&P/ASX 200 tumbled 1.5 percent and markets in Singapore, Malaysia and Taiwan also fell.

BERLIN — The European Central Bank said it is lending 111.2 billion euros ($136.7 billion) to banks in a six-day tender, completing an effort to smooth over the expiry of a record batch of loans.

The ECB said 78 banks subscribed to the operation, conducted as 442 billion euros in credit granted a year ago to support banks during the financial crisis expired.

That came after the central bank said Wednesday it would lend a lower-than-expected 131.9 billion euros to banks for three months. Neither the banks nor their nationalities were identified.

The outcome of the longer-term auction suggested that banks' cash needs are easing despite lingering worries about the impact of the eurozone debt crisis. More than 1,100 banks subscribed to last June's unusual 12-month operation.

LONDON — The industrial sector's growth cooled slightly in the 16 countries using the euro and the United Kingdom, according to manufacturing surveys.

European stocks fell. The FTSE 100 index of leading British shares closed down 2.3 percent, Germany's DAX dropped 1.8 percent and France's CAC-40 fell 3.

TOKYO — Major Japanese manufacturers, riding high from a booming Asia, haven't felt this good for a long time. Business confidence improved for a fifth straight quarter and was in positive territory for the first time in two years.

LONDON — The Bank of England says the amount of secured credit available to households increased slightly in the second quarter, but lenders say it might be more scarce in the July-September quarter.

BERLIN — A small rise in retail sales offered a hopeful sign for Germany's long-sluggish domestic demand, even as the country's economy minister mounted a robust defense of its export-heavy recipe for success.

MADRID — Spain successfully raised 3.5 billion euros ($4.3 billion) in an oversubscribed bond sale, a reassuring sign for markets a day after ratings agency Moody's warned it may join others in downgrading the country's debt.

BEIJING — A Chinese company canceled a $2.5 billion project to develop a bauxite mine in Australia, blaming difficult conditions in the global industry.

TIANJIN, China — Workers at a Japanese-owned electronics factory in the northern Chinese city of Tianjin were on strike over pay and benefits for a third day, the latest in a spate of labor disputes as an increasingly restive work force demands better conditions.

STOCKHOLM — The Swedish central bank raised its key interest rate for the first time in two years, saying the economy is recovering strongly from last year's global downturn.

The Riksbank raised the key repo rate by a quarter percentage point to 0.5 percent.

ATHENS, Greece — Prices of consumer goods and services have risen overnight in Greece, as a new sales tax hike takes effect in an effort to boost government finances.

SINGAPORE — Singapore real estate prices jumped to a record high in the second quarter as the city-state's economic recovery broadened.

NAIROBI, Kenya — Five nations in East Africa implemented new economic rules to boost cross-border employment and trade.

The new steps push forward a larger plan to integrate the economies of Burundi, Kenya, Rwanda, Tanzania and Uganda, which together form the East African Community.

View Source

China's Secret Recipe - Economics Theory


BEIJING -- China’s GDP growth this year may approach 10%. While some countries are still dealing with economic crisis or its aftermath, China’s challenge is, once again, how to manage a boom.

Thanks to decisive policy moves to preempt a housing bubble, the real-estate market has stabilized, and further corrections are expected soon. This is good news for China’s economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash.

Whether or not the housing correction will hit overall growth depends on how one defines "hit." Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11% to 9%, China will avoid economic over-heating yet still enjoy sustainable high growth. Indeed, for China, the current annualized growth rate of 37% in housing investment is very negative. Ideally, it would slow to, say, 27% this year!

China has sustained rapid economic growth for 30 years without significant fluctuations or interruption -- so far. Excluding the 1989-1990 slowdown that followed the Tiananmen crisis, average annual growth over this period was 9.45%, with a peak of 14.2% in 1994 and 2007, and a nadir of 7.6% in 1999.

While most major economies in their early stages of growth suffered crises, China’s story seems abnormal (or accidental), and has elicited periodic predictions of an "upcoming crash." All such predictions have proved wrong, but the longer the story lasts, the more people forecast a bad end.

For me, there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times.

To be sure, both economic development and institutional reforms may cause instability. Indeed, the type of central government inherited from the old planned economy, with its overstretched growth plans, causes fluctuations, and contributed significantly to instability in the early 1980s.

But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment. Local governments and state-owned enterprises do not necessarily have those concerns. They want high GDP growth, without worrying much about the macroeconomic consequences. They want to borrow as much as possible to finance ambitious investment projects, without worrying much about either repayment or inflation.

Indeed, the main cause of overheating in the early 1990s was over-borrowing by local governments. Inflation soared to 21% in 1994 -- its highest level over the past 30 years -- and a great deal of local debt ended up as non-performing loans, which amounted to 40% of total credits in the state banking sector in the mid-1990s. This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990s on local governments’ borrowing capacity.

Now, however, the so-called "animal spirits" of China’s first generation of entrepreneurs have become another source of overheating risk. The economy has been booming, income has been rising, and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor want to get rich fast. They have been successful and, so far, have not experienced bad times. So they invest and speculate fiercely without much consideration of risk.

The relatively high inflation of the early 1990s was a warning to central government policymakers about the macroeconomic risks posed by fast growth. The bubble bursts in Japan’s economy in the early 1990s, and the Southeast Asian economies later in the decade, provided a neighborly lesson to stop believing that bubbles never burst.

Since then, the central government’s policy stance has been to put brakes on the economy whenever there is a tendency toward over-heating. Stringent measures were implemented in the early 1990s to reduce the money supply and stop over-investment, thereby heading off hyperinflation.

In the recent cycle, the authorities began cooling down the economy as early as 2004, when China had just emerged from the downturn caused by the SARS scare in 2003. In late 2007, when GDP growth hit 13%, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction.

Economic theory holds that all crises are caused by bubbles or overheating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for "ironing out cycles" is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.

I am not quite sure whether all Chinese policymakers are good students of modern economics. But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing -- a lot on "de-regulation," but too little on cooling things down when the economy was booming and bubbles were forming.

The problem for the world economy is that everybody remembered Keynes’s lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone -- with no symmetric policy intervention -- during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place.

In a sense, what China has been doing seems to me to be the creation of a true "Keynesian world": more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level.

There may be other factors that could slow down or interrupt China’s growth. I only hope that policymakers’ vigilance will prevail (and be improved upon), enabling China’s high-growth story to continue for another 10, 20, or 30 years.

Fan Gang is professor of Economics at Beijing University and the Chinese Academy of Social Sciences, director of China’s National Economic Research Institute, secretary-general of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China.

www.project-syndicate.org


For a podcast of this commentary in English, please use this link:


http://media.blubrry.com/ps/media.libsyn.com/media/ps/fan16.mp3