By Andrew Baker and Peter Saunders:
There are two ways to reduce “poverty”: increase the value of welfare benefits faster than the value of wages, or move substantial numbers of people off welfare and into full-time jobs. Anti-poverty campaigners invariably emphasise the first option and neglect the second, but the first actually undermines the second……
The real solution to poverty: J-O-B-S, J-O-B-S, J-O-B-S | The Centre for Independent Studies.
Nobel Prize-winning economist, Joseph Stiglitz criticizes presidential policies on both sides. Of President Barack Obama’s financial-industry rescue plan, Stiglitz says that whomever designed it was “either in the pocket of the banks or …. incompetent.”
A few days ago I mentioned that Australia is in a housing bubble. The easiest way to gauge this is to compare Australian household debt/disposable income (DPI) to the US peak before the global financial crisis. After all, household debt is the fuel for a housing bubble.
Australia’s current ratio of 150% (or 1.5 times DPI) is higher than the US peak of 1.3 times DPI during the housing bubble. And far higher than the current US ratio of 1.1 times DPI.
No time to be complacent.
By Barry Ritholtz
The GDP data this morning was a deep sigh of relief for those people who fear a recession may be coming. I don’t have that sense of relief. Perhaps its my own bias, but the details of the GDP report reveal not an organic growth period in a healthy recovering economy, but rather a tepid post-credit crisis expansion highly dependent on government largesse and Federal Reserve accommodation…..
The Reserve Bank of Australia must be viewing the end of the mining boom with some trepidation. Cutting interest rates to stimulate new home construction may cushion the impact, but comes at a price. Consumers may benefit from lower interest rates but that is merely a side-effect: the real objective of monetary policy is debt expansion. And Australia is already in a precarious position.
Further increases in the ratio of household debt to disposable income would expand the housing bubble — with inevitable long-term consequences.
While debt expansion is not in the country’s interests, neither is debt contraction (with growth below zero), which would risk a deflationary spiral. The RBA needs to maintain debt growth below the nominal growth rate in GDP — forecast at 4.0% for 2012-13 and 5.5% for 2013-2014 according to MYEFO — to gradually restore household debt/income ratios to respectable levels.
If the RBA’s hands are tied, similar restraint has to be applied to fiscal policy. First home buyer incentives would also re-ignite debt growth. The focus may have to shift to state and local government in order to accelerate land release and reduce other impediments — both financial and regulatory — to new home development. Lowering residential property development costs while increasing competition would encourage developers to cut prices to attract more buyers into the market. While this would still increase demand for new home finance, lower prices would cool speculative demand fueled by low interest rates.
Andrew Haldane, BOE Director of Financial Stability, addresses the too-big-to-fail problem in a recent article and makes the point that reducing complexity would increase investor trust in the banking system and improve liquidity.
…….Today, the Volcker proposals in the US, the Vickers proposals in the UK and the Liikanen proposals in Europe envisage a similar unbundling of banking portfolios. Despite the alarm some have expressed, if implemented faithfully and simply such structural solutions ought to help solve the too-complex-to-price problem, to say nothing of too-big-to-fail. Alongside efforts to strengthen macro and micro-prudential regulation, these initiatives would help mobilise bank funding and lending, just when it is most needed for the economy.
We should go further unbundling banks | Andy Haldane | Bank of England (pdf).
The Aussie Dollar (daily chart) is headed for another test of resistance at $1.04 against the greenback. A 63-day Twiggs Momentum trough above zero suggests a primary up-trend. Breakout above $1.04 would offer a target of $1.06*.
* Target calculation: 1.04 + ( 1.04 – 1.02 ) = 1.06
The Euro (weekly chart) is testing resistance at $1.32. Recovery of 63-day Twiggs Momentum above zero suggests a primary up-trend. Breakout above $1.32 — and penetration of the descending trendline — would confirm, offering an immediate target of the 2012 high at $1.35.
* Target calculation: 1.32 + ( 1.32 – 1.28 ) = 1.36
Pound Sterling (weekly) rallied off primary support at €1.225/€1.23 against the euro. Breach would complete a head and shoulders reversal with a target of $1.18*. Reversal of 63-day Twiggs Momentum below zero suggests a primary down-trend. Expect a test of resistance at $1.26 followed by another attempt at primary support.
* Target calculation: 1.23 – ( 1.28 – 1.23 ) = 1.18
Canada’s Loonie (daily) is consolidating between $1.00 and $1.01 (USD). Downward breakout — and penetration of the rising trendline — would warn of another test of primary support at $0.96. But 63-day Twiggs Momentum is bullish and a trough above zero would suggest an advance to the 2011 highs at $1.06.
The Dollar Index is consolidating between 79 and 80. Upward breakout would test resistance at 81.00/81.50 — penetration of the descending trendline indicating the correction has ended — but the primary trend is downward and breach of support at 79 would signal another decline. A 63-day Twiggs Momentum peak below zero would strengthen the bear signal.
* Target calculation: 79 – ( 81 – 79 ) = 77
Inflation expectations are easing, with spot gold undergoing a correction since breaking support at 1750. Expect short-term support at 1700 and penetration of the descending trendline would indicate another test of $1800 per ounce*. A 63-day Twiggs Momentum trough above zero is likely — and would signal a primary up-trend, while breakout above $1800 would confirm.
* Target calculation: 1650 + ( 1650 – 1500 ) = 1800
The DJ-UBS Commodity Index also reflects an easing inflation outlook, breaking medium-term support at 145 to signal a correction. 63-Day Twiggs Momentum is unlikely to remain above zero but a shallow trough would be a bullish sign.
Brent Crude is also falling, having broken support at $108 per barrel. Expect a test of $100. Reversal of 63-day Twiggs Momentum below zero would strengthen the bear signal.
* Target calculation: 108 – ( 117 – 108 ) = 99
Nymex WTI Light Crude is similarly headed for a test of primary support at $76/$78 per barrel. The 63-day Twiggs Momentum peak below zero warns of a primary down-trend.
September readings for the Philadelphia Fed survey of state coincident indicators are now out. The 3-Month Index has turned to follow the Monthly Index upward. Reversal of the Monthly Index below 80, however, would be cause for concern.
When we look at the index over the last 30 years, down-turns of the Diffusion Index below 50 normally precede a recession. The only false signal (so far) was the recent 2011 dip of the Monthly Index (DI1) to 20 and the 3-Month Index (DI3) to 46.
The Federal Reserve Bank of Philadelphia calculates monthly coincident indexes for each of the 50 states. The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic: nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.
For further details of Diffusion Index performance in predicting recessions, read Marking NBER Recessions with State Data by Jason Novak (2008).
Marshall Auerback wrote a short piece criticizing the recent IMF study of the “Chicago Plan” first put forward by professors Henry Simons and Irving Fisher in 1936.
“Now there are some good things about a 100% reserve backed banking system. To the extent that we require all institutions to hold liquid reserves of equal value to their deposits then the fear of a bank run is eliminated.
But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes, there would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.”
What he seems to miss is that 100% reserves would be required against demand deposits (checking accounts) and not against savings or time deposits. All that an efficient capitalist system needs is financial intermediaries who can channel savings into credit. It is not essential for them to have the ability to create ‘new money’.
“Note that the current practice is that loans create deposits. Clearly, under a 100-percent reserve system, all credit granting institutions would have to acquire the funds in advance of their lending.”
That is true. And requiring 100% reserves against demand deposits would restrict banks ability to make loans without holding reciprocal savings/time deposits or share capital and reserves. In effect they would be prevented from creating new money by making loans where they don’t have deposits. That is the whole purpose of the proposal: to prevent rapid credit expansion by banks.
“The truth is that the debt explosion that has brought the World economy to its knees was not the fault of private sector credit creation per se.”
Really? What else but private sector credit fueled the housing bubble? The debt explosion was encouraged by lax regulation but the financial sector is far from blameless for its actions.
via ‘The Chicago Plan’ does not deserve to be revisited. – Macrobits by Marshall Auerback.
