Category: Economy

Analysis of the global economy

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Markets Worry About Fiscal Cliff

Michael S. Derby writes about the looming fiscal cliff:

The central problem is the lack of change. President Barack Obama was reelected. Democrats retained control of the Senate, while Republicans held on to the House of Representatives. The fiscal cliff can only be resolved if lawmakers work together. “Returning to status quo likely means all sides see the voters as supporting their views, which means reaching compromise is not likely to get any easier,” economists at Bank of America Merrill Lynch warned clients.

Speaker of the House John Boehner (R-Ohio) says “the Republican majority in the House stands ready to work with [the President] to do what’s best for our country.” Republicans appear willing to accept additional tax revenues but their emphasis is on reforming entitlement programs and curbing “special interest loopholes and deductions”.

The Congressional Budget Office summarizes the fiscal cliff as:

Among the policy changes that are due to occur in January under current law, the following will have the largest impact on the budget and the economy:

  • A host of significant provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312) are set to expire, including provisions that extended reductions in tax rates and expansions of tax credits and deductions originally enacted in 2001, 2003, or 2009. (Provisions designed to limit the reach of the alternative minimum tax, or AMT, expired on December 31, 2011.)
  • Sharp reductions in Medicare’s payment rates for physicians’ services are scheduled to take effect.
  • Automatic enforcement procedures established by the Budget Control Act of 2011 to restrain discretionary and mandatory spending are set to go into effect.
  • Extensions of emergency unemployment benefits and a reduction of 2 percentage points in the payroll tax for Social Security are scheduled to expire.

The CBO estimates that increases in federal taxes and reductions in federal spending, totaling almost
$500 billion, will cause a 0.5 percent drop in GDP in 2013.

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Australia: Hard or soft landing?

Browsing the latest charts from the RBA.

Despite record low 10-year bond yields…..

Housing Finances

Credit growth is subdued and likely to remain so for some time.

Credit Growth by Sector

After a massive credit bubble lasting more than a decade.

Housing Finances

Households are saving close to 10 percent of Disposable Income in anticipation of a contraction.

Housing Finances

While banks are reluctant to lend when their margins are being squeezed.

Housing Finances

Borrowing offshore is not an option. That is how we got into such a fix in the first place.

Housing Finances

Makes me believe we are unlikely to see another housing boom for some time.

There are two possible outcomes: a soft landing and a hard landing.

It all depends on whether Wayne Swan and the RBA know their jobs.

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Is the Fed finally listening to Scott Sumner?

Brendan Greely writes of Scott Sumner.

Sumner who holds a Ph.D. from the University of Chicago, made a suggestion in the late 1980s to the New York Federal Reserve. He proposed that the Fed set a target for nominal GDP—real growth in GDP plus the rate of inflation. He felt that this would induce the correct level of business investment better than targeting either inflation or growth in real GDP by themselves. The response at the New York Fed, says Sumner, was, “Thanks, but no thanks.”

Targeting nominal GDP (NGDP) growth eliminates reliance on inexact measures of inflation which can mis-direct monetary policy. The advantage is that NGDP can be accurately measured. NGDP targeting would help to eliminate bubbles in the long term by restricting debt growth. And in the short-term would encourage the Fed to expand money supply in response to private sector deleveraging, avoiding deflationary pressure.

The announcement by the Fed’s rate-setting committee in mid-September doesn’t contain any mention of targeting nominal GDP. But its open-ended nature and clear goals—pump up the money supply until hiring rises strongly—resembles Sumner’s nominal GDP model, which would have a central bank do all in its power to achieve an agreed-upon nominal rate of growth.

It has taken Sumner almost 3 decades, but in the end he is likely to get there.

via The Blog That Got Bernanke to Go Big – Businessweek.

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Bank of England should leave forecasting to Ladbrokes « The Market Monetarist

The Market Monetarist makes a novel suggestion as to how to avoid central banks from making biased forecasts:

“…..even better as I have suggested numerous times that the central bank simply set-up a prediction market. In Britain that would be extremely easy – I don’t think there is a country in the world with so many bookmakers. The Bank of England could simply ask a company like Ladbrokes or a similar company to set-up betting markets for key macro economic variables – such as inflation and nominal GDP. It would be extremely cheap and the forecast created from such prediction market would likely be at least as good as what is presently produced by the otherwise clever staff at the BoE.”

That could work …..until punters learn that the bets they place indirectly influence central bank monetary policy. It might pay market participants to place large bets on low or high inflation if they stand to benefit from the central bank response.

via Bank of England should leave forecasting to Ladbrokes « The Market Monetarist.

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Explain the disease to help US citizens – FT.com

This must-read opinion by Richard Koo explains the impact US private sector saving — a staggering 8 per cent of gross domestic product — has on the US economy.

“….. if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933.”

via Explain the disease to help US citizens – FT.com.

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The Output Gap: A “Potentially” Unreliable Measure of Economic Health?

Excerpt from a newsletter by Elise A. Marifian, Research Analyst at the St. Louis Fed, describing problems with calculation of the hypothetical output gap and how this can lead to incorrect monetary policy:

Some economists question the reliability of potential output and, therefore, output gap measures. For instance, as James Bullard noted in 2009, if calculations had considered the housing boom and bust, then potential GDP and output gap measurements would have been smaller than they appeared…….. Gavin (2012) shows that the output gap calculations for 2003-12 are reduced significantly when 2011 estimates of potential GDP are used in place of 2007 estimates. If our economy is improving faster than current output gap measurements suggest, then monetary policy intended to boost the economy could produce too much stimulation, thereby fueling inflation once the economy begins to pick up steam.

via Page One Economics – St. Louis Fed.

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Treasury yields warn more of the same

Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.

10-year Treasury Yields

The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.

Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.

Without jobs, no monetary policy is likely to succeed.

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Australia: Falling job ads

ANZ job ads fell 4.6 percent in October after a 3.9 percent fall in September. The index is down 15 percent over the last year.

From ANZ:

“The ANZ job advertisement series measures the number of jobs advertised in the major daily newspapers and Internet sites covering the capital cities each month. It has historically proved to be a very good indicator of future labour market conditions and thus, is extensively relied upon for forecasting employment growth.”

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Nationalbanken Defends Sub-Zero Bemoaned by Banks | Bloomberg

Peter Levring and Frances Schwartzkopff write that Denmark’s central bank has taken an unusual step to defend the krone from capital inflows similar to those experienced earlier by Switzerland.

The central bank has kept its deposit rate at minus 0.2 percent since July, in an effort to fight off a capital influx and maintain the krone’s peg to the euro.

Deposits held at the central bank are charged a fee of 0.2%, rather than paid interest as in the US.

At the same time, the industry is still paying its customers to hold their deposits in an effort to attract stable funding and reduce reliance on wholesale financing. That’s turned deposit banking in Denmark into a losing business.

The measure would encourage banks to increase lending, loosening credit standards to avoid the charge on excess reserves. It would also reduce the rate paid on call deposits, while increasing bank competition for more stable time deposits.

via Nationalbanken Defends Sub-Zero Bemoaned by Banks: Nordic Credit – Bloomberg.

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Fiscal Cliff: Two Candidates, Two Approaches

By ERIC PIANIN and MERRILL GOOZNER, The Fiscal Times

[Romney and Obama] agree that a stopgap measure is needed before January 1 to temporarily extend the raft of Bush era tax cuts and other measures set to expire. However, Obama has signaled his intent to veto even a few months’ extension of tax cuts unless families earning more than $250,000 a year are made to pay higher rates.

……. Romney, Boehner and Senate Republican Leader Mitch McConnell of Kentucky insist that the Bush tax cuts be extended for all Americans, arguing that any increase in rates would discourage investments and job expansion by small businesses. Moreover, Romney has proposed further tax cuts of 20 percent across the board in exchange for capping tax breaks……..

via Fiscal Cliff: Two Candidates, Two Approaches.

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