Economy Archives - Page 95 of 132 - the patient investor

December 11, 2012

Republicans Send Fiscal Cliff Counteroffer To Obama – Business Insider

Brett LoGiurato reports that House Speaker John Boehner made a counter-offer in fiscal cliff negotiations. His spokesman Michael Steel issued a brief statement:

“We sent the White House a counter-offer that would achieve tax and entitlement reform to solve our looming debt crisis and create more American jobs. As the Speaker said today, we’re still waiting for the White House to identify what spending cuts the president is willing to make as part of the ‘balanced approach’ he promised the American people. The longer the White House slow-walks this process, the closer our economy gets to the fiscal cliff.”

via Republicans Send Fiscal Cliff Counteroffer To Obama – Business Insider.

December 11, 2012

The Fed's interest rate policies are damaging rather than restoring confidence and should be reversed

Vince Foster at The Fiscal Times writes about this Wednesday’s FOMC meeting:

With Operation Twist due to expire at the end of the year and because the Fed is essentially out of short-term bonds with which to finance purchases, it is virtually assured that they will opt for outright purchases financed with printed money……….Now, said Ned Davis Research in a report last week, the Fed is likely to replace Operation Twist with purchases of Treasuries, perhaps in the $45 billion a month range, bringing its total monthly purchases to $85 billion.

Outright purchases of long-term Treasuries are far more expansionary than Operation Twist purchases which are off-set by the sale of shorter-term maturities.

Foster discusses Fed motives, considering that previous QE failed to lower interest rates or lift stock market values.

It has been my contention that the main objective is not to reflate asset prices but rather to stimulate credit creation and the velocity of money. According the Fed’s H.8 Release banks are holding over $2.6 trillion in cash that’s sitting idle on their balance sheet in securities portfolios. Bernanke is trying to flush the banking system out of these bloated securities positions and into extending credit by lowering bond yields to levels where banks can no longer afford to hold them.

Foster points out that negative real interest rates may be discouraging banks from lending, inhibiting the recovery. Also that bank balance sheets — bloated with Treasuries and MBS ($2.6 trillion) purchased as an alternative to lending — are vulnerable to capital losses should interest rates rise.

The Fed’s low-interest-rate policies have created a powder keg while being largely ineffectual in stimulating credit creation and consumption. The safest approach would be to reverse these policies and raise interest rates. Raising long-term rates to sustainable levels would reduce uncertainty and help restore confidence. House prices and stocks may initially fall but this would flush any excess inventory out of the system, giving purchasers and banks confidence that the market really has bottomed. With higher rates and stable collateral, banks will be more willing to lend.

At present we are all sheltering under the shadow of the Fed’s low-interest-rate umbrella, but with a nagging fear as to what will happen when the Fed takes the umbrella away. Fed policies are no longer adding confidence but increasing uncertainty. The sooner the umbrella is removed, the sooner the system will return to normality.

QE is likely to continue — Treasury needs to print money in order to fund the fiscal deficit — but this can still occur at higher rates. The fiscal deficit unfortunately will remain with us for some time — until confidence is completely restored and deflationary effects of private sector deleveraging are consigned to the history books.

December 10, 2012

Pettis: Australia should be pessimistic | MacroBusiness

Michael Pettis writes about the latest Australian government White Paper Australia in the Asian Century that projects an average 7% GDP growth rate for China between 2012 and 2025:

This seems to put the Australian government among the most optimistic in the market when it comes to long-term growth expectations for China. I have always assumed that government projections should generally be on the pessimistic side to prepare for unexpected negative shocks (positive shocks can take care of themselves), but apparently not. I am glad to say that my own conversations with Australian government officials lead me to believe that this White Paper may represent the official view of the government, but it does not represent the private views of all Australian government officials…….

December 10, 2012

IS STATE INTERVENTION IN THE ECONOMY INEVITABLE? | CIS

Peter Boettke teaches economics at George Mason University. He writes that ongoing economic woes demand drastic reduction in state intervention into free markets:

The great expansion of trade and technology in the twentieth and twenty-first centuries has produced a level of material wealth that enabled the cost of government intervention to be offset, and remain largely hidden to many observers. This possibility is not a new phenomenon. Adam Smith pointed out long ago that the power of self-interest exercised in the market economy is so strong that it can overcome a ‘hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.’ But it is important to stress that the great material progress realised over the past 100 years was not caused by the expansion of state invention into the economy but in spite of those interventions. And the tipping point is when the number of ‘impertinent obstructions’ grow from hundreds to thousands so that the market economy can no longer hide the costs of the folly of human laws.

It is important to distinguish between state intervention in the free market and state regulation of free markets. Regulation is essential for orderly functioning of the market place. Compare the early days of stock exchanges to the benefits of current regulation regarding insider trading, market manipulation and stock flotation. State intervention, on the other hand, is disruptive to the orderly functioning of markets — distorting price signals which can lead to massive imbalances. The most obvious recent example of state intervention is the Fed suppression of interest rates in the early 2000s which led to a massive property bubble and global financial crisis in 2008.

Read the entire article at IS STATE INTERVENTION IN THE ECONOMY INEVITABLE? | CIS.

December 9, 2012

We warmed to Gough, even as his grand design crumbled

Amanda Vanstone, former Howard government minister, writes on the 40th anniversary of Gough Whitlam’s government.

For a surprisingly long period there was no effective cabinet, then unsatisfactory cabinet process. It was nothing short of economic chaos, a disaster. It was a reminder to everyone that you can have all the great ideas you want about a better world, but if you do not keep the economy on track your government will fall apart.

via We warmed to Gough, even as his grand design crumbled.

December 9, 2012

Phoney recovery?

First signs of recovery after a recession are normally rising earnings, initially from corporate cost-cutting but followed up with rising revenues.

With massive central bank pump priming — referred to by Mark Mobius here — this time may be different. Flows of new money from central bank balance sheet expansion are likely to find their way into the stock market — and even the housing market — driving up prices. But consumption is lagging with slow growth in employment and average wages. With lackluster sales growth, earnings are likely to remain sluggish. Which means inflated stock market valuations and high price-earnings ratios as stocks are driven into over-bought territory. Not a solid foundation for a sustained recovery but another rung up the ladder of risk.

December 9, 2012

Mobius: No global recession on the cards

Franklin Templeton’s Mark Mobius sees central bank balance sheet expansion as saving the global economy from recession in 2013.

http://youtu.be/4f3Rl6aBQmc

December 9, 2012

China is now heading toward Japan-style economic paralysis if it doesnt change course | Quartz

Jack Rodman, president of Global Distressed Solutions LLC, spent 1999 to 2011 living in Japan and China, packaging and disposing of nonperforming loans and distressed assets. He writes on the problems facing China:

At the end of 1989, Japan’s bubble economy burst and its economic miracle came to an abrupt end. The Nikkei exchange fell from nearly 40,000 to its current 10,000 range. Over the course of 20 years, what appeared to be “unstoppable” economic growth proved to be anything but.

Today, China, in some ways, appears to be closer to following Japan than to sustaining its own economic miracle. China’s Shanghai Index (stocks) has fallen from a high of 7,000 in 2007 to a low of 2,000 for the past few years, and Chinese domestic investors have little confidence in their domestic stock market. The Japanese bubble, and its aftermath, was the result of a series of domestic financial and economic imbalances, many of which China faces today—to varying if not greater degrees….

December 9, 2012

Insight: Making France work again | Reuters

Marc John identifies the challenges facing France and how it can recover its lost vigor.

In just over 30 years after World War Two, France lifted itself from the ignominy of Nazi occupation into a sleek and modern Group of Seven economy with world-beating industrial champions in sectors such as energy and aerospace.

Its welfare system is among the most generous in the world. A road and rail transport network means its companies are within hours of tens of millions of potential customers. It is a leader in luxury goods and is the world’s top tourist destination.

But somehow that Gallic vigour is being lost.

Unemployment is at 14-year highs as plant closures mount, France’s share of export markets is declining, and the fact that no government in three decades has managed a budget surplus has created a public debt pile almost as big as national output.

After three decades of uninterrupted post-WWII boom — often described as the “Glorious 30” — the French government lost its way.

By 1980, French economic growth had shrunk to two percent compared to its pre-oil crisis rate of above six percent – a rate which France and most rich states have not seen since.

In the years that followed, governments around the world reacted in their fashion: Britain’s Margaret Thatcher faced down Britain’s unions in a drive to free up labor markets, while Scandinavian leaders sought to free their economies of debt.

In France, governments of left and right chose entrenchment: strong rises in public spending which helped ease the social and employment shocks but which sent national debt soaring from 20 percent of output in 1980 to its current record of 91 percent.

The next three decades are sometimes called the “Pitiful 30”.

Influence exerted by interest groups — or “insiders” — prevented government reform of the labor market, making France increasingly uncompetitive in the face of global competition. This is the same problem that Mancur Olson identified in Great Britain after WWII — when Britain floundered while Germany and Japan flourished. Narrow interest groups maximize their own welfare at the expense of the broader economy.

France faces massive challenges in overhauling — possibly “dismantling” — its welfare state and restoring international competitiveness. Responsibility has fallen to the unlikely figure of socialist President Francois Hollande.

Read the entire article at Insight: Making France work again | Reuters.

December 8, 2012

Most Accurate Forecaster Sees Lethargic U.S. Expansion | Bloomberg

Michelle Jamrisko at Bloomberg writes:

What [Joshua] Shapiro saw two years ago, and other economists didn’t, is that the healing this time would be slower. He and his firm [NY-based forecasting firm Maria Fiorini Ramirez Inc.] have been among the more pessimistic forecasters of a U.S. recovery, citing data that show slow growth and relatively high joblessness persisting through 2013. Shapiro predicts the U.S. economy will grow next year by about 1.5 percent.

Shapiro sees monetary policy, with the Federal Reserve benchmark interest rate at almost zero, as having a limited near-term impact on growth. And he considers the $1 trillion U.S. fiscal deficit an important drag on future expansion.

The uncertain environment should ensure the private sector remains focused on paying down debt rather than expanding investment. And that will ensure that fiscal deficits continue for the foreseeable future. What we need to take into account is how those deficits are funded. If funded by offshore investment from China and Japan, the US manufacturing sector will continue to suffer from an artificially high exchange rate. More likely is Fed funding of the deficit through QE purchases of Treasuries and MBS. That injects new money into the economy, some of which will end up in the stock market. Rising stocks, out-stripping lagging earnings, would take valuations into over-bought territory. Over-valued stocks increase uncertainty, prompting the private sector to repay more debt…… As Yogi Berra said: “It’s like deja vu all over again”.