Thursday, April 30, 2015

Making Sense of Weak Economic Growth in Q1 of 2015

On Wednesday morning, the new GDP figures for the first quarter of 2015 in the US became available...and we managed a whopping 0.2% growth in those first three months of the year. The writer of the article gives two reasons for why he believes the economy performed so sluggishly.

First, he think that our uncommonly cold and snowy winter was bad enough to affect consumer spending (a.k.a. it was so cold that no one wanted to go shopping and instead tried to make do with whatever they had at home). To me, this isn't the most convincing of answers, but the author is quick to point out that exactly the same thing happened last year. Q1 in 2014 was very slow, but growth doubled (to 4.8%) in Q2, and remained the same for Q3, ending in a year, that from an economic standpoint, wasn't nearly as bad as Q1 had foreshadowed. Hopefully, we can experience similar growth through the rest of 2015 as well.

The author's second reason for slow growth was the value of the American dollar. Over the last several months, the dollar has become much stronger compared to several other powerful currencies, and thus, has increased the price of our exports. Our export figures strongly reflect this increase in price, as they fell 7.2% annual rate (contributing to overall GDP by -1.25%). Also, very low gas prices through the latter months of 2014 were hoped to spur consumer consumption into overdrive, however, it didn't. And this continues to be a mystery to economists.

So, what do you guys think of our slow growth to start out the year? Any ideas on what we can do to improve it and hit the sunny projections that were being forecasted at the beginning of 2015? Also, do you think the weather has as big of an impact on the economy as the author seems to think?

China Rethinks Safety Net for Its Banking System

This morning the New York Times published an article about how "China Rethinks Safety Net for its Banking System" (Link here). This article goes in-depth to show how China is considering banking reform to not allow for bailouts of banks in trouble and hopefully create a new habit for banks at making smarter loans to both companies as well as individuals. This reform will help to make banks take responsibility for bad loans and the consequences that come along with these because of the governments unwillingness to bail them out. 

With the introduction of deposit insurance on Friday, Beijing is looking to shake the public’s faith, namely the long-held belief that the government will bail out troubled banks. In short, China is trying to introduce risk into the system.

As China moves to restructure its state-run economy, such banking reform is considered critical. To help bolster consumer demand and wean itself off growth fueled by cheap credit, China needs banks to take a more market-driven approach. That means making smarter loans to companies and individuals — and accepting the consequences when they don’t work out

Since China started opening its economy in the late 1970s, Beijing has played the role of financial arbitrator and ultimate guarantor. It has used banks to promote industries and companies deemed important to the state, propping them up in times of trouble.

When Hainan Development Bank collapsed in 1998, China’s central bank made sure no depositors incurred losses, by transferring their accounts at full value to the much larger Industrial and Commercial Bank of China. Now, the government is signaling a willingness to pull away, at least selectively. On April 21, for example, China’s huge domestic bond market experienced its first default ever by a state-owned company

Officials at China’s central bank have closely studied the situation in the United States in the 1980s, when government deregulation of interest rates contributed to what became known as the savings and loan crisis. Banks and other lending institutions became locked in competitive increases in deposit rates, which drove them to make increasingly risky, high-interest loans. By the mid 1990s, nearly 3,000 United States financial institutions had failed.

Chinese regulators are hoping to avoid a repeat of the American experience. To help keep banks in check, China’s deposit insurance scheme will require the banks to pay a two-part premium: a fixed minimum rate, plus an adjustable rate based on the riskiness of their lending practices.

Now with these new reforms banks are forced to look at who they loan out to because of the lack of possible government bailouts for the banking system. What are your thoughts? Do you agree with this reform? Is this something that the US should consider going forward to avoid another future financial crisis? 

Wednesday, April 29, 2015

The Flawed Analogy of Chinese QE

Yesterday, The Economist posted a very interesting article about the "flawed analogy of Chinese quantitative easing" (link here). Essentially what the article tells us is that although the Chinese "QE" can be superficially compared to the true QE of Europe and the US, in the sense that the People's Bank of China is also buying government bonds, etc. to increase the money supply, the comparison must end there.

Without a doubt, China is loosening their monetary policy, but "the QE analogy falls down in two ways." The article states that loose monetary policy and quantitative tools have long been the norm for China. "The government still sets a money-supply target every year (it is shooting for 12% M2 growth this year) and regulators rely on lending quotas to influence the behavior of banks." What this means, is that the Chinese central bank is increasing the money supply, every year, no matter what. That's one of the ways the Chinese "QE" differs from the US and Europe. China increases the money supply every year, whereas the US and Europe only implemented QE techniques after conventional monetary policies "ran out of room" after the economic crisis of 2008.

The second way the QE analogy fails is because it "exaggerates the extent of Chinese stimulus." In fact, the loosening of monetary policy is intended to replace cash that has left the Chinese economy, rather than "pump extra money into the economy."

The author argues that there is no reason for China to be using quantitative techniques. An economy like China's should first focus on interest rates before expanding the money supply. What are your thoughts? Does this change your opinion on the financial situation in China? Should China keep operating with the same methods?
Income Inequality is Costing the US on Social Issues

Over the past few years income inequality has become a major topic of discussion within our society. Now this income inequality as shown in this NY Times article, Porter believes that income inequality is costing the US on social issues. 

Thirty-five years ago, the United States ranked 13th among the 34 industrialized nations that are today in the Organization for Economic Cooperation and Development in terms of life expectancy for newborn girls. These days, it ranks 29th.

“On nearly all indicators of mortality, survival and life expectancy, the United States ranks at or near the bottom among high-income countries,” says a report on the nation’s health by the National Research Council and the Institute of Medicine.

What’s most shocking about these statistics is not how unhealthy they show Americans to be, compared with citizens of countries that spend much less on health care and have much less sophisticated medical technology. What is most perplexing is how stunningly fast the United States has lost ground.

Three or four decades ago, the United States was the most prosperous country on earth. It had the mightiest military and the most advanced technologies known to humanity. Today, it’s still the richest, strongest and most inventive. But when it comes to the health, well-being and shared prosperity of its people, the United States has fallen far behind.
Pick almost any measure of social health and cohesion over the last four decades or so, and you will find that the United States took a wrong turn along the way.

 As our government continues argues over the budget deficit and the national debt, debate as  to what our country should do about income inequality and the minimum wage are not being answered. Our society is blaming globalization and technological progress for the stagnation of the middle class and the precipitous decline in our collective health is too easy. Jobs were lost and wages got stuck in many developed countries. 

Do you think that these are reasons why the US is falling behind other countries on social issues? Or do you think that there are other reasons for our social decline?

Baltimore on fire

A 25 year old man, Freddie Gray, was arrested (for what?), and died after being transported to booking from a severed spine (how did that happen?). 

From the New York Times:

The unemployment rate in the community where Mr. Gray lived is over 50 percent; the high school student absence rate hovers at 49.3 percent; and life expectancy tops out at 68.8 years, according to analysis by prison reform nonprofits. These statistics are a small glimpse of the radical inequality that blankets poor black Baltimore. It’s no wonder that black Baltimore erupted in social fury. As the Rev. Dr. Martin Luther King Jr. announced in the wake of the Watts riots 50 years ago, “a riot is the language of the unheard.” And judging by the actions in Baltimore, thousands are not being heard.

The Inner Harbor in Baltimore is a great place to live and visit....for tourists and upperly mobile people.  The rest of Baltimore is very different.

Baltimore, then, is like so many other cities with their own Freddie Grays: a place in which private capital has left enormous sections of the city to rot, where a chasm separates the life chances of black and white residents — and where cops brutally patrol a “disposable” population.
Yesterday’s uprising occurred the same day Gray, the twenty-five-year-old whose spine was almost completely severed while in police custody, was laid to rest. Protests haven’t ceased since his April 19 death.  (see link)

Baltimore is a city left behind by globalization  (see link).  

Between 1970 and 1980, the city's population dropped from 906,000 to 787,000. By 2010, Census data showed there were just 620,961 residents in Baltimore.  As factory jobs moved overseas, most of the opportunities for employment that replaced them did not pay very well.
A 2012 Brookings study found that jobs in low-paying industries like food service grew by more than 60 percent in Baltimore from 1980 to 2007. Meanwhile, jobs in high-wage industries increased by only 10 percent.

The gradual attrition of jobs that paid a decent wage rendered Baltimore particularly vulnerable to the drug trade, which has become almost synonymous with the city thanks to media depictions like HBO's "The Wire." Starting in the late 1970s, drug kingpins began recruiting children and teenagers -- who, if caught, could usually escape the criminal justice system more easily and more cheaply than adults -- to aid with the day-to-day business of selling illicit substances. For many young people, the drug trade offered much more lucrative possibilities than the weak local economy.
Compounding all these issues has been the subprime crisis of the past several years. Predatory lenders allegedly targeted black communities in Baltimore, steering people into untenable, high-interest mortgages that would eventually wipe out their wealth and leave the city riddled with foreclosed and vacant homes.  A damaged economy, high levels of crime, little opportunity to achieve something better: That's the context Freddie Gray lived in his whole life. In Sandtown-Winchester, the Baltimore neighborhood where Gray grew up, the unemployment rate is 1 in 5, about twice as high as the city average, according to a Baltimore City Health Department report cited by Slate.

Can the United States still be a place of opportunity and justice?  

Monday, April 27, 2015

China Exaggerates Growth Statistics

According to Mark Magnier’s article (Link Here), China has most likely overstated their growth rates to be a politically desirable value of 7%, which is the lowest rate in several years. However, many are doubtful of the China’s statistics and assume that that the growth rate is much lower. The first hint that makes the growth rate seem unreasonably high is the statistics that China provides do not fluctuate like in other economies, such as the United States. The second hint is that the exact methods to incorporate inflation into China’s GDP are unknown. The third hint is that the industrial production, a surrogate for growth rates, was unusually low compared to the GDP growth statistic provided. The fourth hint is that consumption, investments, and manufacturing outputs have been very weak lately. Finally, in 2007, Premier Li Keqiang – one of the Communist Party chiefs – said China’s GDP values were “man-made and therefore unreliable.”

Even though some may say that China’s National Bureau of Statistics is more professional than in the past, it seems as though they fail to provide accurate statistics. One possible factor leading to the discrepancy in statistics that is stated in the article is the exaggeration of data from local officials. Overall, the fact that China’s statistics are false is concerning. What are your thoughts on China’s faults stats? Besides China gaining too much power, I think that China's faulty stats may be another reason why China may not be included in the TPP.

Sunday, April 26, 2015

Fast Track, Japan, and the Trans-Pacific Partnership

           Recently a bipartisan bill to give president Obama “fast track” authority on trade deals was agreed on by congress. Essentially “fast track” is an expedited process in which congress either votes a trade policy – which consists of domestic laws and tariffs negotiated and agreed upon by the President – up or down without amendments and within a fixed period of time.  The bipartisan bill increases the likelihood that the Trans-Pacific Partnership (TPP) will pass; however there are two major factors to consider. First, the congress must agree on passing the TPP. Second, the Japanese government is unlikely to make major tariff cuts in order to protect its farmers. The U.S. Congress has been cautious with the TPP since Japan has been sly to direct the U.S. attention away from Japanese protection tariffs and towards the containing-China’s economy. Personally, I don’t understand why the United States is so interested in containing China when the world would gain most in the long run if China was included in the TPP.  I could see Japanese tariffs having a larger negative impact on the welfare of U.S. farmer in comparison to increasing trades with China. Furthermore, in Martin Wolf’s The Shifts and the Shocks, Wolf writes that emerging economies did so well after the crisis since China did so well, but now that the Chinese economy’s growth has slowed down significantly all emerging markets are facing challenges (p.105-107). So why would it not be beneficial for China to join the TPP if other economies would experience growth as well?
Regardless of the inefficiencies that may be caused by not including China in the TPP, at least some of the lesser developed countries would interact with more developed countries and reform could occur for areas of intellectual property, and environmental and labor standards.

            Overall, fast-track to the TPP is essential in letting it pass congress. Otherwise many amendments would be made and the TPP would take a long time before passing. I feel that fast-track may not be the best option since some countries (i.e. Japan) are favored by the policy while others are bound to lose (i.e. U.S.). Also I do not fully understand why China is of large concern to the United States.

Where do you get your news?

In 1990, there were 1611 daily newspapers with a readership of 62,000,000.  Today readership is 40,420,000.   So do you read a newspaper?  Where do you get your news?  Is it biased?  Do you care?

go here for data link

How the middle class is disappearing....

How  the world has changed:

There’s something seriously wrong with an economy that nurtures a few billionaires but can’t sustain the middle class. 

Many factors have been blamed for the plummeting fortunes of the American middle class: globalization, technology, deregulation, easy credit, the winner-take-all economy, and even the inevitable tide of history.

But one under-appreciated factor is a pervasive business model that encourages top managers of American corporations to loot their company for short-term gains, depriving those companies of the funds they need to build and enlarge, and invest in their workers for the long haul.
How do they loot their company? By using large stock buybacks to manage the short-term objectives that trigger higher compensation for themselves. By using those stock buybacks to manipulate the share price, which allows them to use inside information to time their own stock sales. By using buybacks to funnel most of the company’s profits back to shareholders (including themselves).
They use the stock market to loot their companies.

“The ‘buyback corporation’ is in large part responsible for a national economy characterized by income inequality, employment instability, and diminished innovative capacity,” wrote William Lazonick, an economics professor at the University of Massachusetts at Lowell in a new paper published by the Brookings Institution. 

What scares me is that the popular press doesn't seem to have noticed this trend.   I wonder why.

The link to the story is here.

Saturday, April 25, 2015

Greece is Running Out of Time

            Since Friday’s meeting, it appears as though Greek officials are experiencing more pressure from the eurozone’s finance chiefs. The Greek Finance Minister Yanis Varoufakis described the meeting’s atmosphere to be intense, tough, and hostile. The environment was such since there has been a lack of progress for agreements on planned overhauls and reforms even though the deadline is at the end of April. Furthermore there has been a lack of agreement between Athens and its international creditor on debt payments. Although many of the official and finance chiefs from other Eurozone countries are losing hope and becoming more frustrated, Varoufakis said that not reaching a deal with Greece’s creditors is not an option and that compromises will have to be made. Varoufakis is under a strict deadline since the Greece international bailout deal expires at the end of June and will cost the Greek government 6 billion euros. The general thought for all the members of Fridays meeting can be summarized by what Mario Draghi – president of the European Central Bank – said: “Time is running out.” Time is definitely an issue especially when the Greek Prime Minister Alexis Tsipras refuses further budget cuts and changes to the labor market.
            Do you think that Greece will make the necessary budget cuts and changes to the labor market?

TTP musings

Supporters call opponents alarmists and anti-trade.  Congress is passing fast-track legislation to pass the treaty without debate.  No one in the public has seen a draft of the trade agreement.  Robert Reich hates it (see here) as does Joe Firestone (see here).

Reich says:

They’re more interested in making sure other countries don’t run off with their patented designs and trademarks. Or restrict where they can put and shift their profits.

In fact, today’s “trade agreements” should really be called “global corporate agreements” because they’re mostly about protecting the assets and profits of these global corporations rather than increasing American jobs and wages. The deals don’t even guard against currency manipulation by other nations.

Firestone writes:

But we do know that “ . . . the TPP would empower another 25,000 foreign corporations to use the investor state tribunals, against the United States . . . an expansion many times the US’s current level of exposure.  We also know that Ecuador is currently facing a judgment against it awarded to Occidental Petroleum in the amount of $2.3 Billion for Ecuador’s lawful termination of a contract for drilling rights. For Educador, a judgment of that size is comparable to one of $340 Billion against the United States, denominated in a foreign currency it cannot issue. (The Dollar is Ecuador’s unit of account and official currency right now, but, of course, it is a currency Ecuador cannot issue.)
If you think this possibility is far-fetched, consider that ISDS actions are a business for multinational corporations experiencing rapidly accelerating and perhaps exponential growth. They and the ISDS Courts, staffed by lawyers who play the roles of judges for those Courts one day, and representatives of the potential plaintiffs in these Courts the next, have little incentive not to expand this line of business to the maximum the traffic can bear. Here’s what Elizabeth Warren thinks about this issue:
ISDS advocates point out that, so far, this process hasn’t harmed the United States. And our negotiators, who refuse to share the text of the TPP publicly, assure us that it will include a bigger, better version of ISDS that will protect our ability to regulate in the public interest. But with the number of ISDS cases exploding and more and more multinational corporations headquartered abroad, it is only a matter of time before such a challenge does serious damage here. Replacing the U.S. legal system with a complex and unnecessary alternative — on the assumption that nothing could possibly go wrong — seems like a really bad idea.

The trade agreement creates more opportunities for global corporations by decreasing national sovereignty.  Is this good? 

Friday, April 24, 2015

Trans Pacific Agreement: A Potential Source of Unemployment?

            Lately, members of the Democratic and Liberal parties have been disagreeing with President Obama on terms in the Trans-Pacific Partnership (PTT) (Link Here): President Obama is in support of the treaty while many others are against the treaty. Nonetheless, both Obama and others do not want to repeat the mistakes of previous trade treaties – such as, the American Free Trade agreement. One of the major fears, especially among the American workers, caused by the trade policies is job loss. Many would like to examine the treaty’s details to ensure that American jobs are protected; however, trade treaty details are usually kept secret.
             Recently, Obama scolded critics in a speech and stated that he will be able to soften the blow the treaty may have on workers. But, Obama should focus on wining the support from workers that they will be protected and not be scolding the critics. If Obama can make the trade bill look like a job bill then only will the bill be successful.
             What is your opinion on the TPP? Do you think it is possible to increase the number of domestic jobs with the TPP or will more domestic jobs be lost?

Is this the business cycle at work .... or something else?

April 24 COTD

A new Bank of America Merrill Lynch survey published Friday finds that US investors have pulled $79B out of equities year to date — including net outflows in 9 of the past 10 weeks — despite stock prices continuing to break new record highs.

An economy based on oversupply

From the Wall Street Journal:

The current state of plenty is confounding on many fronts. The surfeit of commodities depresses prices and stokes concerns of deflation. Global wealth—estimated by Credit Suisse at around $263 trillion, more than double the $117 trillion in 2000—represents a vast supply of savings and capital, helping to hold down interest rates, undermining the power of monetary policy. And the surplus of workers depresses wages.

Meanwhile, public indebtedness in the U.S., Japan and Europe limits governments’ capacity to fuel growth through public expenditure. That leaves central banks to supply economies with as much liquidity as possible, even though recent rounds of easing haven’t returned these economies anywhere close to their previous growth paths.

“The classic notion is that you cannot have a condition of oversupply,” said Daniel Alpert, an investment banker and author of a book, “The Age of Oversupply,” on what all this abundance means. “The science of economics is all based on shortages.”


But analysts are skeptical if the increased demand is enough to fill the void left by China.
The latest glut also underscores a challenging global trade environment as the dollar appreciates against almost all other currencies.
Exporters in countries such as Brazil and Russia are churning out sugar, coffee and crude oil at a faster pace, as they can fetch more in local-currency terms when it is converted from the dollar.

Globalization is a hard task master.  

Thursday, April 23, 2015

Scrip: The Euros Surrogate?

             The Greek economy has not been doing well over the last few decades and has frequently missed scheduled debt payments due to running out of cash. The current ruling party, Syriza, also struggles with defaulting on debt and receiving more bail-outs from creditors (both impractical solutions to resolve economic problems in the long run). Furthermore, the ECB (European Central Bank) is restricting emergency loans to the Greek banks. As a result, the Greeks may have to abandon the euro and seek an alternative. One alternative that is tempting for Syriza is issuing temporary IOU’s or “scrip” to replace cash. The scrip has been successful during emergencies in the past; for example, in the 1690’s, Massachusetts used the scrip to pay citizens “tax anticipation notes”. Essentially this method allows the government to save hard cash for other uses – such as paying debt – during emergencies.  The scrip would become a medium for exchange until the country is debt-free.
Even though using temporary IOU’s seems like a viable approach, this method is not flawless. One of a few major problems with the scrip is that micro-bartering systems, which cause the value of the scrip to change, within smaller regions of a country may be made. If this occurs then the government will have difficulty collecting taxes and replacing the scrip with cash. In generall, the main objective for Greek banks will be to earn more euros and spend fewer. The scrip will only provide the Syriza party with a few months to accumulate the necessary euros to pay debt.

Do you think that the Scrip should be used in the short-run for the Greeks?