As many reading my diaries will gladly remind you, I have been rather vociferous with regard to my criticism of the current administration's economic policies. (I consider myself to be somewhat of a diehard believer in the
New Keynesian school of economic thought; and those policies conflict with the
Neo-Keynesian [i.e.: "Old Keynesian"] thinking of those President Obama appointed to manage the economy under his watch.) But, the fact is--as I've also reiterated it on countless occasions--I will vote for him for re-election in 2012, too.
If there's any other area where I've been especially critical of the administration, it has been in the ongoing messaging errors of the White House communications staff, in general. Ironically, I'm sure that the folks that'll be most critical of even this diary, as you'll see in the comments, below, were busy attempting to do the White House Communications Office's job for them, within this community of supposedly well-informed souls, over the past 21 months, too. And, it's that reality, in and of itself, which supports my criticism moreso than anything I could add to the discussion.
This evening, I bring you reaffirmation of these points of view via Frank Rich's (NY Times) and Yves Smith's (Naked Capitalism) latest pearls of wisdom. (SEE: "
Barack Obama, Phone Home," and "
QE2: Bernanke Cuts Geithner Off at the Knees," respectively.)
Perhaps more important than all of this, I also bring significant new words of hope--a still-dim light, although it's now a little bit closer but at the end of a very long tunnel--for our economy, as reported today by none other than the NY Times' Gretchen Morgenson. (SEE: "He Saw Trouble Coming. Now He Sees It Going.")
Barack Obama, Phone Home
By FRANK RICH
New York Times
November 7, 2010
...You can't win an election without a coherent message. Obama, despite his administration's genuine achievements, didn't have one.
The good news -- for him, if not necessarily a straitened country -- is that the G.O.P. doesn't have one either...
--SNIP--
...The president's travails are not merely a "communications problem." They're also a governance problem -- which makes them a gift to opponents who prefer no governance at all. You can't govern if you can't tell the country where you are taking it...
--SNIP--
...To do this, he'll have to break out of the White House bubble he lamented again last week. He can no longer limit interactions with actual working Americans to photo ops on factory floors or outsource them to a "Middle Class Task Force" led by Joe Biden. He must move beyond his Ivy League-Wall Street comfort zone to overhaul his economic team. If George Bush could announce Donald Rumsfeld's replacement the day after his 2006 midterm thumping, why is the naming of Lawrence Summers's much-needed successor receding into eternity?
In the 1946 midterms, the unpopular and error-prone rookie president Harry Truman, buffeted by a different set of economic dislocations, watched his party lose both chambers of Congress (including 54 seats in the House) to a G.O.P. that then moved steadily to the right in its determination to cut government spending and rip down the New Deal safety net. Two years after this Democratic wipeout, despite a hostile press and a grievously divided party, Truman roared back, in part by daring the Republican Congress to enact its reactionary plans. He won against all odds, as David McCullough writes in "Truman," because "there was something in the American character that responded to a fighter."
Surely there are dozens of supporters reassuring Obama with exactly this Truman scenario this weekend. But if he lacks the will to fight, he might as well just take his time and enjoy the sights of Mumbai.
As Rich talks of the "optics" of a presidential trip to India, immediately after the mid-term elections, we have this much more relevant commentary from Yves Smith: "QE2: Bernanke Cuts Geithner Off at the Knees."
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(Note: Diarist has received formal authorization from Naked Capitalism Publisher Yves Smith to reprint her blog's diaries in their entirety.)
QE2: Bernanke Cuts Geithner Off at the Knees
Yves Smith
Naked Capitalism
Saturday, November 6, 2010 4:08PM
The Fed's announcement of $600 billion of intermediate and long Treasury purchase, informally dubbed QE2, teed off a peppy rally in stocks, and led to further weakening of the dollar. These trends were already well in motion thanks to the central bank's winks and nods that it was going to embark on another round of bond purchases.
This move looks to be bad economics, or at least bad at achieving the Fed's stated aim of lowering unemployment and promoting growth. The first round of QE did not arrest falling housing prices (although they have stabilized in some markets, there is still a large overhang of shadow inventory, both of delinquent borrowers where the bank has not yet seized the house, as well as owners who would like to sell, and will try to do so if the housing market in their area were to improve (and note some of these potential sellers will relent if they perceive prices are not going to rise any time in the foreseeable future). Nor did it help unemployment (one month of improved hiring was not sufficient to budge unemployment levels). As one wag remarked, "The Fed has found another string on which to push."
Some have argued that QE2 is another sop to the banks, but that does not make sense. Moving out the yield curve in bond purchase will lower the interest rate differential between the banks' super low borrowing costs and the interest they earn by parking the proceeds in Treasuries. If the aim were to help banks rebuild their balance sheets, the central bank would want to create a steep yield curve, one with a considerable difference between short and long-term interest rates, as Greenspan did in the wake of the savings & loan crisis. So the aim of "flattening" the yield curve is not to help banks earn easy spread income. It instead appears designed ot encourage investors to take "risk on" trades, in the cheery assumption that real economic activity will follow.
But this logic is spurious. Lower cost funds or investment capital will not lead entrepreneurs to gin up new projects. Business opportunities develop out of opportunities in the real economy; the cost of funds can operate as a constraint, but with interest rates low as it is, it seems highly dubious that a further discount on the cost of money is going to make much difference to businessmen (and it's also worth noting that lower the rate on Treasuries does not necessarily improve availability of credit to small businesspeople).
However, one clear and immediate effect of QE2 has been to sour relationships with our major trade partners. The Fed announcement produced swift denunciations from foreign finance authorities, who correctly anticipate that a further round of Fed easing will fuel a dollar carry trade, with destablizing hot money inflows chasing the highest returns in foreign markets. China, Brazil, and Germany were quick to attack the program and some emerging markets have started restricting currency inflows. Charles Dumas of Lombard Street points out that the impact on China will be particularly acute:
In this dollar economy, China is heavily undervalued (though nobody can assess by how much) and the US is overvalued. The Fed's newly created liquidity could in effect "flow downhill" to the undervalued portion of the dollar economy. Already overheated, inflationary China will get a much larger dose of cost-push inflation in food and energy than the US.
Food is one third of China's CPI, versus 14 per cent in America. This makes the recent 20 per cent rise in food commodity prices more important. Meanwhile, China's competitive leg-up vis-à-vis Japan, Korea, Germany and others will be exacerbated by a further 5 per cent trade-weighted devaluation (in line with the dollar) - a currency impact that is likely to take effect much more quickly than any benefit from devaluation to the US. So higher Chinese inflation arising from QE2 is a double-whammy: demand-pull as well as cost-push.
Food inflation is a charged political issue in China, and the officialdom is particularly sensitive to any foreign measures that might undermine their legitimacy at home.
I want to interrupt (and, at the same time, underscore) Yves' post for a moment with some commentary from Salon's Andrew Leonard, "The Fed's magic money machine annoys the world," as well as some stats reported by Zero Hedge from the Bureau of Labor Statistics and the US Department of Agriculture, from late Friday:
The Fed's magic money machine annoys the world
The latest effort by the U.S. to juice its economy gets an internationally frigid reception
By Andrew Leonard
Salon.com
Friday, Nov 5, 2010 18:08 ET
* What do China, Germany, Brazil and South Africa have in common? Answer: Each country boasts the largest economy on their respective continents, and each country strongly disapproves of Ben Bernanke's recently announced attempt to stimulate U.S. growth by injecting $600 billion of newly created money into the economy. Next week's G-20 meeting of the world's advanced economies is shaking up to be a doozy!
* China's Vice Foreign Minister Cui Tiankai: "It would be appropriate for someone to step forward and give us an explanation, otherwise international confidence in the recovery and growth of the global economy might be hurt. "
* Germany's Finance Minister Wolfgang Schaeuble called the policy "clueless" and sure to create "extra problems for the world."
* South African Finance Minister Pravin Gordhan declared that "developing countries, including South Africa, would bear the brunt of the US decision to open its flood gates without due consideration of the consequences for other nations."
* Brazil's finance minister called Bernanke's move an "error" and Brazil's central bank president said it would have "negative consequences for other countries."
The first takeaway here is that the global outrage can be seen as proof that the Fed's action might actually have some salutary effects for the U.S. economy...
--SNIP--
...The U.S. was originally hoping to use the G-20 forum to put pressure on China on such issues as yuan valuation and rare earth trade policy. That won't be quite so easy if the rest of the G-20 decides that the U.S. is the real rogue nation...
Getting back to Yves' post in a moment, she covers the food price inflation issue as if it's more pertinent to the Chinese political landscape than it is here in the U.S.
However, the facts are that...
1.) as noted by Zero Hedge, reporting on new Bureau of Labor Statistics' and JPMorgan Chase data, on Friday...
...The problem, however, is that for the lowest 20% of Americans, as per the BLS, food and energy purchases represent over 50% of their after-tax income (a number which drops to 10% for the wealthiest twenty percentile). In other words should rampant liquidity end up pushing food and energy prices to double (something that is a distinct possibility currently), Ben Bernanke may have very well sentenced about 60 million Americans to a hungry and very cold winter, let alone having any resources to buy trinkets with the imaginary wealth effect which for over 80% of the US population will never come.
CHART: "% of after-tax income spent on food and energy by income level."
...and...
2.) "Americans On Foodstamps Hits New Record In August, Increase By Over Half A Million To 42.4 Million, 17% Increase Year Over Year."
....Americans on foodstamps has increased by over half a million in August, hitting a fresh all time high of 42.4 million people relying on the government for basic sustenance. At least now we know where that labor force is going. The August number is a 17% rise from the same time a year ago. That number is up 58.5% from August 2007, before the recession began.
In other words, food inflation and energy prices (I might add, if you click on the link in the next paragraph) are quite charged political issues right here in the United States, as well!
(Unfortunately, as it was noted in the run-up to the market implosion in September 2008, price inflation may sometimes be caused by Wall Street speculation [at Main Street's direct expense] within insufficiently-regulated commodities markets, right here at home: "CFTC Verifies Taibbi Charges: Wall St. Caused '08 Oil $ Spike.")
This is further exacerbated by the basic reality that the U.S. doesn't control international oil prices, in general.
Back to Yves...
The bizarre element of this move is its timing. The QE2 launch will hopelessly undermine the US position at the G20 meetings this weekend. Geithner had been pushing for the idea of having an agreement that countries running overly large trade surpluses seek to rein them in; no less that the Financial Times' Martin Wolf thought it was a sound idea. We were skeptical because even though this sounds good as an international trade motherhood and apple pie statement, without any real penalties, it's mere showmanship. However, the plan had a few wrinkles that make it seem a tad more substantive. For instance, 4% of GDP was proposed as the limit of reasonable trade imbalances; persistent results above or below that range would trigger negotiations on how to bring it back into line.
What is going on here? Bernanke, Geithner, and Paulson famously worked fist in glove throughout the crisis, but they seem badly out of sync now. The ill timed Fed move means that QE, and not any US initiative, will be the focus of the G20 sessions. China is using it as an excuse to torpedo the Geithner proposal:
Cui Tiankai, a deputy foreign minister and one of China's lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back "to the days of planned economies".
"We believe a discussion about a current account target misses the whole point," he added, in the first official comment by a senior Chinese official on the subject. "If you look at the global economy, there are many issues that merit more attention - for example, the question of quantitative easing."
China's opposition to the proposal, which had made some progress at a G20 finance ministers' meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve's plan to pump an extra $600bn into financial markets.
It's a bit disingenuous for China, which has a pegged currency and currency controls and more than a few state owned banks, to lecture the US about a planned economy, but America has made such a botch of this situation that China doesn't need to make a credible argument to win allies.
The US has managed to isolate itself, and for no good reason. Geithner peculiarly tried to negotiate with China bilaterally over its peg against the dollar, when many other emerging markets were also suffering as a result of China's peg. QE2 has flipped a situation where China could have credibly been depicted as the bad actor to one where the US is the troublemaker.
Bold type is diarist's emphasis.
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As promised, I wanted to end this post on somewhat of an up note (as long as you ignore inconvenient/contradicting truths such as THIS, THIS, THIS and THIS), from Gretchen Morgenson's report in today's NY Times: "He Saw Trouble Coming. Now He Sees It Going."
He Saw Trouble Coming. Now He Sees It Going.
By GRETCHEN MORGENSON
New York Times
November 7, 2010
ARE we finally coming out of the woods, economically speaking?
Two data points from last week seemed to indicate an upswing ahead. October's employment figures rose more than economists had expected, and the stock market clawed its way back to levels last reached just before the calamitous events of fall 2008.
But positive indicators can and do disappoint, so I decided to consult an expert on these matters: Ian Shepherdson, chief United States economist at High Frequency Economics. As a reader of economic tea leaves over the last five turbulent years, Mr. Shepherdson has a darn good record. For instance, unlike the throng of economists who failed to see the housing crisis coming, Mr. Shepherdson warned his clients in fall 2005 that real estate would crash and a recession would ensue.
He was early, of course, and now acknowledges that he was not nearly emphatic enough in his warnings. But he was fundamentally right back then and has been consistently on target since. So, I am happy to report that he sees the beginnings of a turn in the economy that could translate to a rise in gross domestic product growth and an improving employment picture in the second half of 2011.
The basis for his view is a shift, albeit nascent, in commercial and industrial bank lending. The trend is real, he said, and as it gains steam, small businesses should receive more credit, for which they have been starved. And because these companies employ half of the nation's work force, this credit expansion will translate into real employment gains...
Shepherdson is someone whom I've quoted in past diaries. So, I certainly do value his judgement and forecasts. (Read the whole piece [see link, above] for more comprehensive context.) However, virtually all of his sentiments are predicated upon a Wall Street lending environment which is far more willing to provide credit--and much more friendlier, in general--to Main Street than the TBTF banks have acted, over the past couple of years.
But, at the very least, this is a significant, educated ray of hope in what is, still, a very bleak economic environment.
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