Stephen Roach on the US economy and the Fed

Stephen Roach is a sharp critic of the manner in which the US govt. is building up debt, and the US Fed printing cheap money:

http://www.project-syndicate.org/commentary/federal-reserve-quantitative-easing-ecb-emerging-economies-by-stephen-s--roach

His piece speaks for itself, so I don't know why I am putting extracts down on my site! Except that I have to say I agree, and would like to have it at hand whenever I need it again

"The convoluted logic behind this strategy is quite disturbing – not only for the US, but also for the global economy. There is nothing cyclical about the lasting aftershocks of a balance-sheet recession that have now been evident for nearly five years. Indeed, balance-sheet repair has barely begun for US households. The personal-saving rate stood at just 3.7% in August 2012 – up from the 1.5% low of 2005, but half the 7.5% average recorded in the last three decades of the twentieth century.

CommentsMoreover, the debt overhang remains massive. The overall level of household indebtedness stood at 113% of disposable personal income in mid-2012 – down 21 percentage points from its pre-crisis peak of 134% in 2007, but still well above the 1970-1999 norm of around 75%. In other words, Americans have much farther to go on the road to balance-sheet repair – which hardly suggests a temporary, or cyclical, shortfall in consumer demand."

In other words, the deleveraging by households is about 1/3rd of the way done, whereas this has resulted in govt debt shooting up to nearly 3 times GDP. Cheers! Wonderful for the dollar - once the world is done dealing with the Euro, and ends up with at least one new currency - the drachma or the D Mark. perhaps many more, as the Euro project is fried. Zen ze dollar will be fried, too.

And, just in case anyone believes that the current debt scenario was forced by the Recession, here is a note from Peter Singer, writing for Brookings:
"What makes the problem worse is the poor track record that both parties have at shrinking this debt. Over the last 50 years, the US has only run a budget surplus five total years."

And, on the connection between debt and inequality, here's what Keynes wrote,
"“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."

Read more: http://www.businessinsider.com/socgens-dylan-grice-is-more-worried-than-ever-2012-10#ixzz28CVU22tP

We the ordinary people.

In dispassionate prose, my dear friend Madhavan writes that public services will never improve unless our public masters are forced to use them: http://www.livemint.com/articles/2012/08/20195232/A-dictator-for-a-few-hours.html#.UDW7KZVJK60.twitter.

His comments seemed especially appropriate when I took my 90 year-old father to Max Clinic for emergency investigations at 9 this morning. While I dealt with valet parking and wheel-chair, I noticed a white Ambassador parked on the kerbside with its phalanx of self-important stickers, and the all-important orange beacon.

When I returned to the kerbside an hour later, the Ambassador was still there. "It will be here till 2 o'clock" - for instant service of one of our potentates. Meanwhile,this ordinary tax-payer waited on the kerbside with his 90 year-old father for the car to be ferried from parking half a kilometer away.

Oh, the arrogance, the hypocrisy, of our public servants, who have perfected a system that serves only themselves.

The OPM of the Masses

Government debt is the OPM of the Masses

Just like the NINJA borrowers of the US housing boom, governments have proved to be dishonest and imprudent borrowers.

In India, debt has been raised to pay black-marketers of kerosene, smugglers of PDS wheat, and cooks of public works books. In the US, it is paying the indigent to stay at home, and corporate jailors to house people for consuming and trading one of the most harmless intoxicants, marijuana. But even the largest public debt in the history of civilisation will be hugely inadequate to pay for the inflated medical bills and social security that the US citizenry have come to take as their birth-right. And I guess we better mention Greece, whose citizens have taken to calling German a Nazi nation because its government, whose officials work till 65, are asking their Greek counterparts, who retire at 60, to go easy on their entitlement programs.

This is a world gone crazy. And yet, it was entirely predictable. The phenomenon is called OPM, or ‘Other People’s Money’. Government funds are of course someone else’s money, and the millions of Someone Elses from whom the money is taxed are usually too disorganised to come together to protest. Even if they did, those from whom the bulk of money is taken are a much smaller number than those in whose name the money is spent, so in the rules of the electoral game, they count for little. This leaves those who seek office to compete with each other in promising to extract enough OPM to make the majority, and the most vocal minorities, better off. This process is the true OPM of the masses.

Increasingly, the tax collections of the world’s governments have not been able to keep pace with its spending ambitions. But heads of government would rather not let reality intrude on the OPM-fuelled promise that they can generate prosperity by redistribution. Increasingly, they have been funding their electoral promises by borrowing money. If money markets became tighter, they leaned on Central bankers to open up the money supply, and keep borrowing cheap. In the US, they succeeded; in Greece, since the central bank is shared with Angela Merkel, they got a ‘Nein’. Which is why the US government can borrow money for next to nothing, while the Greek leaders are having to deal with reality.

Reality, of course, has a way of catching up with dreams. If Merkel holds her stance, the European reality check will come this weekend, and this could mean that world markets hit a wall. If, on the other hand, she gives a little - which has been the story of the last couple of years - there will be a little more OPM available in Greece. And Spain. And tiny little Cyprus.

But, run out it will, in Europe to begin with, but also in India, in China, in Japan, in Argentina. Not to mention the US. For the time being, the world is largely ignoring the magnitude of US government debt, but Obama’s administration is the most egregious borrower of all. Any realistic price for US government borrowing will make its public finances completely unviable. When this reset happens, there will be a horrific fallout for the global economy, currently coasting on the illusion that the dollar is a safe haven. In the aftermath, there will be a demagogic deluge about the viciousness of markets.

Markets, of course, are only a forum for individuals to take the decisions they deem most rational at the time. And unlike the electoral process, which gives unbridled power to its periodic winners for long periods of time, financial markets are continuously dynamic; no individual player can hope to set, say, the yield for US debt, in the manner in which monopolistic central bankers routinely do.

It will take a while for our collective economic wisdom to understand the profound fallacy of allowing central bankers to fix the price of money, and yet talk of market failure. It will be convenient to demonise investment bankers when bankrupt governments can’t borrow more. And we may never be able to quantify the distortions introduced into societies spoiled by millions of perverse economic incentives introduced by government policy.

Nevertheless, when the OPM dream fades, we will all be in a cold sweat. It won’t be pleasant for anyone, but it is one more step on the painful path of realisation that centralised decision-making is hugely flawed and deeply demeaning. 

Final Act of the Greek Tragedy

Extend and Pretend is running out of time. Germany has made its intentions clear, as these two articles point out. What I can't figure is why the markets are not absorbing this fact. Time to buy some good 'fat-tail' options.

http://www.ft.com/intl/cms/s/0/3588be46-b8ab-11e1-a2d6-00144feabdc0.html#axzz1yI4pmKxL
http://www.ft.com/intl/cms/s/0/a438a8a6-b8ab-11e1-a2d6-00144feabdc0.html#axzz1yI4pmKxL

Hang On! This analysis shows that the 'half-life' of positive news flow is decaying fast. This would suggest that events could unwind very rapidly, very soon.

http://si.wsj.net/public/resources/images/OB-TK979_EUROHE_G_20120619151633.jpg

Imagining the future

http://www.thebaffler.com/past/of_flying_cars/print

An economic observatory?

From Paul Saffo in Foreign Policy

Imagine [...] an institution with the analytic resources of Wall Street players, the reach of Google, and the openness of Wikipedia. Such an observatory would leverage the capacities of cyberspace to become a global (and cost-effective) clearinghouse for economic information. Its scope would extend far beyond the data collected by established entities today, for example probing deep into the world’s illicit economies and exploring the market implications of rapidly spreading social media. And unlike those institutions, it would serve a purely informational role with no policy responsibilities.

Above all, this economic observatory would be open and independent, inviting the participation of crowds and encouraging the broadest possible research access to its data in the service of rethinking our global economic architecture. Funding is less of a hurdle than one might think. Such an observatory could be operated on a fraction of the 342 million-euro annual budget of the Organization for Economic Cooperation and Development. Moreover, its smaller budget would provide the flexibility required to preserve both the appearance and actuality of independence. It might even be possible to crowdsource the bulk of its budget over the Internet.

Gov. Subbarao fuelling a real estate bubble

When interest rates are negative in real terms, savers are forced to hunt for yield, creating ideal conditions for asset-price bubbles. On Tuesday, April 17, Mr. Subbarao, Governor of the Reserve Bank of India, topped up India’s inflation tanks at a time when they were just beginning to approach a balance with the reality of India’s economy.

While most observers were expecting the RBI to lower interest rates by 25 bps, the Governor cut 50 bps off the price banks pay to borrow money – all the while protesting that inflation was not yet licked. WTF?

The very next day, the consumer price index for March (new series) came in, registering a 9.45% inflation, year-on-year. The policy announcement and the price data were rather poorly coordinated – or perhaps they were well-coordinated! In follow-up meetings to his credit policy review, Mr. Subbarao kept all options open regarding future moves in interest rates, making for a rather quixotic situation.

One of the more significant developments in banking over the last year has been the slowdown in bank deposits. Since you can’t fool all the people all the time, Indians are gradually realising that bank deposits are a bum deal when you lose buying power by lending your money to a bank. If you are a tax-payer, the real loss is significant. The percentage of household putting their savings into equity is small, and diminishing. Aside from the perennial favourite, gold, that leaves real estate.

In South Delhi, real estate prices have moved up 30% over the last year, making it one of the most over-heated property markets in the world today. The March consumer price index reflected this, showing that housing costs are up 14% year-on-year. This is a huge number; with Mr. Subbarao pushing real interest rates deeper into negative territory, it’s going to get worse. The real estate bubble is getting bigger.

Pop!