The author, Federico Pistono, periodically writes a new chapter and I just signed up for updates.
The introduction caught my eye.
Introduction
You are about to become obsolete. You think you are special, unique, and that whatever it is that you are doing is impossible to replace. You are wrong. As we speak, millions of algorithms created by computer scientists are frantically running on servers all over the world, with one sole purpose: do whatever humans can do, but better. These algorithms are intelligent computer programs, permeating the substrate of our society. They make financial decisions, they predict the weather, they predict which countries will wage war next. Soon, there will be little left for us to do: machines will take over.
Does that sound like some futuristic fantasy? Perhaps. This argument is proposed by a growing yet still fringe community of thinkers, scientists, and academics, who see the advancement of technology as a disruptive force, which will soon transform our entire socioeconomic system forever. According to them, the displacement of labour by machines and computer intelligence will increase dramatically over the next few decades. Such changes will be so drastic and quick that the market will not be able to abide in creating new opportunities for workers who have lost their jobs, making unemployment not just part of a cycle, but structural in nature and chronically irreversible. It will be the end of work as we know it.
Most economists discard such arguments. Many of them don’t even address the issue in the first place. And those who do address this issue claim that the market always finds a way. As machines replace old jobs, new jobs are created. Thanks to the ingenuity of the human mind and the need for growth, markets always find a way, especially in the ever-connected and globalised mass market we live in today.
In this book I will try to avoid picking either side based on belief, gut feeling, or hunch. Rather, I will attempt to engage in informed logical reasoning, based on the evidence we have so far.
The book is divided into three parts. First, we will explore the topic of technological unemployment and its impact on work and society – I chose to focus on the US economy, but the same argument applies to most the industrialised world. In the second part we will look into the nature of work itself and the relationship between work and happiness. The last part is a bold attempt to provide some practical suggestions on how to deal with the issues presented in the first two parts. Doing a thorough examination of each section would require a monumental effort, possibly resulting in thousands of pages, far exceeding the purpose of this book. My intention is not to write a complete academic report, but rather to initiate a discussion about what I think will soon be one of the biggest challenges that we have to face as a society and as individuals. Too often we treat various issues as separate subjects, not realising the interconnected nature of our reality. This mistake has made us weak and vulnerable. Over the last 70 years, we have set the stage of our own demise. We have become increasingly discontent, the quality of our relationships have diminished, and we have lost track of what really matters. Today, as the comedian Louis CK has noted: “Everything is amazing, and nobody is happy!” It is time to take a step back and think about where we are going.
Let us begin the journey. ...
Part I is on Automation and Unemployment, and consists of five chapters. Parts II and III are not yet posted. Inquiring minds may wish to follow the journey.
What If?
In the following short 4-minute video Federico Pistono asks "What if the jobs cannot come back? What if it is intrinsically impossible for the jobs to come back? What if unemployment is structural?"
Here is a 17 minute video that is also worth a look. Pistono argues "no one is safe" while asking "what happens if Walmart fully automates?"
Here is my favorite snip from the video: "As much as 80% of the people hate their job. That's four out of five spending most of their useful life doing something they don't particularly enjoy. We are in kind of a work paradox because we work long and hard hours, on jobs we hate, to buy things we don't need, to impress people we don't like. Genius!"
Structurally High Unemployment
For several years I have been writing about the concept of "Structurally High Unemployment" but Pistono goes far beyond that. He explores the idea this is not just another creative destruction phase that will be followed by another job boom, but rather this is the end, computer intelligence is why, and that's a great thing!
Pistono's socialistic vision of the future is that robots will do everything, there are infinite resources, no one has to work, and we all live happily ever after.
To say I disagree about that Pollyanna endgame is putting things mildly. And since I believe there is no work-free nirvana, here's the key question: what if Pistono is half-right, that no job is safe, that no jobs are coming, but robots do not provide the "But that's OK" nirvana Pistono imagines.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Courtesy of my friend Bran who spotted these weather related anomalies in France. Via Google translate, it appears that French economists blame the weather for ...
Delayed maturation of fruits and vegetables
Disrupted cows
Public work productivity declines
Increased electrical consumption
Construction degradation
5 to 10% drop in tourist reservations
Decline in bridge traffic in May between 10% and 30%
30% drop in custom restaurants due to closed outside terraces
Sacrebleu!
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Krugman comes out blazing with the statement "Noah Smith recently offered an interesting take on the real reasons austerity garners so much support from elites, no matter how badly it fails in practice."
He then cites various sources who suggest "business interests hate Keynesian economics because they fear that it might work".
While halfheartedly dissing a similar thesis in Naomi Klein’s Shock Doctrine, Krugman goes on to say the "thesis really helps explain a lot about what’s going on in Europe in particular."
Paul, Please Be Serious
The first problem I have with the article is Krugman knows damn well that no Austrian-minded economist on the planet supports what is commonly, and mistakenly (on purpose) referred to as "austerity".
Please take a look at what Austrian economists want vs. what the nannycrats in Brussels delivered.
What Austrians Want
Lower taxes
Less regulation
End of Fractional Reserve Lending
Sound money
Smaller government
Work rule reform
Pension reform
Free trade
What Brussels Delivered
Higher income taxes
Higher VAT
Proposed financial transaction taxes
More regulation
No free trade
Little if any work rule reform
Little if any pension reform
Reluctant (at best) cuts in government jobs
Reluctant (at best) cuts in government spending
No sound money
No end of fractional reserve lending
Bailouts at taxpayer expense
Insanity on Steroids
Krugman and others parade that mess as "austerity". It's not austerity. Rather, it's insanity on steroids, and every Austrian economist on the planet knew it would not work.
Yet, month in and month out we have to listen to the likes of Krugman saying or implying "I Told You So".
Well, la de frickin' da. I told you so too. And so did thousands of others, Keynesians and Austrians alike.
Krugman would have you believe it's austerity as implemented vs. Keynesianism. Well, it's not, and he knows it, because any thinking mind knows tax hikes in the middle of a recession is insanity.
Idiots Do Idiotic Things
I do not know for sure why the idiots in Brussels forced those measures on Greece, Cyprus, Spain, Portugal, or Ireland, but the most likely explanation is simply "idiots do idiotic things".
To jack this into a belief that politicians did these things out of fear Keynesian policies might work is more than a stretch of the imagination, it's preposterous.
About Those Keynesian Solutions
No, Paul, we do not fear Keynesianism or Monetarism will work, because theory and practice alike say neither will work. If they did work, Japan would not be a basket case after 20 years of trying.
I have asked this simple question of Krugman for what seems like a decade "When does it stop Paul? When?"
Krugman has never answered, but one can presume "never". Japan is supposed to keep on spending money it does not have on wasteful projects "until it works". The US supposedly needs to do the same.
The average 7th grader knows that paying people to dig holes and then others to fill them back up again is economic idiocy, but the average Keynesian doesn't.
With Japan leading the way, we are about to witness the results of such foolishness, but the comfort to the US is Japan will blow up first. Will that change Krugman's mind?
Hardly. And I have an ironic suggestion: Krugman does not want to try Austrian solutions out of fear they might work.
Given the world has tried his methods and they have failed, what else should one believe?
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
The simmering feud between France and Germany erupted into a heated political exchange following Pressure on Hollande to take bold action to revive the French economy, calling for new pension and labour market reforms.
"The commission’s list of recommendations for Paris, which it expects to be delivered in return for allowing France two extra years to meet its budget deficit targets, covered all the hard issues the socialist government faces: cutting public spending; restoring badly diminished competitiveness, opening up restricted markets, reforming the tax regime and loosening tight labour market regulations."
Leading members of Angela Merkel’s ruling Christian Democratic Union in Germany have fiercely criticised François Hollande, accusing the French president of “shaking the foundations of the European Union”, only hours before the two leaders met in Paris in a bid to repair their troubled relations.
Deep German concern about the French government’s resistance to economic reform and hostility to EU pressure emerged after Mr Hollande said it was not for the European Commission “to dictate” reforms to Paris.
“There is no need for European recommendations; what’s needed is obvious. It’s not for the commission to dictate what we have to do,” Mr Hollande said in response to the commission, whose call was part of its annual assessment of budget plans for all 27 EU members.
The French president’s “vehement criticism of the European Commission’s reform proposals . . . contradicts the spirit and letter of European agreements and treaties”, said Andreas Schockenhoff, a deputy chairman and foreign policy spokesman of the CDU in the German parliament. “Someone who talks like that is shaking the foundations of the EU.”
Norbert Barthle, budget spokesman of the CDU in the Bundestag, said the two-year extension granted to Paris in meeting the 3 per cent deficit target was more than Germany had expected.
“France won’t be able to bank on such indulgence again,” he added, saying that Mr Hollande had misunderstood the nature of European co-operation if he thought he could accept the benefit proposed by the commission but reject the conditions attached.
Reflections on the Obvious
Somehow it is OK for France to stipulate conditions on Greece, on Ireland, on Cyprus, on Portugal, and on Spain but not be told what to do itself.
The number of people out of work in France hit a record high in April, the daily Les Echos said on Thursday, casting more doubt on President Francois Hollande's pledge to reverse a long-running rise in unemployment.
The number of registered jobseekers rose by about 40,000 in April from March's previous high, the financial daily reported ahead of the official publication of the figures later on Thursday. It did not quote its sources.
The government is holding to its pledge to turn around the trend by year-end despite multiple forecasts to the contrary, hoping that the economy will start to pick up in the second half of 2013 and that subsidised jobs will help keep a lid on unemployment.
The European Commission, the OECD and France's own jobless benefit fund all see unemployment continuing to rise through 2014. The EU executive said on Wednesday it expects French unemployment to reach 10.6 percent this year after 10.2 percent last year and keep increasing to 10.9 percent in 2014.
"Obviously Obvious"
The odds of a major economic recovery in France in 2013 with socialists in control are essentially zero, and subsidizing jobs is the wrong approach in the first place. Both of those statements are "obviously obvious", except to socialist fools and Keynesian clowns.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
One year. That is the time that the government has to undertake major reforms. The European Commission has published today the document with recommendations to the European Council on the National Reform Plan. Includes advice on pensions, taxes, government spending, administrative reform, etc.. There is virtually nothing that Brussels (and the governments of EU members) does not create the need to change, accelerate or deepen.
On Wednesday Brussels gave Spain more time to reach a budget deficit of 3%, but warns that to achieve this, it is still necessary to continue with the fiscal effort.
Brussels calls for "a systematic review of the tax system by March 2014." Normally, these words have meant raising taxes on consumption (VAT or special) to relax the pressure on other that penalize wealth creation, such as income tax or social contributions. But in the current document there are only requests to raise taxes.
The above snip did not do full justice to the idiocy of the latest Brussels demands. The only thing I support is pension reform.
Tax hikes will do nothing but cause another plunge in revenues and another rise in unemployment.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Looking for value? Then don't look where the herd is looking.
By the way, someone occasionally asks "who is curve watchers anonymous?" One person went so far as to do a search and wondered why the only references were to my blog. The reason is simple, I made up the name and have been using it for years.
I prefer GoldMoney to other precious metal holding companies but that is an admittedly biased opinion as I have a relationship with them. Anyone wanting additional information on GoldMoney: Please Email Mish
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Schäuble is convinced that "Spain has made enormous progress in recent years under the Government of Mariano Rajoy". So much so that now Spain "has a strong economy, reduced labor costs, has significantly increased its exports and has done a good job in restructuring its banking sector, also after the trial of the Troika".
Spain, on the right track
In this sense, on financial reform, says that "all international agencies agree that Spain is on the right path" also "regarding to the recapitalization of the banks." Asked if it is all done in the Spanish financial system reform, Schäuble gave their trust to the minister of economy and competitiveness Spanish: "It is my duty to give advice to my colleague and friend Luis de Guindos , he knows better than me what has to do ".
Over four-page interview in the Journal of Vocento, Schäuble never tires of positive messages about the Spanish economy. Not only speaks of "tremendous advances" for Spain Rajoy has achieved, but doubts that at one point made investors wary of the Spanish economy "no longer exists", not least because "Spain reject outright the possibility of not repay the loans made." "The state capital need could not be funded under acceptable conditions. This is the only reason that Spain has had to seek help from the European Stability Mechanism to recapitalize their banks," he added before insisting that "the figures and results "of Spain and its reforms" are impressive. "
What is Shäuble smoking?
Most likely Shäuble's comments are some sort of election ploy for chancellor Angela Merkel. If that's not it, he has lost his mind.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
In an interesting development in the battle to see which country is bright enough to exit the euro first, a book urging a return to the Escudo (the prior Portuguese currency) became an instant a bestseller in Portugal.
A book by a Portuguese economist achieved a small feat on its release last month: It instantly topped Portugal's bestseller list, overtaking several diet books and even the popular erotic novel "Fifty Shades of Grey."
The book, "Why We Should Leave the Euro" by João Ferreira do Amaral, has helped ignite a public debate in Portugal about the real cause of the country's economic pain: Is it only the hated austerity needed to secure European bailout loans, or is the euro?
Public lectures, TV debates, newspaper columns and some politicians are starting to explore a question that until recently was confined to university seminars: whether the country has a realistic path to recovery inside the euro.
Portugal "has no chance of growing fast within a monetary union with a currency this strong," Mr. Ferreira do Amaral said in a recent interview. "Thankfully, this issue has stopped being taboo, and there is now a lot of discussion here and abroad." The book is in its fourth edition, selling more than 7,000 copies so far—a lot for an economics tract in the small Portuguese market.
Mr. Ferreira do Amaral is getting some high-profile backers. This month, Supreme Court of Justice President LuÃs António Noronha Nascimento called for Portugal and other Southern European countries to quit the euro, warning the gap between Europe's richer and poorer states will keep widening otherwise.
Whether the debate gains traction depends on the economy, analysts say. Portugal's government insists the long-awaited recovery will arrive in 2014, but many economists doubt that. If the recession continues, politicians will need to enact even more budget cuts to meet EU deficit targets. "It may become too hard for politicians to sell austerity measure after austerity measure," says Antonio Costa Pinto, political scientist at the University of Lisbon. "This could create the perfect environment for a shift of ideas."
A year ago, only 20% of Portuguese wanted to leave the euro. It would be interesting to see a similar poll in a few weeks after debate over the book escalates.
Wahl-O-Meter support for AfD now clocks in at 8.9% and the Green Party is down to 10.5% from 11.4%. Wahl-O-Meter is not a statistically valid poll, yet I have been told by reader Bernd (not AfD party leader Bernd Lucke) that Whal did better than polls in predicting results of previous German elections.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Hedge funds are the least bullish on gold in more than five years as speculation about the pace of money printing by central banks whipsawed prices, driving volatility to a 17-month high.
Money managers cut their net-long position by 9 percent to 35,686 futures and options as of May 21, the lowest since July 2007, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 6.7 percent to a record 79,416. Net-bullish wagers across 18 U.S.-traded commodities slid 2.1 percent, as investors became more bearish on coffee and wheat.
Investor sentiment is “negative towards gold,” and physical demand has started to slow, Suki Cooper, a New York-based analyst at Barclays Plc, said in a May 24 report. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.
“I would be underweight the commodities at this point until we start seeing a pickup in global growth and a self-sustaining recovery here in the U.S.,” Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $130 billion. “The global economy has been decelerating, and China is struggling.”
Metal Will Get “Crushed” Says Credit Suisse
Unlike copper, gold is not an industrial commodity so a slowing global economy is simply not that pertinent. It appears to me that neither Ric Deverell at Credit Suisse, nor Chad Morganlander at Stifel Nicolaus has a clue about what the fundamental driver for the price of gold is.
Granted sentiment is poor, but bull markets tend to end on good news with extreme positive sentiment (such as we see now with US equities), and bear markets end on bad news and extreme pessimism.
Speculative positioning in gold is at a 5-year low on little over a 30% drop in price. That is hugely negative sentiment for such a routine drop. Bull markets do not end that way. They end with the masses becoming true believers.
I strongly suspect the bull market in gold will not end until after the public embraces gold in a major way.
Inquiring minds may be interested in a chart of Spanish public debt over time to see how the policies of Spain and the Troika are working out in practice.
My stab at a translation of text regarding public debt reads "Spanish banks are deluded. They must think we are going to save them from the assets that they have purchased."
Pension Benefits Need to Drop 22-45%
Regarding pensions, here is a Mish-modified translation of various paragraphs from site: "Pension benefits need to drop between 22% and up to 45% on average to avoid bankruptcy of the system. The projected costs and revenues of Social Security until 2050 and the population pyramid ensures an inevitable adjustment to retirement benefits. We are up Spain creek without a paddle. The state does not have money for anything."
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Things are getting rather interesting in the Netherlands as low interest rates have increased pension deficit liabilities. Unlike the US and other parts of Europe where deficits are ignored, Dutch law requires 105% funding and the plans fell from 152% funded in 2007 to 102% funded today.
This has forced pension plans to cut benefits by as much as 7% for some trades. As might be expected, this has given rise to a 50 Plus Party, which won election to the Dutch parliament for the first time last year on promises to defend the interests of pensioners.
A combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits.
For the Dutch, the cutbacks are the first ever in a nation which has the second largest “defined benefit” system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unraveling under the pressure of the financial crisis and ensuing recession.
In April, under orders from the Dutch central bank, 66 of the country’s 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range.
Last September the parliament, under pressure from older voters, approved new rules that allow pension schemes to use a higher rate to gauge the pace at which inflation will erode liabilities.
This has lowered liabilities, and funding targets. The sector as a whole now has a coverage ratio of 105 per cent under the new rules, but just 101 per cent under the old rules, according to an analysis by Aon Hewitt.
As at 2007, a quarter of Dutch retirees were below the age of 60. Early retirement has proved extremely expensive for defined benefit schemes, especially as longevity has risen sharply. On average, Dutch men aged 65 can expect to live for another 18 years as of 2011, up from just 15.5 years a decade earlier.
Head in the Sand Solution
Burying your head in the sand is not a solution to the problem but that is exactly what the Dutch parliament did by assuming higher rates of inflation (and interest on bonds) in a low-yield world.
This is yet another consequence of central bank policy to drive down interest rates. When the US stock market heads south again (and it will), US pension plans, already trillions of dollars underfunded, will become even more underfunded.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
When political leaders do out of there way to make make mollifying statements on the economy, it's a sure thing the opposite is about to happen. Platitudes are flowing in Japan as Haruhiko Kuroda, Japan’s central bank governor, says the risk of systemic instability is “not large”.
Haruhiko Kuroda, Japan’s central bank governor, said the country’s financial system could cope with rising interest rates only once the economy improved, as he laid out the stakes in his attempt to tame the volatile bond market.
Japanese banks and insurance companies have accumulated vast holdings of government bonds whose value would fall sharply if investors demanded higher yields on newly issued debt. The BoJ calculates that a 1 percentage point rise in rates would lead to mark-to-market losses equivalent to 10 per cent of tier one capital at big banks, and 20 per cent at weaker regional lenders.
Mr Kuroda said he believed that Japanese financial institutions were “strong enough to deal with these negative effects even if such a situation occurred” and that the risk of systemic instability was “not large”.
Rates on 10-year Japanese government bonds climbed to 1 per cent last week for the first time in a year. The market has gyrated since Mr Kuroda announced in April that the BoJ would dramatically increase its purchases of JGBs, to the equivalent of about 70 per cent of new issuance, in an effort to stimulate lending and investment and reverse more than a decade and a half of consumer price declines.
Rates Climb Even With Japan Buying 70% of New Issuance
Rates are climbing even with massive purchases by the bank of Japan. That tells you banks and pension plans are attempting to unload existing inventory as well.
There is no one to unload to, except the Bank of Japan. Yet given age demographics, pension plans are now net sellers of Japanese bonds. And Japan is still piling on more debt with a 10-trillion Yen ($128 billion) stimulus package.
Kuroda says "rates must stay low until the economy improves" but in spite of the improvement in the stock market, business investment and demand for loans shrank for the 5th straight quarter.
The only way rates can stay low with this borrowing is is the Bank of Japan buys 100% of new issuance and all sellers of existing bonds at a price the central bank likes.
This is theoretically possible, but only if Japan is prepared to suffer the consequences of a collapsing Yen.
Factset Buyback Quarterly has an interesting series of charts and facts on corporate share buybacks.
Here is my favorite chart in the series.
Aggregate Buybacks: Dollar-value share repurchases amounted to $93.8 billion over the fourth quarter and $384.3 billion for 2012. The fourth quarter total is in-line with that of Q3, but represented year-over-year growth of 9.6%.
Sector Trends: The Information Technology and Health Care sectors spent the most on quarterly repurchases ($19.8 billion and $14.4 billion, respectively) in Q4 2012. However, of the sectors that averaged $2 billion or more in quarterly share repurchases since 2005, the Industrials sector showed the largest sequential and year-over-year growth (30.6% and 59.4%) in dollar-value buybacks.
Buyback Conviction: Dollar-value buybacks amounted to 79.1% of free cash flow on a trailing twelve month basis, which is the largest value since Q3 2008. The Consumer Discretionary and Consumer Staples sectors both spent more than 100% of their free cash flow (116.7% and 114.2%, respectively). The Energy and Utilities sectors spent $35.8 billion and $1.4 billion, respectively, on buybacks, despite generating negative free cash flow (-$25.7 billion and -$23.5 billion). The Consumer Discretionary sector also led all sectors in repurchasing the most shares relative to its size. Over the trailing twelve months, the sector repurchased shares that amounted to 4.5% of the sector’s average shares outstanding over the year.
Timing Suspect at Best
One look at the above chart is all it takes to see most shares are bought back at high prices rather than low prices.
And check out the latest authorizations.
Looking Forward: Program Announcements & Buyback Potential Going forward, several companies in the S&P 500 have authorized new programs or additions of $1 billion or more since December 31st, including Gap (GPS), Blackrock (BLK), Marathon Petroleum (MPC), L-3 Communications (LLL), Visa (V), Allstate (ALL), Moody’s (MCO), CBS Corporation (CBS), Dow Chemical (DOW), and AbbVie (ABBV). In addition, even larger authorizations were made by United Technologies Corp. (UTX), 3M Co. (MMM), and Lowe’s (LOW), which all announced replacement programs worth approximately $5.4 billion, $7.5 billion, and $5 billion, and Hess Corporation (HES), which announced a $4 billion buyback program on March 4th. Finally, a number of banks were approved to buy back large amounts of common and preferred shares in 2013. JPMorgan Chase (JPM) which was approved for $6 billion in share repurchases, Bank of America (BAC) was approved for $5 billion in share repurchases plus $5.5 billion in redemption of preferred shares, and Bank of New York Mellon (BK), U.S. Bancorp (USB), State Street Corp (STT), and American Express (AXP) were also approved to repurchase greater than $1 billion worth of shares.
Why? Share prices certainly are not cheap.
Much of the buybacks are in conjunction with massive shareholder dilution via stock option grants to executives. The executives continually unload their shares and corporations buy them back.
Buybacks from the last two years generally look good, at least right now. But for how long? 2006 and 2007 buybacks looked good too, up until the crash.
Is this yet another case of "here we go again?"
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
"Europe needs to be rethought. We consider just one year of information and then hold a referendum to say yes or no to the euro and yes or no to Europe. " Beppe Grillo to ride a strong theme of the last election campaign the 5 Star Movement. "Europe on the euro and the British teach us democracy. No party can claim the right to decide for 60 million people. "
"I want to go to Europe and re-discuss a Plan B to be in five years, "added the leader M5S, explaining:" When we do, then we are ready for a referendum and we decide whether to stay in the euro or not."
Sooner or later this sentiment is going to catch fire. And the sooner the better for Europe when it does.
The political opposition that Spain remains part of the euro begins to crystallize. And the tool to achieve that end-Spain output of the single currency is again signing a manifest public that, for the moment, has already been signed by around 1,000 professionals convinced "the risks of deterioration and degradation that there are the enormous social suffering caused by the persistence of adjustment policies, austerity and privatization of the public ".
Among the signatories are former general coordinator of United Left (IU) Julio Anguita or economists Juan Francisco MartÃn Seco and Pedro Montes, Manuel Monereo addition, Manuel Muela and Carlos Martinez, president of Attac Spain, or exsindicalista Agustin Moreno. Written Signatories to the start for a first finding analysis: the level of unemployment is "catastrophic "the indebtedness of the Spanish economy to the outside is" unable to cope "and the evolution of public accounts leads inexorably to the" economic collapse of the state ".
Specifically, they say, more than six million unemployed, more than 2.3 billion euros of gross liabilities from the outside and a public debt of almost a billion euros, growing and already close to 100% of GDP, "are data defining an unmanageable mess, endanger destroy coexistence and social rights. "
Jose Carlos Diez, chief economist at Intermoney, feels Spain should not be the first country to leave but "should have a plan to do it." This was pointed out in a meeting he had with el Economista.
Spain should never be forced out. We are a big country in Europe, and we must enforce our political weight, seeking alliances to solve the crisis. But if Portugal or Italy decide to leave the euro, we must have a plan to get out that day, "he answered a question from a reader. "I hope that there is intelligent life in Europe and that day may never come," he added.
Euro Exit Manifest
The talk has started. That is the first step. Inquiring minds may wish to read the Euro Exit Manifest mentioned in the first link.
Greece was supposed to get it's debt to GDP ratio to 100% by 2012, then 100% by 2013, then 110% by 2014. Now Jeroen Dijsselbloem, president of the Eurogroup finance ministers, says Greece May Get Still More Time to meet fiscal targets.
And the alleged level of debt sustainability keeps rising all the while.
The euro zone may give Greece more time to meet fiscal targets agreed under its international bailout, the chairman of the euro zone finance ministers said in an interview published today.
"The Commission΄s approach regarding fiscal consolidation is more flexible, giving certain countries more time to meet their targets. I believe that this will be the case for Greece if needed," Jeroen Dijsselbloem told Kathimerini newspaper.
Greece΄s European partners agreed last year to extend the maturities and reduce the interest on the nation΄s bailout funds to help cut its debt mountain to a more sustainable level of 124 percent of GDP in 2020, from an estimated 173 percent this year.
Greek Debt Unchanged After Massive Bailouts and Haircuts
Note that the sustainable level of debt is now 124% of GDP, ratcheted up numerous times in the past couple of years..
Two bailout agreements, total aid of 240 billion euro, and one bonds’ ‘haircut’ later…. Greek public debt remains as high as it was in 2010 – the year in which Greece sought the ‘rescue’ by the International Monetary Fund.
2010: Public debt: 310.3 billion euro 2013: Public debt: 309.4 billion euro
The public debt is almost the same, we are all still sitting on the same old boat. Just the economic situation of the average Greek is much worse: bankrupt households, unemployment at 27% and 64% among youth 15-24 years old, recession and even deflation. Oh, and a sharp rise in suicides and homeless.
I hope nobody remembers Evangelos Venizelos, finance minister in March 2012, heralding after the Greek bond swap (53.5% haircut) “we got rid of 100 billion euro debt.”
More Time Is Useless
By now it should be readily apparent the situation is totally and completely hopeless.
Greece will not reduce debt to 124 percent of GDP by 2020 from an estimated 173 percent this year, unless of course Greece defaults.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
April Employment vs. April Employment in Previous Years
click on chart for sharper image
Tim writes ...
Hello Mish
Bernanke was touting the direction of employment using the familiar "7.5%" numbers and pointing to all the improvement. While granting that more people are working now than in 2010, we recognize that more people are working part time and less people are working overall than in 2008.
This got me wondering how long it took to recover to pre-recession employment numbers in the past.
Up until the recession of 1982, All drops in employment from one year to the next had fully recovered to new employment highs within 2-3 calendar years. In the recessions around 1982, 1991 and 2001, job recovery took about three calendar years.
In our current malaise, we have been at this 5 years and employment is still 2.2 million people below the employment number in April 2008. Moreover, part-time employment is up about 2 million workers. Thus, full-time employment is 4 million below the 2008 number, 5 years ago.
Tim
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Here's some news that caught my eye earlier today when I was on the road: The Markit Flash France PMI® shows French private sector output continues to fall at marked rate in May.
Key points:
Flash France Composite Output Index unchanged at 44.3
Flash France Services Activity Index unchanged at 44.3
Flash France Manufacturing PMI rises to 45.5 (44.4 in April), 9-month high
Flash France Manufacturing Output Index up to 44.3 (44.1 in April), 9-month high
Summary:
The downturn in French private sector output continued in May. Unmoved from April’s reading, the Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, posted 44.3. Although remaining above the levels registered in Q1, the latest reading was indicative of a marked rate of contraction in overall activity.
Comment:
Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI®, said: “May’s unchanged PMI reading points to ongoing struggles for the French private sector economy. Activity has continued to fall at a marked pace in Q2 so far, suggesting that another drop in GDP could well be on the cards following the recent confirmation that France was in recession during the previous two quarters. PMI data highlight continued pressure on employment and operating margins, as the difficult business climate facing French companies persists.”
Mish Comments
Scores below 50 designate contraction, and scores in the 44-range designate substantial contraction, so those 9-month highs just go to show how awful conditions are.
With French president Francois Hollande at the helm of France, and the nannycrats in Brussels in control elsewhere, don't expect conditions to get much better any time soon.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Spanish banks will need to put aside extra provisions of up to €10bn to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain.
According to recent data, Spanish banks rolled over more than €200bn of loans before they expired – often because corporate borrowers would be unable to repay their debt on time and in full. The €10bn estimate is the first official assessment of the likely impact of the central bank’s new approach towards these refinanced loans.
The Bank of Spain believes that the risks emanating from this practice, known as “extend and pretend”, have not been fully covered and is pressing all banks to reclassify their refinanced loans according to tighter standards by the end of September. The new regime will make it harder for banks to treat refinanced loans as if they were performing normally, in turn forcing lenders to take additional provisions.
“Our banks will need more provisions,” a senior official at the Bank of Spain told the Financial Times. “The provisions will affect their results, but the question is by how much. We cannot know for sure but we think the impact will be between €5bn and €10bn [in provisions] across the system.”
€10bn or €100bn?
Banks rolled over €200bn of loans because they could not pay debt on time, pretending the loans were current, and the Bank of Spain estimates the risk at a mere €10bn.
Who do they think they are they fooling?
Will 70% of those loans be paid back? 50%? 20%? I don't know but I strongly suggest it sure will not be 95%.
Given the perpetual over-optimism on Spanish bank losses, I estimate there is a 0% chance the losses on this disclosure will be as little as €10bn.
That said, I do not know what the existing loan loss provisions are, but if they are high enough (extremely doubtful), then there is some chance the losses will be on the order of €30bn or so (on the general principle things are typically 300% worse than the optimistic scenario).
This does not factor in losses on Spanish government bonds when Spain eventually seeks a massive bailout. Realistically, Spanish banks are insolvent.
Another Warning Call!
By the way, this is yet another warning call "If you have money in Spanish banks, move it somewhere else immediately!"
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Christine Lagarde, head of the IMF, is in court today addressing her role in a $366 million payout to Bernard Tapie, a close friend of former president Nicolas Sarkozy who was also Lagarde's boss at the time. Lagarde was Sarkozy's finance minister.
IMF chief Christine Lagarde was questioned in court by French magistrates on Thursday over her role in a 285-million-euro ($366 million) arbitration payment made to a supporter of former president Nicolas Sarkozy.
Lagarde risks being placed under formal investigation at the hearing for her 2007 decision as Sarkozy's finance minister to use arbitration to settle a long-running court battle between the state and high-profile businessman Bernard Tapie.
Under French law, that step would mean there exists "serious or consistent evidence" pointing to probable implication of a suspect in a crime. It is one step closer to trial but a number of such investigations have been dropped without any trial.
In Paris, Lagarde flashed a smile at waiting media as she arrived at court with her lawyer and said: "It's a pleasure to see you."
They were not expected to emerge until the end of the day's proceedings, which could run into late evening. The decision on whether to place her under investigation or give her "supervised witness" status will be announced at the end of the hearing, which could last into Friday.
Lagarde is not accused of financially profiting herself from the payout and has denied doing anything wrong by opting for an arbitration process that enriched Tapie. With interest, the award amounted to 403 million euros.
However a court specializing in cases involving ministers is targeting her for complicity in the misuse of funds because she overruled advisers to seek the settlement.
If Lagarde is formally charged with embezzlement or fraud, she may be asked to resign as head of IMF whether she is convicted or not.
It's difficult to say how much of this is political maneuvering by current French president Francois Hollande, but it's equally difficult to dismiss the charges outright.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Curve Watchers Anonymous has been watching a major selloff in Japanese bonds. Here are a couple charts to consider.
10-Year Japanese Government Bond Yield
5-Year Japanese Government Bond Yield
Since March 4, the 5-year yield has gone from 0.1% to 0.43%. Although a mere .33 percentage points, the move represents a 330% percent rise in in yield.
The Bank of Japan vowed yesterday to take necessary steps to reduce volatility in bond markets that has threatened to jeopardise the government’s fight to end deflation and revive growth.
BOJ Governor Haruhiko Kuroda vowed to take steps needed to reduce volatility in the JGB market, but he disappointed some bond investors by sticking with the strategy of leaving it to BOJ bureaucrats to address the problem by tweaking the bank’s market operations.
Indeed, Kuroda played down any economic impact from the bond moves, where the benchmark yield recently had its biggest three-day spike in a decade as investors struggle to cope with the overwhelming impact of the BOJ’s radical money expansion.
“I don’t think the recent rise in yields is having a big impact on the economy,” Kuroda told a news conference after a two-day BOJ policy meeting.
No Impact "Yet"
In absolute terms there is not much impact, yet. However, I put an emphasis on the word "yet", a word Kuroda conveniently left out.
Curbing Turbulence is Theoretically Easy
It's theoritically easy to curb turbulence. Central banks can in fact control any single economic variable they want such as interest rates, money supply, or even the price of gold.
To control bond turbulence, all the Bank of Japan has to do is corner the market. To do so would be quite similar to the Swiss National Bank putting a cap on the value of the Swiss Franc or the Bank of China controlling the exchange rate of the Yuan vs. the US dollar.
To set a price, the Bank of Japan would have to be willing to buy every single bond offered at that price. It could pick any price it wanted, but the lower the interest rate, the more bonds it would have to buy. At a low enough price, it would have to buy every security.
Damn the Consequences
Theoretically, that's easy. The problem of course is the consequences. If the Bank of Japan does buy every Japanese government bond, it will have no control over things like the value of the Yen, the CPI, various asset bubbles that may form, or in the extreme case - Japanese hyperinflation.
Practical Ridiculousness
If you reflect on what's theoretically possible for more than a second, you will see the practical ridiculousness of the Bank of Japan's statement on curbing turbulence. And what applies to Japan applies even more so the Fed's dual mandate of "low inflation and job growth".
Simply put, it is impossible for a central bank to control more than one variable at a time, and the consequences of controlling even a single variable are rather extreme when the market refuses to play along.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
@SenRandPaul: Instead of examining our broken tax system, the US Senate is about to harass Apple-one of the greatest business success stories in history.
@SenRandPaul: I am offended by a $4 trillion government bullying, berating and badgering one of America's greatest success stories.
@SenRandPaul: To US Senate: I say, instead of Apple executives, you should have brought in a giant mirror if you want to see who is responsible.
@SenRandPaul: Instead of doing the right thing we drag businessmen and women in here to berate them for trying to maximize their profits for shareholders.
@SenRandPaul: Apple has done more to enrich people's lives than politicians will ever do.
@SenRandPaul: To the Apple executives here, I apologize for this theater of the absurd.
@SenRandPaul: If you want to chase companies like Apple away, continue to vilify them. Congress should be giving Apple an award today.
@SenRandPaul: It's absurd for Congress to vilify businesses like Apple for wanting to minimize their tax code just like every other American rightly does.
@SenRandPaul: The Senate hauled before a committee one of America's greatest success stories—and wanted what? Applause?
It's absurd that Apple CEO Tim Cook Should be in Congress in the first place.
Did Apple break any laws? Of course not. Is Apple responsible to absurd tax code or is Congress? The answer of course is Congress. So yes, Rand Paul is correct for forcing Cook to testify.
Apple Inc.'s tax strategies came under harsh scrutiny Tuesday in the Senate, where lawmakers are finding it far easier to call for a simpler tax code than to produce one. Still, nothing in the deluge of bad publicity about the tax code in recent weeks touches on the most durable obstacle to congressional action on a broad tax overhaul. The two parties remain far apart on whether such a rewrite should also raise revenues to reduce the deficit. Democrats insist it should, while Republicans insist it shouldn't.
Sen. Carl Levin (D., Mich.), chairman of the investigations panel, on Tuesday accused Apple of employing "alchemy" and "ghost companies" to escape tax collectors in the U.S. and Ireland, the base of the firm's international operations outside the Americas.
"Apple has sought the Holy Grail of tax avoidance," said Mr. Levin. "Apple is exploiting an absurdity, one that we have not seen other companies use."
Apple (AAPL) CEO Tim Cook‘s offered his testimony on Capitol Hill, before the U.S. Senate Permanent Subcommittee on Investigations, regarding tax policy and overseas earnings, followed by questions from the Senators.
Senator Carl Levin comes back and presses Apple’s tax administration head, Phillip Bullock, as to whether the company effectively “shifted economic rights” to intellectual property, the “crown jewels of Apple Inc,” as Levin puts it, to Apple’s Irish subsidiaries.
Levin persists: “You shifted something, the most valuable thing you have, the economic rights to the most valuable thing you own, intellectual property, the thing that produces the profits, to those three Irish corporations that you own. 70% of the profits worldwide now end up with those Irish corporations. Of course you can bring those profits home. The only reason you’re not is because they’re transferred to those three Irish companies.”
Hypocrite McCain
Fortune magazine says Senators Carl Levin and John McCain were careful to balance praise for Apple's (AAPL) achievements with outrage over its "convoluted and pernicious" (McCain's words) tax avoidance strategies. Sen. Rand Paul showed no such balance. He lit into his own committee's leadership for "dragging" one of America's great success stories into what he called a "show trial."
Mish says McCain is one of the biggest hypocrites you can find when it comes to tax avoidance.
There are two reasons companies keep profits overseas.
Tax law (for which McCain has voted for)
Tax repatriation holidays for which McCain has personally sponsored
Senators John McCain, R-Ariz., and Kay Hagan, D-N.C., introduced legislation Thursday allowing multinational corporations to repatriate their foreign earnings at a reduced tax rate. The bipartisan bill, known as the Foreign Earnings Reinvestment Act, aims to trigger the flow of $1 trillion from the foreign subsidiaries of U.S.-based multinationals at a reduced tax rate of 8.75 percent, as opposed to the statutory corporate income tax rate of up to 35 percent. It would accomplish this through a temporary dividends received reduction of 75 percent.
As an incentive to create jobs, the bill would allow companies to further lower the tax rate they pay to 5.25 percent if they grow their domestic payroll during 2012.
McCain Should Apologize to Paul
It seems to me that hypocrite Senator John McCain should apologize to Senator Rand Paul as well as to Apple.
Instead The Hill reports Sen. John McCain (R-Ariz.), also defended the Senate inquiry, calling it “offensive” for anyone to accuse Levin of bullying.
Final Thoughts
It is absolutely absurd for taxes to be lower overseas than in the US.
Current policy encourages movement of jobs and capital to foreign countries. If anything, taxes ought to be higher on foreign profits than lower. That would encourage investment in the US.
I have been writing about this for years. Levin acts as if this is something new. Perhaps he is dumb enough that he just figured this out. Regardless, he still is not bright enough to realize where to point the finger.
Finally, and as I also pointed out, tax repatriation policies do not help at all. And on that score Senator McCain is personally responsible. He does not know where to point the finger either.
I will be glad when McCain retires. Rand Paul is the future of the party, McCain is the past.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Here are some point-by-point statements by Bernanke with my comments immediately following each set of statements.
Bernanke: Conditions in the job market have shown some improvement recently. The unemployment rate, at 7.5 percent in April, has declined more than 1/2 percentage point since last summer. Moreover, gains in total nonfarm payroll employment have averaged more than 200,000 jobs per month over the past six months, compared with average monthly gains of less than 140,000 during the prior six months.
Mish: What Bernanke failed to say is real wages are anemic and the Fed's low interest rate policy is making it easy for corporations to borrow at excessively low rates and use the money to invest in hardware and software robots to fire workers.
Bernanke: Payroll employment has now expanded by about 6 million jobs since its low point, and the unemployment rate has fallen 2-1/2 percentage points since its peak.
Mish: Even if those were all full-time jobs, this was a very anemic recovery by historic standards.
Bernanke: Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place.
Mish: That is a reasonably accurate set of statements but nowhere does the Fed admit its role in creating those conditions with its boom-bust, moral-hazard monetary policies.
Bernanke: The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.
Mish: The fiscal deficit is high because of perpetual overspending by Congress on top of the Fed's boom-bust, moral-hazard monetary policies.
Bernanke: Consumer price inflation has been low. The price index for personal consumption expenditures rose only 1 percent over the 12 months ending in March, down from about 2-1/4 percent during the previous 12 months. This slow rate of inflation partly reflects recent declines in consumer energy prices, but price inflation for other consumer goods and services has also been subdued. Nevertheless, measures of longer-term inflation expectations have remained stable and continue to run in the narrow ranges seen over the past several years. Over the next few years, inflation appears likely to run at or below the 2 percent rate that the Federal Open Market Committee (FOMC) judges to be most consistent with the Federal Reserve's statutory mandate to foster maximum employment and stable prices.
Mish: The Fed has no idea what inflation is or why because the Fed ignores asset bubbles in stocks, in bonds, and in houses. It uses fatally flawed definitions of inflation, and inaccurately measured at that.
Berrnanke: Over the nearly four years since the recovery began, the economy has been held back by a number of headwinds. Some of these headwinds have begun to dissipate recently, in part because of the Federal Reserve's highly accommodative monetary policy. Notably, the housing market has strengthened over the past year, supported by low mortgage rates and improved sentiment on the part of potential buyers. Increased housing activity is fostering job creation in construction and related industries, such as real estate brokerage and home furnishings, while higher home prices are bolstering household finances, which helps support the growth of private consumption.
Mish: Housing sentiment has indeed improved, but that is of course what happens when central banks artificially suppress rates with the purposeful intention of creating bubbles, not to help consumers but to bail out banks still stuck with housing inventory they need to unload.
Bernanke: Over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period. For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.
Mish: At best, that's a start. And it fails to address untenable union wages and benefits and absurd collective bargaining agreements of public workers.
Bernanke: At the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year. The Congressional Budget Office (CBO) estimates that the deficit reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points during 2013, relative to what it would have been otherwise.
Mish: It is preposterous to whine about pissy cuts in spending when the cuts have all been back-end loaded, and there are no real cuts in the first place. Congress did not really cut anything. It decreased the amount of expected budget increases and called that a cut.
Bernanke: In present circumstances, with short-term interest rates already close to zero, monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.
Mish: Headwinds? From non-existent cuts? From a rollback of tax cuts that should never have happened in the first place?
Bernanke: Although near-term fiscal restraint has increased, much less has been done to address the federal government's longer-term fiscal imbalances. Indeed, the CBO projects that, under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter, in large part reflecting the aging of our society and projected increases in health-care costs, along with mounting debt service payments. To promote economic growth and stability in the longer term, it will be essential for fiscal policymakers to put the federal budget on a sustainable long-run path.
Mish: Note the blatant hypocrisy of Bernanke whining about non-existent cuts, about tax rollbacks the country could not afford, while warning Congress that something must be done to put the federal budget on a sustainable long-run path.
Bernanke: Importantly, the objectives of effectively addressing longer-term fiscal imbalances and of minimizing the near-term fiscal headwinds facing the economic recovery are not incompatible. To achieve both goals simultaneously, the Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
Mish: Yeah, right. Like what? Of course that's not his problem. He just begs Congress to kick the can down the road, which of course is all the Fed ever does too.
Bernanke: With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools. The first of these alternative tools is "forward guidance" about the FOMC's likely future target for the federal funds rate.
Mish: Got that? Forward guidance is a tool. In reality, the Fed is totally clueless about the economy, about housing housing, about jobs, and about where interest rates should be (as directly evidenced by it repeat bubble-blowing exercises).
Bernanke: The second policy tool now in use is large-scale purchases of longer-term Treasury securities and agency mortgage-backed securities (MBS). These purchases put downward pressure on longer-term interest rates, including mortgage rates. For some months, the FOMC has been buying longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per month. The Committee has said that it will continue its securities purchases until the outlook for the labor market has improved substantially in a context of price stability. The Committee also has stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
Mish: Note the dual mandate nonsense of jobs and inflation. It is impossible for bureaucrats and central planners to target one factor of the economy accurately. Two is insane. Yet, price stability is easy enough to achieve. Simply get rid of the Fed and fractional reserve lending.
Bernanke: At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes.
Mish: That makes sense (in a perverse sort of way). The Fed has no idea what it is doing so it needs to be prepared to do anything.
Bernanke: In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment. Importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee's 2 percent longer-run objective.
Mish: What a bunch of self-serving nonsense. Higher asset prices have primarily benefited the wealthy. For discussion, please see Who Won? the 93% or the 7%? Why?
Moreover, Bernanke does not understand the simple math of 2% inflation over time. When wage growth does not keep up, and it hasn't, huge economic distortions arise along with dependency on food stamps, disability, and other programs. In short, 2% stability, is very destabilizing. I spoke about this at length in Fallacy of Inflation Targeting.
Here is the key chart.
Inflation Targeting at 2% a Year
Over time, prices rise, but wages for the masses do not. Worse yet, Bernanke, cheap money philosophy makes matters worse because it encourages businesses to invest in hardware and software robots that will enable companies to fire more workers.
There are no benefits of artificially low rates, at least to the average worker.
Bernanke: That said, the Committee is aware that a long period of low interest rates has costs and risks. For example, even as low interest rates have helped create jobs and supported the prices of homes and other assets, savers who rely on interest income from savings accounts or government bonds are receiving very low returns. Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability. For example, investors or portfolio managers dissatisfied with low returns may "reach for yield" by taking on more credit risk, duration risk, or leverage.
Mish: The committee would not recognize risk if it jumped up and spit in Bernanke's face. Low interest rates have already undermined future financial stability bu encouraging "reach for yield" excessive credit risk, duration risk, and leverage.
Bernanke: Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve--consistent with its congressional mandate--to provide policy accommodation as needed to foster maximum employment and price stability. Of course, we will do so with due regard for the efficacy and costs of our policy actions and in a way that is responsive to the evolution of the economic outlook.
Mish: Bernanke took one last opportunity to hide behind a ridiculous dual mandate while turning a blind eye to the destabilizing asset bubbles it creates.
