Who Cares About Credit Rating Agencies?

Yesterday, Standard & Poors cut the credit rating of the Netherlands from AAA to AA+. Market reaction? Dutch yields fell marginally, from 2.03% to 2.027%. Similar previous downgrades of the United States and France was similarly not followed by an uptick in yields. This is a sign that very few or nobody cares about them anymore, and to the extent they do it is only because government regulation forces companies to use the ratings when valuing assets in their balance sheets. And that is good and rational, considering their awful track record.

David Stockman On Fed's Lunatic Policy

Here are what David Stockman says about Fed (and other central bank) policy. An excerpt from the interview:

"The Fed is exporting this lunatic policy worldwide," Stockman said, referring to the Federal Reserve's asset-purchasing program. "Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere."

"It's only a question of time before the central banks lose control, and a panic sets in when people realize that these values are massively overstated," he said.

The issue, says Stockman, is that central banks around the world have followed the Fed's dovish lead "for either good reasons of defending their own currency and their trade and their exchange rate, or because they're replicating the Fed's erroneous policies."

Either way, "Central banks have been massively expanding their balance sheets," which has reduced interest rates on government bonds, and increased the amount of money chasing a fixed set of assets.

Stockman, who is the recent author of "The Great Deformation: The Corruption of Capitalism in America," says that it takes little digging to discover that assets are overextended.

"This is a financial asset bubble, and you can see it in the valuations if you want to look at it," Stockman said on Tuesday's episode of "Futures Now." "The Russell 2000 is hitting another peak today—it's trading at 75 times reported trailing earnings. That makes no sense. It's up 43 percent in the last year, but earnings of the Russell 2000 companies have not increased at all. It's up 230 percent from the bottom. Mainstream America is not doing that well."

Swedish Money Supply Growth Increases Further

Swedish money supply growth increased further in October, to 5.9% from the 5% rate I mentioned in my previous post. Yet Paul Krugman still thinks it is equivalent to an Ayn Rand-style gold standard.

Krugman's Bizarro Post About Sweden

Krugman has a blog post about Sweden's monetary policy, whose message can be summarized in four points as:

-The Swedish central bank is holding interest rates higher than they otherwise would have to prevent a housing bubble.
-This supposedly amounts to "bubblephobia" and at the same time also a puritan "haunting fear that someone, somewhere, may be happy."
-Bubbles are supposed to be created, and besides they can't really be prevented.
-The aforementioned policy is somehow the equivalent of an Ayn Rand-style gold standard.

The first point is sort of true, though interest rates at 1%  are still being held too low to prevent continued debt build up because of the fear of consumer price deflation and an excessively strong exchange rate.

The second point just illustrates how nut Krugman has become. It is somehow irrational to want to avoid bubbles? That of course completely ignores the negative after effects of bubbles, which means that people won't be happy.

Krugman may think that the negative after effects can be avoided by constantly inflating more and more, but that is as misguided as an alcoholic that thinks the hangover can always be prevented from happening by being constantly drunk, 24/7.

The third point consists largely of the same bubble-loving nonsense and is also self-contradictory since he both argues that it is proper to pursue policies that leads to bubbles and at the same time asserts that the bubbles have nothing to do with them.

And the idea that the Riksbank policy, which still implied money supply growth of 5%, is equivalent to an Ayn Rand-style gold standard, that is just plain silly.

Janet Yellen's Trickle Down Economics

Jeffrey Bell at the Weekly Standard points out the monetary policy views of Janet Yellen (and other Keynesians and Monetarists) essentially amounts to an inflationist trickle down theory: inflate asset prices and thereby make the already rich even richer, then the rich will consume some of that extra wealth, and it will trickle down to everyone else. I made the same point in 2011, except then with reference to Bernanke.

Was Jack Welch Right After All?

According to this New York Post article, the strong employment reports released before the 2012 election were in fact fabricated just as former General Electric boss Jack Welch asserted at the time (something that he was widely criticized for).

Krugman Is Endorsing Bubbles Again

Interesting post about how Paul Krugman endorses a text by Larry Summers where Summers asserts that the economy "needs bubbles just to achieve something near full employment". I guess Krugman hasn't learned a thing since he in 2002 advocated a housing bubble.

Of Course QE Has Significantly Boosted Stock Prices

If I hadn't already read so many completely ridiculous articles before, I would have written that this article, and the McKinsey report it references is the most ridiculous I've ever read, as it is asserted that QE has had at most only a small effect on stock prices

They first have an empirical argument by asserting that valuation levels really aren't high, but that's because they use a misleading measure, namely current stock prices compared to projected future earnings. But such projections tends to be systematically over-optimistic as official "analysts" wants to fool people in to buying stocks, something their firms profits from. Furthermore, their last data was from december 2012. Since then, the S&P 500 has risen by more than 26%.

If you instead look at stock prices compared to actually reported earnings, you can see that they are about 50% higher than the historical average.
And as they noted themselves later, stock prices aren't just boosted through higher valuations, they're also boosted by increasing corporate profits. Their assertion that this effect is however supposedly small rests on the faulty assumtion that this only happens because of lower interest expenses. A more important causal channel is by raising product prices more than wages/salaries. As a result, corporate profits are at an all time high of national income.

Another argument they use, that the negative reaction on stock prices from warnings about taper was transitory only proves the point further. A key  reason it was transitory was because there was no actual taper.

They further use the "theoretical" argument that lower interest rates will only have a small effect on the discount rate that investors use when calculating the present value of future earnings and dividends because investors will expect interest rates to rise eventually. That argument fails on two grounds. One is that it is dubious whether we should really expect interest rates to rise soon as the economies become increasingly addicted to cheap money. Another is that the whole point of QE is to bring down long-term yields, something that secures a lower discount rate for all earnings/dividends the coming decade.

 Finally, they argue that most of the money coming in to the stock market from bonds, but from institutional investors. But that proves nothing as it is likely that low bond yields have made them prefer stocks over bonds.

Krugman Views Government Spending As A Goal

After having bashed Germany last week, Krugman now defends France, arguing that the fact that some advocates of deficit reduction criticize France for doing it through tax increases shows that their real goal is shrinking government spending, not deficits.

Krugman is certainly right that many people, including me, who advocate deficit reduction views lower government spending as a goal, for ideological and/or economic reasons. However, there's no conflict between viewing deficits as a problem and thinking that spending cuts are a better way of reducing them than tax increases, especially in a country like France, where government spending relative to GDP is the highest in the world, except for Denmark

Furthermore, Krugman reveals by his wording that he himself inserts ideological thinking in this, except he has the opposite ideology of viewing government spending as something good. While he normally attacks "austerity policies" fiercely, he describes the French tax increasing policies as being "fiscally responsible". Not exactly the words he use to describe spending cuts.....

Venezuela Arrest Store Owners

Hugo Chavez may be dead, but his successor Nicolas Maduro continues his crazed Marxist policies by first inflating so much that price inflation soars above 50% and then blaming store owners for it, arresting them and seizing their stores. 

Of course, running those stores with low prices even as input costs increases will in the end be very costly for the government. And the example this creates is of course going to discourage any even remotely sane businessman from investing in Venezuela.

Record Gap Between U.S. Employment Surveys

As noted several times in the past, unlike most countries, the U.S. two different employment surveys, one based on households and one based on employers ("the payroll survey"). Since they're supposed to describe the same real-world phenomenon they should generate the same numbers, but they often don't since they have different data sources, and both are somewhat unreliable.

The latest month and year, the divergence has been record large, with the payroll survey coming with far stronger numbers than the household survey. Here's how they changed the latest month:

Payroll: +204,000 jobs
Household: -735,000 jobs

And the latest year:
Payroll: +2.33 million jobs
Household: +0.24 million jobs

Part of the most recent monthly divergence could be related to furloughed federal workers during the partial shutdown counting as employed in the payroll survey but not in the household survey, but even adjusting for that the household survey still suggests a much weaker labor market than the payroll survey.

What Really Irks Krugman About Germany

Paul Krugman really doesn't like Germany. He has in the latest week devoted note only one of his twice-weekly NY Times columns, but also half a dozen or so blog posts to attacking Germany. What has Germany done to make him so upset? Well, they have a large current account surplus, which Krugman claims is bad for the entire World economy because it is in a "liquidity trap".

But why Germany? There are countless countries over the world with larger relative surpluses, including for example Singapore, Saudi Arabia, Kuwait, Norway, Switzerland and the Netherlands. But Germany is the biggest in absolute terms (after having recently surpassed China), you say? So this means that if they break up Germany, the smaller political units would get off the hook?

And the notion that the entire world is in a "liquidity trap" is false too. Even if we for the sake of the argument accepts that theory, it is in fact the case that most countries in the world don't even have official short-term interest rates at zero. And except for Japan and Switzerland, no countries have long term yields close to zero. So there is more than enough room for German savings to push down interest rates around the world.

No, what really irks Krugman about Germany is two things. First of all, Germany has proven another of his predictions false. Krugman long asserted that for Southern European current account deficits to be eliminated, the German surplus must also be eliminated. Well, the Southern European deficits have now been eliminated, but the German surplus remains as large as ever, proving Krugman wrong.

The other thing that annoys Krugman is that Germany is a success story, with strong finances, low unemployment and high per capita growth "despite" the fact that it has a political culture dominated by semi-Austrian, anti-Keynesian ideas, and pursues policies of that kind.

For QE To "Work", It Needs Asset Price Bubbles

Often, advocates of "quantitative easing", reason in "Underpants gnomes" fashion:


QE-advocates version of this business plan is:

Phase 1: Central Banks purchase bonds.
Phase 2: ?
Phase 3: Higher growth!

So what could phase 2 be about, really? One possibility is exchange rates, but as noted before, exchange rates are a zero sum game, some countries  depreciation will be others' appreciation. Another possibility is to make sure the rich become even richer, or to create a "wealth effect" as central banks call it, by inflating asset prices. The fact that this increases the inequality that leftists claim they're opposed to, or that it creates potential bubbles is something that QE-supporters completely ignores.

Joe Wilson Was Right

Joe Wilson was widely criticezed for telling Obama "You lie!" during Obama's speech to Congress, but more people need to follow his example and confront Obama when he lies.
 


 Because he does that very often. Here are just three example compiled by Scott Sumner

  1. Taxes: The president defended his proposal by saying that, for high-income taxpayers, “the tax rates would just go back to where they were under President Clinton.” The president reminded his listeners that the economy grew at a rapid clip during the Clinton years, adding tens of millions of new jobs.

[Added below is an excerpt from Sumner's linked text, which was written in 2010]

In 2010, the top income tax rate bracket for ordinary income is 35 percent. Besides wages and interest income, this income category includes profits from pass-through business firms—sole proprietorships, partnerships, and S-corporations. Under the president’s proposal, the top bracket will rise to 39.6 percent. A stealth provision that phases out high-income taxpayers’ itemized deductions will also be reinstated, adding another 1.2 percentage points to the effective tax rate, bringing it to 40.8 percent. Wages and some of the pass-through income will also remain subject to a 2.9 percent Medicare tax. These 40.8 and 43.7 percent tax rates, which will apply in 2011 and 2012, match the 1994 to 2000 rates—the same top bracket, stealth provision, and Medicare tax were in place then.

But the picture changes in 2013. Under the healthcare law adopted in March, the Medicare tax will rise that year, from 2.9 to 3.8 percent. Also, a new 3.8 percent tax, called the Unearned Income Medicare Contribution (UIMC), will be imposed on high-income taxpayers’ interest income and most of their pass-through business income that’s not subject to Medicare tax. So, under the president’s proposal, virtually all of top earners’ ordinary income will be taxed at 44.6 percent, starting in 2013. We’re not just going back to the Clinton-era rates of 40.8 and 43.7 percent.

A similar pattern holds for capital gains. Under the president’s plan, in 2011 and 2012, the top rate on gains, now 15 percent, will go to 20 percent, with the stealth provision adding 1.2 percentage points, sending the tax back to its 1997–2002 level of 21.2 percent. Starting in 2013, though, capital gains will also be hit by the UIMC, pushing the rate to 25.0 percent. Under the president’s proposal, virtually all of top earners’ ordinary income will be taxed at 44.6 percent, starting in 2013. We’re not just going back to the Clinton-era rates of 40.8 and 43.7 percent.

Dividends may, or may not, face a much steeper tax increase. If Congress does nothing, the top dividend tax rate will rise from 15 percent today to the Clinton-era effective rate of 40.8 percent in 2011 and 2012, with the UIMC pushing the rate to 44.6 percent in 2013. To his credit, though, President Obama has called for dividend tax rates 19.6 percentage points below these levels, leaving dividends taxed much more lightly than under Clinton. It remains to be seen whether congressional Democrats will go along.

 2. Spying: WASHINGTON – The White House and State Department signed off on surveillance targeting phone conversations of friendly foreign leaders, current and former U.S. intelligence officials said Monday, pushing back against assertions that President Obama and his aides were unaware of the high-level eavesdropping. Professional staff members at the National Security Agency and other U.S. intelligence agencies are angry, these officials say, believing the president has cast them adrift as he tries to distance himself from the disclosures by former NSA contractor Edward Snowden that have strained ties with close allies

 3. Healthcare: President Obama repeatedly assured Americans that after the Affordable Care Act became law, people who liked their health insurance would be able to keep it. But millions of Americans are getting or are about to get cancellation letters for their health insurance under Obamacare, say experts, and the Obama administration has known that for at least three years.

Exchange Rates Are A Zero Sum Game

According to preliminary estimates, euro area inflation fell to 0.7% in October, the lowest since 2009, and "core" inflation fell to 0.8%, the lowest ever during the existence of the euro area.

This has the usual suspects up in arms about "deflationary trap", which is then used to argue that the ECB should try to push down the euro's exchange rate just like the Bank of Japan has done with the yen's.

But this overlooks that a key reason for the drop in inflation is the way other central banks, particularly the Bank of Japan have lowered the value of their currencies, causing the euro's value to increase.

We need to remind ourselves of two things. First, how does "quantitative easing" increase price inflation? Well, there are many ways, but one of the most important causal mechanisms is by lowering its exchange rate. That will raise import prices, something that not only raises consumer prices directly but also indirectly by allowing domestic producers to raise their prices and by increasing the cost of imported inputs. Also higher nominal export earnings will put upward pressure on prices.

The second thing to remember is that exchange rates are a zero sum game. If one currency's exchange rate depreciate, a weighted average of the world's other exchange rates increases at the same rate. Thus, when Japan started to implement "Abenomics" it had a deflationary effect on other countries at the same time that it had an inflationary impact on Japan.

As I've noted before, between 2006 and 2012, the prices of Japanese imports to the U.S. rose by 1-2% per year, but during the latest year they have dropped by 2.8%

So if the ECB successfully emulated "Abenomics", the effect would be deflationary on all economies except the euro area (and the countries that pegs their currencies to the euro). That is not something I would view as bad, or at least not necessarily bad, but the pro-inflation non-euro area pundits that calls for the ECB to inflate would presumably dislike it.