Light of Hope?

Happy 4th of July!

So Europe is turning against austerity. Merkel is alone. Big question is still where the growth is going to come from? German consumers?

China's growth has slowed and policy is at the beginning of an easing cycle.

US is easing further, given the slow down in data? Quite possibly.

So for once in a long while, we can hope for an implicitly coordinated pro-growth policy actions among the major actors of the world economies...

Jobs "structurally" destroyed?

"Structural" unemployment means different things for different people. To PIMCO's Bill Gross, who says that U.S. jobs have been "structurally" destroyed, it means technological change and globalization, and the inability of the U.S. economy and government to counter these structural forces. Not much more than the impression we get from reading financial headlines. (For the interview, and a better read on what Bill Gross is trying to say, listen to this.)

But if you take the argument that lack of aggregate demand is essentially responsible for the sluggish recovery, then there is nothing inherently "structural" about the U.S. economy that supports the outlook of sub-par growth, if only the government can act more forcefully to stop the bleeding. To Paul Krugman, "structural" unemployment is therefore nothing more than an excuse for inaction.

The evidence suggests that jobs have been destroyed across the board.

Global liquidity trap: "the easy stuff!"

Germany sold six-month treasury bills with negative interest rate.

European banks are hoarding cash with ECB, trying desparately to manage their liquidity and balance sheets.

All these are evidence of a "liquidity trap" situation that Europe is in. By Paul Krugman's account, about 70% of the world is in the trap. The strange things going on now in Europe are just some latest evidence.

The concept is not hard to grasp, but the mainstream news media and investment community seem slow in catching on. It's nice to see Paul McCulley on CNBC today talking coordination between monetary and fiscal policies in such a world:

Euro, death spiral

It looks increasingly likely that the Euro has entered a death spiral: Spreading sovereign debt crisis is weighing on bank capital which requires more government supports, causing more stress on government debts.

One hope is for ECB to become the lender of last resort, an idea that Germany has consistently blocked.

The latest European Summit was all about sumitting to the German will of tighter budget control, but without any economic stimulus for the troubled nations. The implications can be deadly.

The 10-year Italian government bond yield is back up to about 6.5%. If it hits 7%, Europe will be back to the full crisis mode again, much sooner than the summit "leaders" have expected.

Jobs sorely missed

- Connecting dots. Follow your heart and intuition.
- Love what you do. Keep looking. Don't settle.
- Know you may die tomorrow.

Idle labor, idle capital, perverse austerity

The great recession of 2008-09 has left us persistent high unemployment, record low interest rate, large corporate and bank reserves. Consumers are struggling to repair their balance sheets, yet neither governments nor large corporations are doing much to help solve the economic slump.

What's going on? Can "market" solve the problem on its own? And what do we mean by that, anyway?

The only sensible diagnosis I've seen so far by economists is that the "advanced world, accounting for 70 percent of world GDP at market prices, is in a liquidity trap."

What should be done?

In the words of Nobel Laureate Peter Diamond:

On the nation’s unemployment problem and how infrastructure spending could help solve it:

–Most of [the 9.1% unemployment rate], more than half of it, is inadequate aggregate demand and what we need now, very badly, is more fiscal stimulus and the continuation by the Fed of rolling out monetary stimulus as it fits their projections of what’s going on.

–Right now we have idle labor, idle capital… [and] interest rates are low, so doing it sooner has that advantage compared to doing it later. And third we do get a Keynesian multiplier out of it. –The fact that infrastructure spending will be phased in slowly doesn’t seem to me a shortcoming right now, because all the forecasts we’ve seen say coming out of this [malaise] is going to be a slow process.

Are we headed for another recession?

–There’s no question that we’re vulnerable….. It’s really important to put into place policies that would have the long-run effect of reducing debt growth. But there’s nothing on the debt side we need to do immediately. We do not have a debt crisis. We have a long-run debt problem and austerity today is perverse from the point of view of unemployment, and insofar as the economy is vulnerable that will make it more vulnerable, and of course a double-dip [recession] will lose us a lot of tax revenue.

Professor Diamond is known for his "search" model of labor market, which brings in a form of market friction to explain the lack of clearance in labor market. Even he thinks the unemployment problem is mostly an aggregate demand problem. The rest could perhaps be attributed to "structural" problems such as skill mismatch.

The interview with WSJ's Kelly Evans shows these takes and views:

Doing a lot more with a lot less

The U.S. corporations have recovered remarkably well. Revenues and earnings are growing in a slow-growth economy. As Jack Welch puts it: The American corporations have learned to do a lot more with a lot less.



Large corporations have a lot going for them: extremely competitive labor market and technologies allowing them to cut costs. On top of that, cost of capital has been driven to historical low as the Fed fights the great recession. They're also able to tap into the fast-growing emerging market economies for demands on their goods and services. The Fed is lending a helping hand here too by maintaining the easy money policy which tends to drive down the dollar.

A natural question to ask the government is why can't it do a lot more with a lot less? The Republicans are clearly on the affirmative. But can austerity really help small businesses and help create jobs? You just can't run a government as if it's a corporation.

Can labor or consumers manage to do a lot more with a lot less? Somehow you just can't push that logic very far with tens of millions of unemployed and under-employed.

Obama's job bill may be too little too late, if it gets passed in some form at all. The Fed's latest "operation twist" (a double twists) may be too little as well. A twisted QE may have more sense given the grim outlook. More firepower should be concentrated on the mortgage market. At least the Fed is trying.