Guest Blogger: Rob Parenteau on Slaughtering PIIGS - Greek Default

Rob Parenteau is the sole proprietor of MacroStrategy Edge which provides macroeconomic analysis to institutional and hedge funds for U.S. equity and global balanced portfolio strategies.  He is a a Research Fellow at the Levy Economics Institute and the editor of the monthly Richebacher Letter. 

Revisiting the PIIGS Led to Slaughter Perspective: Implications of a Greek Default

Last year we provided an analysis (on the Naked Capitalism blog and elsewhere, including the Levy Economics Institute Annual Minsky Conference, and CBC interviews), based on the financial balances approach that suggested a number of problems could arise with the eurozone’s pursuit of what are called “expansionary fiscal consolidations”. Without a large and sustained swing into a current account surplus, the financial balance approach revealed that the pursuit of fiscal consolidation would undermine the ability of the private sector to service the debt loads it had built up during the prior decade of currency union. Simply put, higher taxes and lower government spending drain cash flow from households and firms, and that increases the financial fragility of economies.

For a number of reasons, there appears to be a glaring blind spot with regard to private debt as investors and policy makers remain focused on reducing public debt growth. There is little or no recognition of how changes in fiscal policy may influence the sustainable paths available for the private sector to manage its financial obligations. For example, with regard to the case of Greece, the household debt to GDP ratio soared during the past decade, and is now on par with the rest of the eurozone. However, private sector nonfinancial debt stopped growing in 2008 as the Global Financial Crisis hit, and we have since witnessed the onset of a nominal income contraction since 2009, when fiscal policy became hamstrung by what amounts to a bond investor capital strike.

We currently have in hand an extreme case of this interaction of public and private financial conditions. Investor and policy maker attention is now focused squarely on the prospect of an imminent Greek public debt default. But the issue of a Greek government debt default immediately raises the issue of Greek bank solvency (since much of the Greek public debt is held on their books), and hence provokes the question of how the necessary bank recapitalization could proceed. I doubt the EFSF or ECB (or Qatari investors, for that matter, who must feel like Prince Alwaleed with his Citi holdings) will be in the mood for subsidizing a Greek bank recapitalization if Greece has defaulted on its public debt.

Oddly enough, the level of Greek bank write-offs has been falling since the turn of the year, and private loan growth is once again contracting on a year/year rate as of June. This makes no sense given that nominal GDP growth was contracting at more than a 5% year/year rate through mid year 2011. So what happens if Greek private debt outstanding starts shrinking because Greek banks not only have stopped making new loans, but they can no longer roll the old loans, and in fact, have to shrink their loan books through distress sales of existing assets because they are a) insolvent and b) unable to be recapitalized by the public sector? With regard to the latter, remember that in all likelihood, the Greek government will have to reduce expenditures to match the level of incoming tax revenues if it adopts the default option. Accordingly, there will be little room for them to bootstrap their own bank recapitalization. Possibly if they went completely AWOL, they could reconfigure the Greek central bank to somehow recapitalize the banks, but by then we are on to the new drachma.

I submit with Greece, the world is in all likelihood about to witness yet another case study in Irving Fisher's debt deflation dynamics, which he described a lifetime ago after losing his shirt in the Great Depression – an experience that led him to rethink his conviction that markets are generally self-stabilizing in a general equilibrium fashion. The attempt to move toward zero public debt growth can have very destabilizing results on economies in which the private sector has spent the prior decade leveraging up. This follows from the simple application of double entry book keeping to macroeconomics. As policy authorities who work with the financial balance approach must know, it is a conclusion that depends on no high macroeconomic theory, Keynesian or otherwise. Whether German PM Schauble will be able to recognize that, even as the Greek debt deflation plays out in front of his own eyes, is debatable. Whether the Reinhart and Rogoff Bible will be re-examined for errors or omissions is also debatable. Whether we are about to see “failed nation states” emerge in the eurozone as a result of blithely ignoring these simple principles of double entry book keeping remains to be seen.

Faith based economics is a funny thing that way - although at the moment, it does not look like Zorba is about to get the last laugh, at least not until the debt deflation sewage from the periphery backs up all the way to German banks and German exporters. A Greek public debt default will place the question of the necessary eurozone wide bank recapitalization at the head of the line, which is where the IMF’s Lagarde was trying to place it a week ago before EU officials reeled her back in this week. Even if governments are able to swiftly execute publicly assisted bank recapitalizations in the wake of Greek default, it is high time to recognize that attempting a multi-year, multi-country fiscal consolidation against the backdrop of high private debt to income ratios is bound to produce rising private debt distress, with all that means for the ability of the private sector to generate the income growth necessary to service existing private debt load and higher taxes, and with all that means for the ability of financial institutions to remain solvent. Perhaps this is a lesson best relearned sooner, rather than later. It cost Irving Fisher his fortune, and then his house, before he was prepared to learn that lesson. We need not be so stubborn this time around.

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What President Obama Should Do About Jobs

There has been a lot written about what President Obama should say in his speech this coming Thursday.  There has been speculation for weeks, because the continuing high unemployment attests to the inadequate 2009 stimulus.  It has been argued that the ARRA of 2009 merely shifted employed individuals form one job to another and I have stated many times that the construction stimulus merely kept construction workers employed, but the ugly fact is the unemployed are staying unemployed and the older the unemployed individual the less likely they will find employment as they are subject to not only the discrimination of being unemployed but of being older.  Surveys of the unemployed show they are losing hope and see a dismal future not only for themselves but for the country and their children.  Aggregate demand is contracting and where there is no demand or less demand you do not find job creation.  With the growing economic indicator evidence that the U.S., European, and global economies are slowing down to crawl, pre-recession speeds, unemployment is poised to increase if not surge upon any economic shock.

Many commentators have been dismissive that the President will say anything meaningful, while others have weighed in with their opinions as Warren Mosler did in a post and Robert Reich did in this post. Let me tell you what I think President Obama should do and then I will tell you what I think he will do.

Create an infrastructure program which is ongoing to address the inability of cities and states to build and maintain roads, municipal and regional transportation systems, bridges, schools, sewer systems, and water supplies.  Water, in particular, is becoming a valuable and increasingly scarce commodity.  This will keep construction workers busy and reduce future infrastructure maintenance costs.  No significant new immediate jobs here and it will take one to two years to begin.

Create a government run program to restructure underwater home mortgages to reflect true value and get the housing market moving through the FHA and bankruptcy laws.  Depressed housing prices are a significant factor in the very slow economic growth and deflation.  The current program run through banks has a well documented record of failure and delay.  It needs to get done.

Provide funds, perhaps in the form of loans, to local governments and school systems to insure adequate police, fire, and teaching staffing is maintain for the safety and to insure an adequately educated youth for future growth.

Increase Social Security and Medicare payroll "taxes" to apply to all levels of earned income.  Social Security is not an entitlement, it is a pension in the form of deferred compensation and the top income level for contributions has never been inflation adjusted.  At some point in time, it will have to be admitted that the totally inadequate PPACA will have to be folded into an expanded Medicare program for everyone, because health care is a right to life and denial of adequate health care is ultimately murder.  Payroll tax cuts have little economic stimulus effect as it is little noticed by workers in their paycheck and people are saving and paying down debt not splurge buying; business tends to save tax reductions rather than spend when demand for their services and products have not increased.

Concentrate on efficiency cuts in government.  Government exists to provide services to its citizens.  It is one thing to provide services and another to provide them efficiently.  Any business can tell you this.

Create a National Job Corps.  This is the only way to create jobs now. It has worked in the past and it can work more efficiently now. 

Extend unemployment to those who have lost part-time jobs.  Many people, according to the unemployment statistics, are captive to involuntary part-time employment, because they cannot find full time positions. The loss of a part-time job can be devastating.  With a National Job Corps, unemployment benefits should be temporary transition funds only.

Unfortunately, the political debate within the U.S. is dysfunctional.  The two political parties are engaged in opposition at all costs with a President who holds personal deficit hawk views and who is timidly attempting compromise when, if the President proposed the opposition party's political platform, he would be opposed by that very same party.  The President needs to lead and let those who vote against jobs reap the harvest of their constituency at the next election. This political dysfunction and the President's personal deficit cutting sympathies has lead the President and his advisers to flounder economically as they seek politically acceptable policies which do little or nothing rather than what needs to be done.  These political concerns have caused the President and his advisers to court the wrong constituency.  The economic crisis is not debt; it is jobs and income inequality.  The wealthiest top 1% of the population have too much power as can be evidenced from no banker going to jail for the mortgage frauds or engaging in financially and systemically (globally) dangerous trading and business activities.  In fact, we bailed them out financially.  In a period of aggregate demand contraction (less consumer and business spending), government is the spender of last resort.  When politicians stop an economy from growing with deficit cutting at the wrong time, the economy tanks and misery sets in.  If you are one of the wealthiest 1%, you suffer, but you also benefit from opportunities for more control and wealth.

I expect President Obama to announce spending cuts.
I expect him to propose incentives to businesses to hire workers.
I expect him to announce a job training program in which workers are trained on the job and the government pays them, much like the State of Georgia is doing and nothing like what Germany does. 
I expect him to announce an infrastructure program to build schools.
I expect him to appeal to bipartisanship.
I would not be surprised if he broached the subject of cutting/modifying Social Security and (maybe) Medicare.
I expect him to say, like Hoover, what the financial/banking sector wants him to say.
I expect the amount to be inadequate, say only $300 billion, covered by spending cuts.


We deserve better.



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Jobs = Growth: We Have Neither: Unemployment August, 2011

Real men (and women) want real jobs.  They want to provide shelter, clothing, and food for their families.  It is the 18th Century concept of the pursuit of happiness and some people who have loved and fought for freedom thought of it as a God given inalienable right of all free men.  What we have seen, since the beginning of the 1960's particularly, is the accrual of GDP growth primarily to the top 1% wealthiest in society at the expense of the remaining 99% of society.  We can talk about confidence --- and there appears to be less in the United States, Europe, and globally, but economic data on confidence is always past tense when received.  In the final analysis it comes down to real wages and personal income.  The myth that increases in the minimum wage increase unemployment has been repeatedly shown by economic studies to be false with moderate increases in the minimum wage having no appreciable effect on jobs.  Worker productivity has grown 80% since 1980 while real compensation has only grown 8% and real wages only 7% of which 23.5% of the income went to the top 1%.

The August, 2011 Unemployment report was unchanged (zero net job growth) with unemployment remaining unofficially at 9.1% and total official discouraged workers at 16.2% an increase of one tenth.  Using the older 1994 BLS calculation, Shadow Statistics estimates (this graph will change monthly) the total discouraged workers at approximately 22.8%.  The number of unemployed remained unchanged with no jobs added, because the participation rate went up to 64% and the employment-population rate went up to 58.2%.  The number of workers who could only find part-time work rose to 8.826 million from 8.396 million.  The average work week declined to 34.2 hours and the average hourly wage declined one tenth.  The participation rate is edging up for older age groups including those 55 years of age and older and it appears it will be getting older.  As for education, it appears that educational level is not significant in the ability to find new employment when unemployed and the diffusion index is at 52.2 (below 50 is contractionary) across all industries and is at its lowest level since last September.  For a full set of employment graphs at Calculated Risk go here.

Worse, the prior two months were revised down and the major indicators around those who have jobs are weak  The average duration of unemployment has dropped while the median has increased, which means that more people are dropping out of the labor force discouraged.  There is little remaining the Fed can do leaving the bulk of necessary action in the domain of the government's fiscal policy.  The continuing high unemployment is a direct result of the inadequate stimulus applied in 2009 and the destruction of education jobs will have a serious future effect on the ability of the United States to be competitive and to grow economically.

In an extensive analysis of the United States unemployment figures, the Australian economist Bill Mitchell finds a staggering loss of unemployment, increased under employment, a stagnant labor market, and declining economic growth heading towards recession as the result of the inadequate 2009 stimulus and political bickering which is abandoning U.S. workers to oblivion.

If you look at this link from the economist James Hamilton on the current economic condition with respect to the most recent economic reports, you will see that the United States has been making little meaningful progress in recovering from the global financial crisis and has only very slow growth to look forward to in the next six months.

In graphs from Calculated Risk, you can see several measures of recession and where we are in the terms of slow growth.  Using some different GDP per capita variations, Doug Short looks at recession indicators in a series of graphs and comes to the conclusion we have not yet fallen back into recession, but we are surely in the a second great contraction.  The Consumer Metrics Institute in their August 30 News, which has not yet been posted to their website, argues that the BEA deflators are not correctly portraying nominal GDP in real numbers.  By reverse engineering the BEA numbers, the Consumer Metrics Institute says, "When we recast the GDP growth rates using the BLS sourced deflaters we can build the following table showing the past 10 quarters of growth in "nominal" GDP, "real" GDP using the CPI or PPI tables (as appropriate for each individual GDP line item), the per-capita "real" GDP similarly calculated and the per-capita "real" disposable income (again most recent quarter on the left):

"Annualized GDP Growth Rates Past 10 Quarters

	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010
"Nominal" GDP  Annualized Growth Rate	3.51%	3.09%	4.16%	3.86%	5.43%	5.52%
BLS Derived  "Deflaters"	4.69%	10.65%	2.90%	1.37%	0.36%	4.60%
BLS "Real"  GDP Annualized  Growth	-1.18%	-7.55%	1.26%	2.49%	5.07%	0.92%
BLS Per-Capita "Real" Annualized  GDP Growth	-1.90%	-8.29%	0.32%	1.54%	4.25%	0.11%
BLS Per-Capita "Real" Disposable  Income Growth	-0.60%	-3.62%	1.18%	1.46%	4.47%	2.83%

4Q-2009	3Q-2009	2Q-2009	1Q-2009
4.88%	1.94%	-1.14%	-5.23%
2.11%	-0.43%	8.15%	3.61%
2.77%	2.36%	-9.29%	-8.84%
1.82%	1.42%	-10.06%	-9.59%
1.29%	-3.99%	-4.38%	-10.97%"

                          

Consumer Metrics Institute provides several graphs in the August 30 News asserts the double dip has already occurred with this chart below, which is one of several in the August 30 News, and you can find a larger version of it at the Consumer Metrics link above:




The Consumer Metrics Institute bottom line is the revised data shows Q1 2011 was far worse than recognized but the data shows moderation in the contraction rate but the full effect of the contraction has yet to be felt and deflating commodity prices can have a sudden positive impact on the economy.

The failure of government to create jobs now, not just down the road, has become morally inexcusable.  



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Guest Blogger: Warren Mosler With Economic Speech for President Obama

Warren Mosler is an economist, former hedge fund manager, and institutional investment advisor with his own broker/dealer and investment management firms.  This article was first posted on his blog The Center of the Universe.  I have my own concerns and thoughts on what President Obama should do to create jobs and economic growth with less systemically dangerous financial activity which I intend to write this weekend.  Different opinions and analysis are always useful in developing one's own analytical conclusions.

                                        PRESIDENT OBAMA --- USE THIS SPEECH

This is the speech I would make if I were President Obama:

My fellow Americans, 

let me get right to the point.

I have three bold new proposals to get back all the jobs we lost, and then some.

In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same.

Jobs are lost when business sales go down.  

Economists give that fancy words- they call it a lack of aggregate demand.

But it's very simple.  

A restaurant doesn't lay anyone off when it's full of paying customers, 

no matter how much the owner might hate the government, 

the paper work, and the health regulations.

  

A department store doesn't lay off workers when it's full of paying customers,

And an engineering firm doesn't lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason. 

So the reason we lost 8 million jobs almost all at once back in 2008 wasn't because all of a sudden 

all those people decided they'd rather collect unemployment than work.

The reason all those jobs were lost was because sales collapsed.  

Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.

That's a serious collapse that cost millions of jobs.

Let me repeat, and it's very simple, when sales go down, jobs are lost, 

and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone 

willing and able to work.

That's good for businesses and all the people who work for them.

And these proposals are bipartisan.  

They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.

So listen up!

My first proposal if for a full payroll tax suspension.

That means no FICA taxes will be taken from both employees and employers.

These taxes are punishing, regressive taxes that no progressive short ever support.

And, of course, the Tea Party is against any tax.  

So I expect full bipartisan support on this proposal.

Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living.

This is big money, not just a few pennies as in previous measures.

These are the people doing the real work.  

Allowing them to take home more of their pay supports their good efforts.

Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over.

When government stops taking FICA taxes out of their pockets, 

they'll be able to get back to more normal levels of spending.

And many will be able to better make their mortgage payments and their car payments,

which, by the way, is what the banks really want- people who can make their payments.

That's the bottom up way to fix the banks, and not the top down bailouts we've done in the past.

And the payroll tax holiday is also for business, 

which reduces costs for business, 

which, through competition,

helps keep prices down for all of us, which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living,

and lower costs for business to help keep prices and inflation down,

so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments 

with no strings attached.  

This will help the states to fill the financial hole created by the recession, 

and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday

restores their lost revenues.

Again, I expect bipartisan support.  

The progressives will support this as it helps the states sustain essential services, 

and the Tea Party believes money is better spent at the state level than the federal level.  

My third proposal does not involve a lot of money, 

but it's critical for the kind of recovery that fits our common vision of America   

My third proposal is for a federally funded $8/hr transition job 

for anyone willing and able to work, 

to help the transition from unemployment to private sector employment.

The problem is employers don't like to hire the unemployed, 

and especially the long term unemployed.

While at the same time, 

with the payroll tax holiday and the revenue distribution to the states,

business is going to need to hire all the people it can get.

The federally funded transition job allows the unemployed to get a transition job,

and show that they are willing and able to go to work every day,

which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support.

Progressives have always known the value of full employment, 

while the Tea Party believes people should be able to work for a living, rather than collect unemployment.

Let me add here that nothing in these proposals expands the role or scope of the federal government.

The payroll tax holiday is a cut of a regressive, punishing tax, 

that takes the government's hand out of the pockets of both workers and business.

The revenue distribution to the states has no strings attached.  

The federal government does nothing more than write a check.

And the transition job is designed to move the unemployed, who are in fact already in the public sector,

to private sector jobs.

There is no question that these three proposals will bring drive the increase in sales we need to 

usher in a new era of prosperity and full employment.

The remaining concern is the federal budget deficit.  

Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA,

a very important lesson was learned.

Interest rates actually came down.  And substantially.

And with that the financial and economic heavy weights from the 4 corners of the globe 

made a very important point.

The markets are telling us something we should have known all along.

The US is not Greece for a very important reason that has been overlooked.

That reason is, the US federal government is the issuer of its own currency, the US dollar.

While Greece is not the issuer of the euro.

In fact, Greece, and all the other euro nations, have put themselves in the position of the US states.

Like the US states, Greece and other euro nations are not the issuer of the currency that they spend.

So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.

But the issuer of its own currency, like the US, Japan, and the UK, 

can always pay their bills.

There is no such thing as the US running out of dollars.

The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.

The US federal government can not go broke like Greece.

That was the important lesson of the S and P downgrade, 

and everyone has seen it up close and personal and they all now agree.

And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.

Does that mean we should spend without limit and not tax at all?

Absolutely not!

Too much spending and not enough taxing will surely drive up prices and inflation.

But it does mean that right now, 

with unemployment sky high and an economy on the verge of another recession,

we can immediately enact my 3 proposals to bring us back to 

a strong economy with good jobs for people who want them. 

And some day, if somehow there are too many jobs and it's causing an inflation problem,

we can then take the measures needed to cool things down.

But meanwhile, as they say, to get out of hole we need to stop digging,

and instead implement my 3 proposals.

So in conclusion, let me repeat these three, simple, direct, bipartisan proposals

for a speedy recovery: 

A full payroll tax holiday for employees and employers

A one time revenue distribution to the states

And an $8/hr transition job for anyone willing and able to work to facilitate 

the transition from unemployment to private sector employment as the economy recovers.

Thank you.

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