589 QE3 stoking another boom on Wall St, while real economy founders. Neo-Liberals want to wreck China as they did Russia

QE3 stoking another boom on Wall St, while real economy founders.
Neo-Liberals want to wreck China as they did Russia

Newsletter published on 5-3-2013

The bulletin I sent yesterday has been censored. If you did not receive
it, look for it in your Spam or Junk folders. The headline was "Petras
castigates anti-Stalinist Left for fall of Communism and dismantling of
welfare state".

(1) QE3 stoking another speculative boom on Wall St, while the real
economy founders
(2) QE fails; Protectionism is next. The crisis is a trade conflict
masquerading as a debt crisis - Pettis
(3) Bernanke rejects Rate Rise to curb Speculation; it would kill the
Recovery
(4) Neo-liberalism wrecked US - and USSR (GDP fell 36%, male life
expectancy fell 4 years). Now they want to do it to China - John Ross

(1) QE3 stoking another speculative boom on Wall St, while the real
economy founders
'
http://www.fa-mag.com/news/fed-easy-credit-end-becomes-debate-over-qe3-escape-13343.html

TUESDAY MARCH 5, 2013

Fed Easy Credit End Becomes Debate Over QE3 Escape

FEBRUARY 11, 2013 • BLOOMBERG NEWS

Federal Reserve Chairman Ben S. Bernanke says the end of the central
bank’s bond buying won’t constitute a move toward tighter policy. He may
have a tough time convincing stock and bond investors that’s true.

The Fed is acquiring $85 billion of securities each month, and policy
makers are grappling with how to condition markets not to interpret a
stop in those purchases as a prelude to the exit from easy credit.
Bernanke said Dec. 12 in Washington that he “would emphasize” the end
won’t be “a turn to tighter policy.”

If the Fed fails, interest rates may climb prematurely, as traders
arrange positions for the withdrawal of unprecedented monetary stimulus,
according to Dean Maki, chief U.S. economist at Barclays Plc in New
York. The Fed has kept its benchmark federal funds rate near zero for
more than four years and swelled its balance sheet to a record of more
than $3 trillion through three asset-purchase programs.

“There is a risk the markets get ahead of the Fed,” said Maki, a former
Fed board economist. “It will be tricky for the Fed to signal it’s going
to stop buying without signaling that tightening is imminent.”

Ending the Fed’s third round of so-called quantitative easing carries
greater significance than completion of the previous two because those
were introduced with defined amounts and durations.

Open-Ended Program

For QE3, the Federal Open Market Committee in September announced
purchases of $40 billion a month in mortgage-backed securities, leaving
the program open-ended until the labor market improves “substantially.”
In December, the FOMC added $45 billion of monthly Treasury purchases.

Marilyn Cohen, founder of Envision Capital Management Inc. in Los
Angeles, said she doesn’t think the Fed will be able to convince traders
that interest rates aren’t going up when the central bank stops buying
bonds. Cohen said she’s already lowered the interest-rate sensitivity of
her $325 million portfolio in preparation.

“The markets are on edge; and any hint that things are changing, and we
will see the repercussions,” Cohen said. “I’ve been in this business
since 1979 -- I’m one of the old dinosaurs -- and I cannot remember when
there was such a chorus in the investment landscape that all are calling
for higher rates.”

Long-Term Concerns

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment
Management Co.; Jim Rogers, chairman of Rogers Holdings; Wells Capital
Management Inc. and Goldman Sachs Group Inc. all have voiced concern
about long-term bonds.

The Jan. 3 release of the minutes from the FOMC’s Dec. 11-12 meeting
illustrates investors’ sensitivity, Cohen said. Central bankers
discussed possibly curtailing or halting their asset purchases this
year. That surprised analysts and traders, sending the Standard & Poor’s
500 Index down 0.2 percent and pushing up yields on the benchmark
10-year Treasury note 0.07 percentage point that day.

James Bullard, president of the Federal Reserve Bank of St. Louis, says
the “communication challenge” the central bank faces with the end of QE3
is comparable to all periods of easing.

“The same thing happens with interest-rate policy; you’re lowering the
interest rate, and after a while you decide to quit lowering the
interest rate and just hold it steady,” Bullard said in a Feb. 1
interview in Washington. “And at that point, you have to convince
markets this is really a lower rate than it used to be.”

Treasury Yields

U.S. 10-year government notes declined, pushing the yield up two basis
points, or 0.02 percentage point, to 1.97 percent at 10:32 a.m. London
time. Yields on thirty-year bonds also climbed two basis points to 3.18
percent.

Fed Governor Jeremy Stein warned last week that the market for
speculative-grade debt may be overheating even as his institution’s
policy of keeping benchmark borrowing costs low is pushing investors
into riskier debt. ...

“There is no doubt that when the Fed pulls back you will see a big shoot
upward in Treasury yields,” said Karl Haeling, head of strategic-debt
distribution in New York at Landesbank Baden-Wuerttemberg, one of
Germany’s largest banks. “There are a lot of people who think the only
reason rates are here is because the Fed put them here. Nobody wants to
be the last man standing.”

(2) QE fails; Protectionism is next. The crisis is a trade conflict
masquerading as a debt crisis - Pettis

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9891082/Trade-protectionism-looms-next-as-central-banks-exhaust-QE.html

Trade protectionism looms next as central banks exhaust QE

Officials at the US Federal Reserve may be more worried than they have
let on about the treacherous task of extricating America from
quantitative easing. This is an unsettling twist, with global implications.

By Ambrose Evans-Pritchard, International Business Editor

6:00PM GMT 24 Feb 2013

A new paper for the US Monetary Policy Forum and published by the Fed
warns that the institution's capital base could be wiped out "several
times" once borrowing costs start to rise in earnest.

A mere whiff of inflation or more likely stagflation would cause a bond
market rout, leaving the Fed nursing escalating losses on its $2.9
trillion holdings. This portfolio is rising by $85bn each month under
QE3. The longer it goes on, the greater the risk. Exit will become much
harder by 2014.

Such losses would lead to a political storm on Capitol Hill and risk a
crisis of confidence. The paper -- "Crunch Time: Fiscal Crises and the
Role of Monetary Policy" -- is co-written by former Fed governor
Frederic Mishkin, Ben Bernanke's former right-hand man.

It argues the Fed is acutely vulnerable because it has stretched the
average maturity of its bond holdings to 11 years, and the longer the
date, the bigger the losses when yields rise. The Bank of Japan has kept
below three years.

Trouble could start by mid-decade and then compound at an alarming pace,
with yields spiking up to double-digit rates by the late 2020s. By then
Fed will be forced to finance spending to avert the greater evil of
default."Sovereign risk remains alive and well in the U.S, and could
intensify. Feedback effects of higher rates can lead to a more dramatic
deterioration in long-run debt sustainability in the US than is captured
in official estimates," it said.

Europe has its own "QE" travails. The paper said the ECB's purchase of
Club Med bond amounts to "monetisation" of public debt in countries shut
out of global markets, whatever the claims of Mario Draghi.

"We see at least a risk that the eurozone is on a path to become more
like Argentina (which of course is why German central bankers are most
concerned). The provinces overspend and are always bailed out by the
central government. The result is a permanent fiscal imbalance for the
central government, which then results in monetization of the debt by
the central bank and high inflation," it said.

In America, the Fed would face huge pressure to hold onto its bonds
rather than crystalize losses as yields rise -- in other words, to
recoil from unwinding QE at the proper moment. The authors argue that it
would be tantamount to throwing in the towel on inflation, the start of
debt monetisation, or "fiscal dominance". Markets would be merciless.
Bond vigilantes would soon price in a very different world.

Investors have of course been fretting about this for some time. Scott
Minerd from Guggenheim Partners thinks the Fed is already trapped and
may have to talk up gold to $10,000 an ounce to ensure that its own
bullion reserves cover mounting liabilities.

What is new is that these worries are surfacing openly in Fed circles.
The Mishkin paper almost certainly reflects a strand of thinking at
Constitution Avenue, so there may be more than meets the eye in last
week's Fed minutes, which rattled bourses across the world with hints of
early exit from QE.

Mr Bernanke is not going to snatch the punch bowl away just as the US
embarks on fiscal tightening this year of 2pc of GDP, one of the most
draconian budget squeezes in the last century. But he may have concluded
that the Fed is sailing too close to the wind, and must take defensive
action soon.

Monetarists say this is a specious debate -- arguing that the losses on
the Fed balance sheet are an accounting irrelevancy -- but Bernanke is
not a monetarist. What matters is what he thinks.

If this is where the Fed is heading, the world is at a critical
juncture. The US economy has not yet reached "escape velocity", and in
fact shrank in the 4th quarter of 2012. Brussels has slashed its
eurozone forecast, expecting a second year of outright contraction in 2013.

The triple "puts" of the last eight months -- Bernanke's QE3, Mario
Draghi's Club Med bond rescue, and Beijing's credit blitz -- have done
wonders for asset markets but have not yet ignited a healthy cycle of
world growth. Nor can they easily do do since the East-West trade
imbalances that caused the 2008-2009 crisis remain in place.

We know from a body of scholarship that fiscal belt-tightening in
countries with a debt above 80pc to 90pc of GDP is painful and typically
self-defeating unless offset by loose money. The evidence is before our
eyes in Greece, Portugal, and Spain. Tight money has led to self-feeding
downward spirals. If bondyields are higher thannominal GDP growth, the
compound effects are deadly.

America may soon get a first taste of this, carrying out the epic fiscal
squeeze needed to bring its debt trajectory back under control with less
and less Fed help. Gross public debt will hit 107pc of GDP by next year,
and higher if the recovery falters as pessimists fear.

With the fiscal and monetary shock absorbers exhausted -- or deemed to
be -- the only recourse left is to claw back stimulus from foreigners,
and that may be the next chapter of the global crisis as the Long Slump
drags on.

Professor Michael Pettis from Beijing University argues in a new book --
"The Great Rebalancing: Trade, Conflict, and the Perillous Road Ahead" -
that the global trauma of the last five years is a trade conflict
masquerading as a debt crisis.

There is too much industrial plant in the world, and too little demand
to soak up supply, like the 1930s. China is distorting the global system
by running investment near 50pc of GDP, and compressing consumption to
35pc. Nothing like this has been seen before in modern times.

This has nothing to do with the "Confucian" work ethic or a penchant for
stashing away money. Fifty years ago the stereotype was the other way
round. Confucians were seen as feckless. In fact, Chinese families never
get the money in the first place. The exorbitant Chinese savings rate is
due to a structure of taxes, covert subsidies, and banking rules.

Variants of this are occuring in many of the surplus trade states.
Germany is doing it in a more subtle way within Euroland. The global
savings rate is almost 25pc and climbing to fresh records each year. The
overstretched deficit states in the Anglo-sphere and Club Med are
retrenching but others are not picking up enough of the slack. Germany
has tightened fiscal policy to achieve a budget surplus. This is untenable.

In the Noughties the $10 trillion reserve accumulation by Asian
exporters and petro-powers flooded the global bond market. At the same
time, the West offset the deflationary effects of the cheap imports by
running negative real interest rates.

The twin policy regimes in East and West stoked the credit bubble, and
this in turn disguised what has happening to trade flows. These flows
were disguised yet further after 2008 by QE and fiscal buffers, but the
hard reality beneath may soon be exposed as these are props are knocked
away.

"In a world of deficient demand and excess savings, every country will
try to acquire a greater share of global demand by exporting savings,"
he writes. The "winners" in this will be the deficit states. The
"losers" will be the surplus states who cannot retaliate. The lesson of
the 1930s is that the creditors are powerless. Prof Pettis argues that
China and Germany risk a nasty surprise.

America's shale revolution and manufacturing revival may be enough to
head off a US-China clash just in time. But Europe has no recovery
strategy beyond demand compression. It is a formula for youth job
wastage, a demented policy when youth a scarce resource. The region is
doomed to decline until the boil of monetary union is lanced.

Some will take the Mishkin paper as an admission that QE was a misguided
venture. That would be a false conclusion. The West faced a 1931 moment
in late 2008. The first round of QE forestalled financial collapse. The
second and third rounds of QE have had a diminishing potency, while the
risks have risen. It is a shifting calculus.

The four years of QE have given us a contained depression and prevented
the global strategic order from unravelling. That is not a bad outcome,
but the time gained has largely been wasted because few wish to face the
awful truth that globalisation itself -- in its current deformed
structure -- is the root cause of the whole disaster.

It will be harder from now on if central banks conclude that their
arsenal is spent. We can only pray that their help will not be needed.

(3) Bernanke rejects Rate Rise to curb Speculation; it would kill the
Recovery

http://www.huffingtonpost.com/2013/03/02/bernanke-interest-rates-recovery_n_2794161.html

Ben Bernanke: Raising Interest Rates Carries 'Risk Of Short-Circuiting
the Recovery'

Huffington Post

March 1 (Reuters) - Ben Bernanke, the chairman of the Federal Reserve,
said on Friday that pulling back on aggressive policy measures too soon
would pose a real risk of damaging a still-fragile recovery.

There has been some disagreement within the Fed of whether the U.S.
central bank's bond-buying program, which is designed to push down
long-term interest rates, should be phased out.

Fed Board Governor Jeremy Stein argued recently there were signs of
overheating in certain financial markets and that the central bank
should consider using monetary policy to address such risks if they persist.

The Fed chief was not convinced, saying that, even for the purposes of
financial stability, a continuation of the central bank's aggressive
stimulus, conducted through purchases of Treasury and mortgage
securities, remains the optimal approach.

"In light of the moderate pace of the recovery and the continued high
level of economic slack, dialing back accommodation with the goal of
deterring excessive risk-taking in some areas poses its own risks to
growth, price stability, and, ultimately, financial stability," Bernanke
said in remarks prepared for delivery at a conference sponsored by the
Federal Reserve Bank of San Francisco.

In response to the financial crisis and deep recession of 2007-2009, the
Fed not only chopped official rates to effectively zero, but also bought
more than $2.5 trillion in assets in an effort to keep long-term rates low.

Still, economic growth remains subdued and is expected to register just
2 percent this year, while the jobless rate remains elevated at 7.9
percent currently.

"Premature rate increases would carry a high risk of short-circuiting
the recovery, possibly leading - ironically enough - to an even longer
period of low long-term rates," Bernanke said.

He noted that a stimulative monetary policy was simply a response to
economic conditions, rather than any attempt to keep rates artificially
low to inflate asset prices.

Policymakers are cognizant of possible risks to financial stability, he
said, while indicating a preference for employing regulatory and
supervisory tools to mitigate any possible fallout from the Fed's
low-rate policy.

"We pay special attention to developments at the largest, most complex
financial firms," Bernanke said.

He argued banks had gone some way toward repairing their balance sheets
since the financial crisis. The Federal Deposit Insurance Corp. reported
this week that bank profits rose in 2012 to their highest levels since
2006, the year before the subprime mortgage meltdown gained momentum.

Earlier this week, Bernanke delivered a strong defense of the Fed's
unconventional monetary policies in testimony before Congress. He also
warned lawmakers to avoid the looming short-term spending cuts known as
the sequester.

(4) Neo-liberalism wrecked US - and USSR (GDP fell 36%, male life
expectancy fell 4 years). Now they want to do it to China - John Ross

http://ablog.typepad.com/keytrendsinglobalisation/2012/11/note-to-neo-liberals-earth-orbits-the-sun.html

John Ross

24 November 2012

Note to neo-liberals: Earth orbits the sun

John Ross {Visiting Professor at Antai College of Economics and
Management, Jiao Tong University, Shanghai}

The following article originally appeared in China Daily Europe. * * *

In the next 15 years one of the greatest turning points in world history
can occur. In five to seven years China will become the world's largest
economy. In about 15 years China will achieve the annual $12,000 GDP per
capita qualifying it as a developed economy by World Bank criteria.
China is so large that these events will change the world. For example,
China's 1.3 billion population is larger than the combined 1.1 billion
of all existing developed economies.

But these successes are not inevitable. China has enjoyed tremendous
economic achievements since 1978, experiencing in the last decade the
fastest per capita GDP growth in any major economy in history, and the
fastest growth of consumption in a large country. It achieved this
because it followed economic policies laid out by Deng Xiaoping from
1978. But now an attempt is being made by some to divert China onto an
economic path, neo-liberalism, which has failed wherever it has been
carried out. Examining the factual record of neo-liberal policy shows
the scale of what is at stake both for China and internationally.

Neo-Liberal policies were applied in Latin America in the 1980s. The
result was that Latin America's per capita GDP fell by an average 0.5
percent a year for 10 years.

In the former Soviet Union neo-liberal shock therapy, based on full
privatization, was carried out after 1991. Russia's GDP fell 36 percent,
the greatest decline of a major economy in peacetime in modern world
history. Russia's male life expectancy fell by four years, to only 58,
by 1998 and Russia's population today is 7 million less than it was in 1991.

Neo-liberal policies in the US instigated under Ronald Reagan led to the
colossal accumulation of debt that culminated in the international
financial crisis of 2008. During the earlier Keynesian period of US
economic policy, lasting from the end of the Korean War (1950-53) until
1980, US state debt fell from 70 percent to 37 percent of GDP. During
the succeeding neo-liberal period US state debt rose to 88 percent of
GDP by last year. Over the same period the 10-year moving average of
annual US GDP growth fell from 3.3 percent to 1.6 percent. Under
neo-liberal policies US state debt more than doubled, and US economic
growth halved.

Given neo-liberalism's disastrous record, which is even starker when
compared with China's growth, how can anyone advocate that China adopt
such a failed policy? The answer is that intellectually this can be done
only by making no reference to economic facts or by falsifying them. An
example of the latter is the assertion that China's investment is less
efficient than that of economies such as the US when the facts show the
opposite. Even before the international financial crisis China had to
invest only 4.1 percent of GDP to produce each percentage point of
economic growth, compared with the 8.8 percent in the US. Since the
financial crisis the US position has worsened.

Neo-liberalism fails as economic policy because it refuses to follow
science's first rule of starting with the facts, or, in the famous
Chinese phrase, it refuses to "seek truth from facts". Rather in the
style of pre-Copernican astronomers who insisted that the sun orbited
the Earth, because they failed to make measurements showing the Earth
circles the sun, neo-liberals construct models of an economy that does
not exist. They imagine an economy made up of millions of competitive
firms (technically "perfect competition"), in which prices are flexible
downward as well as upward, and in which investment is a low percentage
of the economy. The real economy is nothing like this.

The scale of investment has been rising for 300 years to levels of 20
percent, or even more than 40 percent, of GDP. Huge financial structures
were necessarily created to centralize the resources for this. Banks now
agreed to be "too big to fail", and which therefore cannot be allowed to
operate in a free market without incentivizing uncontrollable risk
taking. Due to this high investment the world's most important
industries - automobiles, aviation, computers, finance, pharmaceuticals
- do not operate according to "perfect competition" but are monopolies
or oligopolies. As neo-liberalism does not correspond to economic
reality its policies are necessarily damaging.

For this reason, even when not fully adopted, neo-liberalism's influence
damages China's economy. For example, early this year severe negative
pressure on China's economy occurred due to a downturn in the global
economy driven by a fall in private investment. However, due to the
influence of neo-liberal views, that the State should "get out" of the
economy, the necessary stimulus to counter this was not launched early
enough. Fortunately, in the second half of the year, China's government
launched a required medium-scale State-led investment stimulus that
stabilized the economy during the third quarter and should now lead to
accelerated growth.

The consequences for the popularity of those implementing neo-liberal
policies, and for social stability, are also clear. For example in
Britain David Cameron launched the Big Society, the concept that the
state should be small and be replaced in social protection by the market
and voluntary organizations. But factual evidence shows that pure
operation of the market increases, not decreases, social inequality and
fails to provide social protection. The result under Cameron was sharply
rising social inequality, ridiculing of his policies even by those not
associated with the political opposition, and a collapse in the
government's popularity.

In China, where there is a widespread consensus that in the recent
period social inequality has gone too far, and which due to size is more
difficult to govern than any European state, to embark on neo-liberal
policies, which would inevitably increase inequality, would not only be
economically damaging but socially and politically destabilizing.

However, neo-liberalism is not just an intellectual theory. Many people
profit from it. In the US most of those in the finance sector who led
its economy to disaster in 2008 retain the private wealth gained from
neo-liberal policies.

Two groups of people would gain from neo-liberalism in China, and
therefore support it. The first are some financial layers in the
country. The second are US neo-con circles that aim to maintain the US
as the world's largest economy despite remorseless arithmetic showing
this is impossible.

The population of the US is only 23 percent of China's. The only way the
US could remain the world's largest economy is if China's per capita
GDP, and by implication its living standards, never reaches 23 percent
of US levels. Quite rightly China's population will never accept they
can only have less than one quarter of the US living standard; nor in
the future will India. As China's GDP per capita moves toward that of
the US China's economy will become first the largest and later the
strongest in the world. The only way to stop this is to sharply slow
China's economic growth, neo-liberalism's disastrous consequences being
the way to achieve that.

China's economic rise immensely benefits not only itself but humanity.
When, in about 15 years, China achieves advanced economy status, 35
percent of the world's population, for the first time in modern history,
will enjoy the benefits of this. When China has come so close not only
to full national revival but to decent living standards for its people
it would be one of the greatest tragedies in world history for
neo-liberalism to block this.