duminică, 16 ianuarie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Shanghai Prepares for Property Tax to Curb ‘Speculative’ Buying; China Addresses Symptom NOT Problem

Posted: 16 Jan 2011 06:08 PM PST

China's problem is rampant growth in money supply. Instead of curbing the problem, China prepares to address the symptoms, city by city it appears.

Please consider Shanghai Prepares for Property Tax to Curb 'Speculative' Buying
Shanghai, China's financial center, will this year prepare for a trial property tax, becoming one of the first cities in the nation to introduce the measure aimed at curbing "speculative" investment.

Mayor Han Zheng announced the move in a speech to the Municipal People's Congress yesterday, without giving details of how much the tax would be or when it would be implemented. Shanghai and southwestern Chongqing are the two cities that will begin trials of a property tax, according to a Jan. 10 report by Nomura Holdings Inc., which expects China to selectively introduce a tax rate of about 0.8 percent.

"We will step up macro-control measures, prioritize the supply of non-luxury residential units to be owned and occupied by ordinary citizens, and prepare for the trial reform on property tax as required by the central government," Han said.

China has pledged to speed up property tax trials to rein in surging prices that have made housing too expensive for an increasing proportion of the population. Premier Wen Jiabao said on Dec. 26 that measures control housing costs weren't well implemented and that he would introduce more policies to crack down on speculation. China has tightened rules on down payments, suspended mortgages for third homes last year.

Shanghai will begin building 220,000 units of subsidized housing as it pushes plans to create affordable homes, Han said in a report to the congress in Shanghai. The municipality aims to add 1 million units of subsidized housing from this year to 2015, he said.

Beijing won't join the property tax trial, the Beijing News reported today, citing Deputy Mayor Ji Lin. The Chinese capital will try to finish 100,000 units of subsidized housing this year, acting "firmly" to curb rising property prices, Xinhua said, citing Mayor Guo Jinlong.

Home prices in Shanghai jumped 26.1 percent in 2010 and those in Chongqing surged 29.4 percent, according to Soufun Holdings Ltd., the country's biggest real estate website owner.
Unworkable Measures

1. Offering subsidies to control housing prices adds to the demand for houses.

2. Taxing houses to curb prices is complete silliness if you are just going to turn around and subsidize the tax.

3. Even without the subsidy, the problem is not prices. Rapidly rising home prices are a symptom of too much credit.

In case you missed it, please see Chinese Bank Lending Spree Continues; $75 Billion New Loans First Week in January Alone; Inflation Gone Amuck
China's official inflation is 5%. Unofficially, estimates are 10% as noted in China's Foreign Exchange Reserves Jump by Record $199 Billion; Cost Push Inflation from China? Don't Count On It!

However, that does not count increases in home prices. It is an enormous mistake to ignore property bubbles, as the US found out, and as China, Australia, Canada, and the UK are going to find out.

Vacant China City Stories


China property bubble will overheat until it implodes. In the meantime, regardless of what China reports on the CPI, inflation remains a huge problem. Once again, those looking for inflation can find it in China, not the US, where consumer credit is contracting.
You cannot fight problems by attacking the symptom. It is tantamount to putting a person in a meat cooler to fight a fever.

In this case, excess credit will go somewhere else. Perhaps more commodity speculation.

Chinese Pig Farmers Speculate In Copper

This story is a little dated as it is from September 17, 2009, but it exemplifies the problem with fighting symptoms. Please consider China's Pig Farmers Amass Copper, Nickel
Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That's about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.

Sucden's estimate underscores the difficulty analysts face in gauging metals demand in China amid increased speculation by retail investors, whose holdings remain outside the reporting framework undertaken by exchanges. Private investors in China also had as much as 20,000 tons of nickel, Goldwyn wrote.
Also see Pig Farmers are Making Brent Nervous, from November 11, 2009.
Before getting into to the relationship between copper and pork products, I want to draw your attention to what makes me nervous, have a look at these photos from China. They are excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country. According to an associate of mine at an Asia-focused hedge fund who was just in China, "It's pervasive; people are piling this stuff up in their backyards."
Michael Pettis on Lending Quotas

Inquiring minds are reading China's lending quota? by Michael Pettis.
It seems to me that if Beijing wants GDP growth in 2011 to come in at the expected 9%, the amount of new investment in China – which is determined in large part by the banking system – is really not something they can decide today. It is going to be whatever it needs to be given developments in household consumption growth and the trade surplus.

This is why I argued a few weeks ago that at whatever level the new loan quota was set, I was not going to think of it as constraining new lending in any way. Either the loan quota would be adjusted (upwards, almost inevitably) or more new lending would occur outside the banks' balance sheets, as it did in 2009 and 2010.

Investment this year I suspect is going to be extremely high, as high as in 2009 and 2010, because it is only with very high levels of investment that we are likely to manage GDP growth rates high enough to keep Beijing happy.

So my guess is that 2011 will be yet another year in this increasingly strained investment-driven party. Chinese GDP growth will continue to be the envy of the world, while those of us who worry about the sustainability and quality of the growth will worry more than ever. The banks will probably rush to expand lending in the first quarter, out of fear that they may be restricted later in the year. And of course we will all be watching the trade account very closely.

On the topic of trade I am going to put on my broken-record hat and say what I have been saying for two years. Forget about momentary thaws, feel-good speeches, and pious posturing. The global trade environment is not about to get better. All of the distortions and strains remain, and the crisis in Europe is putting more pressure than ever on a resolution. ....
China is overheating, it needs to slow the growth of credit. Instead, it is hell-bent on idiotic measures that cannot possibly work. So, China is going to overheat until it implodes.

In the meantime everyone is going gaga over China's growth and growth targets that are not possibly sustainable.

How do we know that? Easy, China's property bubble and inflation problem (massively understated at that), tells us all this "growth" is nothing but malinvestment, quite similar to the "growth" the US saw in its property bubble.

We know how that ended, and it will end the same way in China, Australia, Canada, the UK, and India as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

MP3 of My WLS AM Saturday Evening Session on Quinn and Illinois Taxes

Posted: 16 Jan 2011 04:00 PM PST

Saturday Evening I was on "The Eddie & JoBo Show" WLS 890 AM talking about the Quinn recall and Illinois taxes. I have an MP3 of the session.

Click here to Download and Listen.

The segment is about 14 minutes long and was a lot of fun. Play it to the end. It goes on for about a minute after the stated cutoff. They took one ad-hoc call that's pretty funny.

For more on the Quinn Recall please see

Please click on the first link in the above list to volunteer help. Also pass a link to this post to your friends and have them do the same.

Illinois Pension Funding Worst In Entire U.S.

To gain an understanding of the sorry state of Illinois pension funds please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

Once the map pops up, click on Illinois.

Taxpayers ought to be scared to death by Illinois pension plan funding with governor Quinn at the helm.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Baby Steps or Simply Mush from Christina Romer Regarding "What Obama Should Say About the Deficit"

Posted: 16 Jan 2011 01:41 PM PST

Christina Romer is the out-going Chair of the Council of Economic Advisers in the Obama administration. She is now member of the President's Economic Recovery Advisory Board.

She has an Op-Ed economic view in the New York Times, What Obama Should Say About the Deficit.
This year, instead of being on the floor of Congress with the rest of the cabinet, I will be watching on television with the rest of the country. Instead of knowing what is coming, I can write about what I hope the president will say. My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.

I am not talking about two paragraphs lamenting the problem and vowing to fix it. I am looking for pages and pages of concrete proposals that the administration is ready to fight for. The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start.

The need for such a bold plan is urgent — both politically and economically. Voters made it clear last November that they were fed up with red ink. President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.

The economic need is also pressing. The extreme deficits of the last few years are largely a consequence of the terrible state of the economy and the actions needed to stem the downturn. But even with a strong recovery, under current policy the deficit is projected to be more than 6 percent of gross domestic product in 2020. By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P.

Such deficits are not sustainable. At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow. We would become the Argentina of the 21st century.
So far so good. Romer is saying all the right things. That is the Romer we knew and loved. However, watch the article morph into compete mush in a matter of sentences.

She continues...
So what should the president say and do? First, he should make clear that the issue is spending and taxes over the coming decades, not spending in 2011. Republicans in Congress have pledged to cut nonmilitary, non-entitlement spending in 2011 by $100 billion (less if recent reports are correct). Such a step would do nothing to address the fundamental drivers of the budget problem, and would weaken the economy when we are only beginning to recover.

Instead, the president should outline major cuts in spending that would go into effect over the next few decades, and that he wants to sign into law in 2011.

Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms.

One important provision of the law was the creation of the Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth. But the legislation exempted some providers and much government health spending from the board's purview. The president should work to give the board a broader mandate for cost control.

The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.

President Obama needs to explain that while these cuts will be painful, there is no way to solve our budget problem without shared sacrifice.
Did you catch that? Romer did not name one cut! Instead she called for ...

  • Cost-containment mechanisms in healthcare
  • An Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth.
  • Slower growth in military spending
  • Thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor.
  • Caps on nonmilitary, non-entitlement spending

Complete Mush

For starters, the Independent Payment Advisory Board would be another totally useless board that will cost taxpayers money because the study would be tossed in the gutter by Congress before anyone even reads it. We know that simply from the title of it (see word #3).

Sadly, Romer tells the President what he needs to do in plain simple English then drafts a proposal for a speech that calls for nothing of the kind.

Since when is a slowing of growth called a "cut". Since when is a "cap" a cut? Worse yet, note the proposed cap is on "nonmilitary, non-entitlement spending".

It is mandatory we CUT military spending and she cannot even mention cap except for piddly nonmilitary, non-entitlement spending.

Budgetary Delusions: Federal Deficit Charts from CBO Budget Projections

Let's review Budgetary Delusions: Federal Deficit Charts from CBO Budget Projections
Can the budget deficit be solved by cutting earmarks? How about cutting 100% of all federal non-defense discretionary expenditures?

US Federal Revenues and Expenditures 2000-2020



click on chart for sharper image
That chart is from reader "David" and is based on budget projections from the CBO. The main point is from now until 2020, we could eliminate 100% of all federal non-defense discretionary expenditures and still run a deficit.

Romer's proposed "cut" is to cap it. Meanwhile check out the following chart.

Entitlement Spending Growth




click on chart for sharper image

Both charts are from David who posts on the No Money No Worries blog.

Mind To Mush

Romer's mind has clearly gone to mush. Let's see if we can figure out when that happened.

In 2007 her mind appeared to be in working order.

I make that claim based on a review of The Macroeconomic Effects of Tax Changes, an article regarding "Exogenous Tax Changes" classified as "any tax change not motivated by a desire to return output growth to normal". Here are a few select quotes.

Exogenous Tax Change Effects

  • "We find that exogenous tax increases have a large, rapid, and highly statistically significant negative effect on output."
  • "Among exogenous tax changes, we find that tax increases motivated by a desire to reduce an inherited deficit appear to have much smaller effects on output than tax changes taken for long-run reasons."
  • "Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent."
  • "We examine how exogenous tax changes affect the components of real GDP, such as consumption, investment, and imports. The most striking finding is that tax increases have a large negative effect on investment."
  • "The estimated maximum effect of an exogenous tax increase of one percent of GDP is a fall in output of 3.9 percent."
  • "The response to a long-run tax increase is negative, large, and highly statistically significant. In contrast, the response to a deficit-driven tax increase is positive, though not significant."
  • "For all legislated tax changes, controlling for spending has a larger effect."

Romer's Conclusion
Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent. Second, these estimated effects are substantially larger than those obtained using broader measures of tax changes, such as the change in cyclically adjusted revenues or all legislated tax changes. This suggests that failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent. The behavior of inflation and unemployment suggests that this persistence reflects long-lasting departures of output from its flexible-price level, not large effects of tax changes on the flexible-price level of output.
Romer on the Unemployment Rate

Please consider Figure 1 from The Job Impact of the American Recovery and Reinvestment Plan by Christina Romer, January, 9, 2009.



As Figure 1 shows, even with the large prototypical package, the unemployment rate in 2010Q4 is predicted to be approximately 7.0%, which is well below the approximately 8.8% that would result in the absence of a plan.
Mind Mush Disease

Romer's mind appears to have turned to mush sometime slightly before or slightly after she was appointed as Chair of the Council of Economic Advisers. Either way, we can see that Romer's mind is still mush after she left that position. Proof if the New York Times column she just wrote.

Then again, it's fair to point out she is now member of the President's Economic Recovery Advisory Board. Perhaps that explains the continued progression of MMD "Mind Mush Disease".

Regardless, somehow, somewhere along the way, she started thinking that slowing growth was the same thing as a cut. Somehow, somewhere along the way, she started thinking that "capping" nonmilitary, non-entitlement spending" would make a difference.

For the sake of macroeconomists everywhere, we must answer the crucial question "Did Romer's mind turn to mush slightly before she was appointed (explaining why she was appointed), or did her mind turn to mush after she was appointed?

Either way, the safe thing for economists to do is refuse such appointments. Then again, if all economists acted on that simple principle, only those whose minds are already mush would accept such appointments.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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