Central Perk

miercuri, 19 octombrie 2011

Protecting the Jobs of Those Who Protect Us

Your Daily Snapshot for
Wednesday, October 19, 2011

Protecting the Jobs of Those Who Protect Us

Last week, Vice President Biden was in Flint, Michigan to talk with fire fighters and police officers about the American Jobs Act. Right now, local communities across the country are laying off first responders because of budget cuts. It’s putting public safety at risk. That's why the American Jobs Act calls for $5 billion for local governments to keep police and fire fighters on the job.

This afternoon, President Obama will talk to fire fighters at Fire Station 9 in North Chesterfield, Virginia about the American Jobs Act and how it will restore police departments and fire departments to their full strength.

Hear what first responders have to say about the American Jobs Act:

SEOptimise

Google dropping analytics keyword data – what does this mean?

Posted: 19 Oct 2011 03:56 AM PDT

For anyone who missed it yesterday, Google announced on their Blog that they would be "protecting personalized search results" by encrypting search queries made whilst signed into your Google account. Which, they go on to explain, means that "websites you visit from our organic search listings will still know that you came from Google, but won’t receive information about each individual query".

For SEOs this means that within Google Analytics (and in fact ALL analytics programs) you will no longer be able to see the referring keyword for a certain percentage of your traffic, and will instead get a variation of the "(not set)" which is used for PPC traffic (I think I remember seeing it will be "(not provided)"). This will obviously create issues for SEOs, who will be unable to fully track campaign performance, as it will also have a knock-on effect on conversion tracking and ROI calculations. Google have mentioned that "an aggregated list of the top 1,000 search queries that drove traffic to a site for each of the past 30 days" will be available through Webmaster Tools, but will this suffice for even medium size sites that may be getting traffic from thousands of queries?

So what are the likely solutions for SEOs…
• Are we going to have to give more weight to less worthwhile metrics such as rankings?
• Are we going to have to spend more time fiddling and combining data from WMT and analytics?
• Are we going to have work on assumptions that traffic to certain pages will have come from certain keywords?

There are a few interesting subplots to this announcement. Firstly, clicks on PPC ads will still send information on the query to "enable advertisers to measure effectiveness of their campaigns and to improve ads and offers they present to you"; obviously Google doesn't care as much who sees what paid advertising you click on or the information advertisers can use to manipulate your online experience! Secondly, a lot of people are already speculating this is linked to paid Analytics. What are the odds that Google will give this data out to people who cough up for a subscription?

It would be interesting to know your thoughts so I have set up a quick poll.

Obviously not the most in-depth poll, but feel free to leave your comments below.

Post Panda: Affiliates Guide to Surviving Google – a4uexpo London 2011

Posted: 18 Oct 2011 07:57 AM PDT

Today myself and Daniel Bianchini gave a presentation at a4uexpo London 2011 on how to survive Google’s panda algorithm update.

In case you missed it, we’ve posted both sets of slides online here:

The 4 Hour Affiliate Week – Kevin Gibbons, A4UExpo London 2011

View more presentations from Kevin Gibbons.

A4 u panda-slap-db

View more presentations from Daniel Bianchini.

If you have any questions on this please let us know in the comments.

Seth's Blog : The power of visualization

The power of visualization

Data is not useful until it becomes information, and that's because data is hard for human beings to digest.

This is even more true if it's news that contradicts what we've already decided to believe. Can you imagine the incredible mindshift that Mercator's map of the world caused in the people who saw it? One day you believed something, and then a few minutes later, something else.

We repeatedly underestimate how important a story is to help us make sense of the world.

Jess Bachman wants to help you turn the data about the US budget (the largest measured expenditure in the history of mankind, I'm betting) into information that actually changes the way you think.

Hence Death and Taxes, which we're publishing today. The new version belongs on the wall of every classroom, every public official's office, and perhaps in the home of every person who pays taxes.

It is not possible to spend less than ten minutes looking at this, and more probably, you'll be engaged for much longer. And it's definitely not possible to walk away from it unchanged. That's a lot to ask for a single sheet of paper, but that's the power of visualizing data and turning it into information.

• Email to a friend •

marți, 18 octombrie 2011

Mish's Global Economic Trend Analysis

Bank of America Moves a Merrill Lynch Derivatives Unit to an Insured Deposits Unit (Putting FDIC at Risk); Fed approves Move, FDIC Doesn't
French-German Yield Spread Hits 1.13 Percentage Points, Widest Since 1992; Bailout Campaign Bogs Down in Bickering; Dead Before Arrival?
Leveraged Poison; Jackasses Never Give Up; More Fog Rolls In
Protectionism Cannot Bring Prosperity

Bank of America Moves a Merrill Lynch Derivatives Unit to an Insured Deposits Unit (Putting FDIC at Risk); Fed approves Move, FDIC Doesn't

Posted: 18 Oct 2011 08:11 PM PDT

Bank of America, at the request of counterparties, just moved a Merrill Lynch derivatives unit to an Insured Deposits unit, under protest by the FDIC.

The FDIC does not like the move because it puts the FDIC at risk. Bernanke is fine with the move, which means the Fed and FDIC are once again in an open feud about risk management.

Please consider BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people.

The Moody's downgrade spurred some of Merrill's partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody's decision, said a person familiar with the matter.

Bank of America's holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan's deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm's $79 trillion of notional derivatives, the OCC data show.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender's affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed's website.

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

This outrageous too-big-to-fail, moral-hazard behavior, approved by the Fed, is another reason in a long line of reasons it is time to get rid of Bernanke, the entire Fed with him, and end fractional reserve lending at the same time.

The harsh reality is too-big-to-fail really means too-big-to-succeed. Those protesting Wall Street ought to be protesting the Fed and Congress instead.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

French-German Yield Spread Hits 1.13 Percentage Points, Widest Since 1992; Bailout Campaign Bogs Down in Bickering; Dead Before Arrival?

Posted: 18 Oct 2011 12:56 PM PDT

Amidst all the conniving to make the EFSF bazooka credible, the bond market has cast its vote already.

Germany 10-Year Government Bond Yield

France 10-Year Government Bond Yield

Italy 10-Year Government Bond Yield

Interest Rate Comparison

Germany 2.01%
France 3.14%
Italy 5.87%

Germany-France Spread 1.13 Percentage Points (a 20 Year record)
Germany-Italy Spread 3.86 Percentage Points (and climbing)

Use of a leveraged EFSF is one of the reasons for the widening spread between Germany and France. See Leveraged Poison; Jackasses Never Give Up; More Fog Rolls In for additional details.

Bailout Campaign Bogs Down, Divisions Flare

Bloomberg reports Euro Leaders' Crash Crisis Campaign Bogs Down on Divisions Over Timetable

Europe's options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend's summit and central bankers balked at extended bond purchases.

European stocks fell for a second day after German Chancellor Angela Merkel's office knocked down what it called "dreams" that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France's central bank, ruled out a ramping up of the European Central Bank's bond-buying program as part of a multi-pronged strategy to shield countries like Italy.

While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.

"We're really in a bind here," Carl Weinberg, founder and chief economist at High Frequency Economics, said in an interview with Betty Liu on Bloomberg Television's "In the Loop." "We have a lot of egos, a lot of national interests, a lot of political considerations, and that's just hampering us from getting to a solution."

One and Only Solution Ruled Out

The reason Europe is in a bind is simple: There is no solution (other than a breakup of the Eurozone). Thus the one and only solution is the one and only solution that is ruled out.

Pea Shooter or Bazooka?

The interesting thing about the alleged bazooka play that may trash France's sovereign debt rating is that the bazooka has the firepower of a pea shooter.

ZeroHedge lays out all the details in The Math Behind The Re-Revised EFSF Reveals A "Pea Shooter" Not A "Bazooka"

Two simple paragraphs highlights the problem nicely.

Italy and Spain together have just under €2.5 trillion worth of general government debt outstanding. Tradable Spanish and Italian sovereign debt alone amounts to €2.1 trillion. Adding Greece, Ireland and Portugal raises general government debt to €3.1 trillion and tradable government debt to €2.6 trillion. Adding Belgium would raise these totals to €3.5 trillion and €2.9 trillion. In the perhaps unlikely case that France would need sovereign debt insurance, targeting the stocks rather than the flows would require taking care of €5.1 trillion of gross sovereign debt or €4.3 trillion of tradable government debt.

These numbers are beyond the size of even the most optimistic estimates of the most audacious of rescue umbrellas.

ZeroHedge goes through additional math using leverage and insurance as well as analysis by Willem Buiter that plainly shows the math does not work and thus the insurance proposal is Dead-on-Arrival.

Dead-on-Arrival (DOA) or Dead-before-Arrival (DBA)?

The "Dead-on-Arrival" theory makes an assumption the German supreme court would let the idea "arrive" in the first place.

Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for further discussion.

Adding to that viewpoint, just yesterday Der Spiegel reported Parliamentary Bailout Committee May Be Unconstitutional

Expect the DOA vs. DBA question to be resolved soon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Leveraged Poison; Jackasses Never Give Up; More Fog Rolls In

Posted: 18 Oct 2011 09:44 AM PDT

Tim Geithner and all the Euro "big bazooka" clowns want the EU to use leverage on the EFSF to "increase firepower". However, leverage works both ways as I have pointed out on numerous occasions for numerous reasons. Leverage amplifies gains as well as losses nad leverage will cost France its AAA rating.

Ambrose Evans-Pritchard says the same thing in A leveraged EFSF is pure poison

Big snag. If Europe's leaders do indeed leverage their €440bn bail-out fund (EFSF) to €2 trillion or €3 trillion through some form of "first loss" insurance on Club Med bonds – as markets now seem to assume – the consequences will be swift and brutal.

Professor Ansgar Belke, from Berlin's DIW Institute, said any leveraging of the EFSF would be "poisonous" for France's AAA rating and would set off an uncontrollable chain of events.

"It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone", he told Handlesblatt.

My take on the rating game is France Risks AAA Rating on EFSF Leverage; Spotlight on Portugal, the Next to Fail

Is Leverage Even Constitutional?

Poison or not, there is a far more basic question at hand: Is a leveraged EFSF even constitutional? What about insurance and other proposals?

Once again I have already suggested the proper answer is "no", as noted in Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers

However, Eurozone dunderheads simply will not take "no" for an answer so the question comes up again, and again, and again, and again (in many ways shapes and forms).

Parliamentary Bailout Committee May Be Unconstitutional

Der Spiegel reports Parliamentary Bailout Committee May Be Unconstitutional

A new panel of lawmakers set up by the German parliament to reach quick decisions on the release of rescue funds from the European Financial Stability Facility (EFSF) may be in breach of the German constitution, a study by the parliament's research unit has shown.

The panel is intended to ensure that parliament has a say in the release of funds from the EFSF, following a Constitutional Court ruling last month which said the parliament must be involved in measures to bail out other euro-zone member states.

The nine-member body, to be selected from the parliament's budget committee, is to approve bailout decisions with the necessary speed and confidentiality to avoid fanning financial market turmoil.

New Challenge Could Be Launched at Highest Court

But the study, undertaken by legal experts and commissioned by a member of parliament from the opposition center-left Social Democrats, Swen Schulz, has cast doubt on whether the panel will preserve an adequate degree of parliamentary sovereignty on budget decisions amounting to billions of euros.

"Delegating this authority to a special body shifts responsibility onto a small number of people and obstructs the involvement of all members of parliament in the parliamentary process," the study says.

Schulz is now considering taking the matter to the Constitutional Court, which is Germany's highest judicial authority. "A nine-member panel can't replace the Bundestag in such an important question," he says.

Jackasses Never Give Up

To repeat what I said yesterday in Smoke Clears, Fog Lifts, Revealing More Smoke and Fog; Sell the "No-News"; Point by Point Synopsis of the Merkel-Sarkozy Plan ...

Five-Point Plan

In the works for the summit is a five-point plan to

Foresee a solution for Greece
Bolster the firepower of the 440 billion-euro ($611 billion) EFSF
Recapitalize banks
Push to boost competitiveness and consideration
European treaty changes to tighten economic management

Point Number One: Greece

Greece will default and it will be a hard default. The Yield on 1-year Greek bonds is hit a new high of 176% today, currently at 172%.

Merkel and Sarkozy have no plan for Greece other than to keep Greece in the Euro and that is not up to Merkel and Sarkozy, but rather up to the citizens of Greece.

Moreover, the smaller the haircut, the bigger the burden on Greece and the more likely Greece leaves sooner rather than later.

Point Number Two: Bolstering the Firepower of the EFSF

Let's assume Nouriel Roubini, Tim Geithner, and everyone else pitching "firepower" nonsense gets their way. Let's boost the EFSF to $2 trillion. Better yet, let's talk "Big Bazooka" and boost it to $40 trillion.

Can Roubini, Geithner, Merkel, Sarkozy, or any of the EU clowns tell me exactly where $40 trillion will come from? Here is the answer: They can't.

Moreover they cannot tell us where $2 trillion will come from either because all these plans for boosting the EFSF are against the German constitution, not that any of the EU jackasses care.

So let's assume the jackasses get their way. Exactly what good will $2 trillion do? Will the ECB just print the money and give it away? Will citizens put up with another $2 trillion highway robbery plan to bail out the banks and bondholders?

Point Number Three: Raise Capital

Banks are resisting mightily. Moreover, where does the capital come from? If from banks and bondholders, expect to see shareholder dilution. In fact, expect to see shareholder dilution regardless where it comes from. Is the stock market priced for that?

Sovereign debt ratings will sink like a rock if nations start bailing out the banks, yet again.

Point Number Four: Push to Boost Competitiveness

I happen to agree with this point. It is necessary. However, look at the pushbacks against austerity programs. Expect more pushbacks, in every country.

More importantly, even if there was substance to the plans (there isn't), and even if the "non-plans" were implemented (assuming Merkel and Sarkozy had plans that other nations would adopt), it would take years, not months to produce results.

Point Number Five: European Treaty Changes to Tighten Economic Management

Jackasses never give up. Point number five is proof.

Look at the difficulties just to get the latest EFSF to pass. It brought down the government of Slovakia. Perhaps the clowns manage to get away with boosting the "firepower" of the EFSF (illegally of course), but they still have to come up with the money.

However, getting 17 nations to agree to treaty changes has no chance at all. The German courts alone would stop it without a voter referendum and new German constitution.

Fog Behind the Fog

Thus, there is absolutely no substance to the Merkel-Sarkozy 5-point plan. There is only fog behind the fog, just as there was with the G-20 summit.

More Fog Rolls In

That a "New Challenge Could Be Launched at Highest Court" simply adds more fog until there is a ruling.

Given that "leveraged poison" and resolution by "Merkel Committee" are both piss poor ideas, everyone should hope a challenge is issued and sustained.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Protectionism Cannot Bring Prosperity

Posted: 18 Oct 2011 12:54 AM PDT

It is not often I vehemently disagree with Michael Pettis at China Financial Markets regarding trade. This time I do. Interestingly, there are some points of his recent analysis that I strongly agree with.

Via Email, interspersed with my comments please consider the following point counterpoint discussion.

Pettis:

Expect Still More Trade Intervention

Last week's Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has widened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position I think the likelihood of a good outcome, while never high, is declining further.

The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments that characterize each side. For example many of those who believe China is cheating on trade go through complicated exercises to prove the currency is undervalued and should be sharply revalued, without considering other relevant factors.

The currency may well be undervalued, but it shouldn't be the only issue taken into account. A significant rise in the RMB, especially if it is countered domestically by an expansion in credit at lower real rates, might actually make the global imbalances worse and, more worryingly, cause China's debt burden and capital misallocation to rise. This would make China's eventual adjustment far more difficult and would cause more damage to the global economy.

The focus should be more general – on shifting China's economy towards the more labor-intensive and efficient sectors – and an appreciating RMB might actually make things worse, especially if it encourages hot money inflow. It is much better, I think, for China to raise interest rates, for example, than to raise the value of the RMB. We need an internal shift in which resources are transferred from the capital-intensive SOEs towards households as well as to the more labor intensive SMEs, and a rise in the RMB will adversely affect the SMEs far more than it affects the SOEs, and would be no more efficient than in shifting wealth to households than a revaluation.

Mish:

In general I have no disagreements with the ideas presented above. However, if China raises interest rates, it will, without a doubt, place upward pressure on the valuation of the Yuan.

Interest rates are not the only factor in relative currency movements, but interest rates, and more importantly, rates of change in interest rates are two of the most important factors.

That said, I wholeheartedly endorse the idea that "complicated exercises to prove the Yuan is undervalued" are seriously misguided.

Pettis:

The other side of the debate is unfortunately even more muddled. The US-China Business Council, for example, issued a release on October 12 that exemplifies some of the major misunderstandings on trade. I realize that the USCBC is primarily an advocacy group, and so their arguments are aimed at supporting a position rather than adding to the debate, but I wonder if making arguments that are so easily refuted helps their cause.

The USBC makes two claims: first, that a revalued RMB will hurt US households, and second, that it will have no employment impact in the US. The first argument is incomplete and the second wrong. Here is what they said in their October 12 release.

USCBC believes that the currency legislation passed yesterday by the US Senate will do more harm than good. USCBC continues to advocate that China needs to move faster toward a market–determined exchange rate; passing tariff legislation on imports from China will not get us closer to this goal and will hit the pocketbooks of American households at a time they least can afford it. Limiting imports from China would not mean an increase in US employment or lower the trade deficit; we'll just shift our imports to another overseas supplier. If this is intended to be a jobs bill, it is a jobs bill for Vietnam, Indonesia and Mexico.

For their first point, we should be clear. Tariffs will hurt the pocketbooks of American households as consumers, but it will not hurt American households as workers and will probably help them.

Mish:

Muddled is the appropriate word.

On one hand Pettis is correct: US consumers will be hurt. However, Pettis is incorrect in his belief that tariffs create jobs.

Pettis ignores the unseen. For starters he assumes China will not retaliate. I suggest China may retaliate even if it is not in China's best interest to do so.

The Smoot-Hawley tariff act in the Great Depression certainly provides an example of what happens when trade wars start and global trade collapses.

Forget about all of that. Let's take a simple example from my post on October 2: Trade War Threat Looms Once Again; Senate Takes Up Bill to Punish China for Manipulating Currency; How Many Jobs Would Tariffs Create?

Tariffs Will Cost Jobs

Anyone who thinks government officials can determine if and when currencies are "misaligned" has no economic sense, is engaging in populist rhetoric to buy votes, or both.

The clowns at the Economic Policy Institute think tariffs will create 2 million jobs and reduce the trade deficit by $120 billion.

I suggest tariffs will cost jobs. Manufacturing will not return to the US, nor will manufacturing of any sort, on account of tariffs. Wage differentials are too great and trade channels will simply shift (at great expense) to another country.

However, prices will rise, sales will slow, and the squeeze on consumers will accelerate. Here is a simple example: Let's assume a 35% tariff on underwear. How many jobs will return to the US ? 50? 100? Any?

Let' be generous and assume 500 (although the answer is most likely zero). In return for those 500 jobs, everyone in the United States has to pay 35% more for underwear? Is that a good trade-off?

Clearly the answer is no, but it is much worse than that. We also need to address the question "how many jobs would be lost because underwear is 35% higher?"

Whatever additional money is spent on underwear by 300 million Americans will come at the expense of those consumers spending less on something else, perhaps eating out, perhaps buying toys, or perhaps buying shirts.

To save 500 or whatever manufacturing jobs, everyone buying underwear will cut back on something else. Those cutbacks will have a real effect on shipment of goods (trucking), eating out, recreation, etc., just to benefit underwear manufacturers.

Magnify the underwear example by the vast numbers of idiotic lawsuits from manufacturers that will stem from a law that only requires some bureaucrat to figure out if a currency is misaligned. Then figure out how much bureaucratic expense and waste will that cause?

Lindsey Graham and Mitt Romney are definitely on the wrong side of this issue.

If Congress is foolish enough to pass such a law, and president Obama is foolish enough to sign it, expect to lose a half million jobs minimum because of it. Depending on retaliations and how things escalated, 2 million jobs lost would not be surprising in the least.

Pettis:

The truth is that I am very pessimistic about the evolution of trade over the next few years. If we are going to do better, at the very least we need to accept two pretty straightforward claims that both basic trade theory and economic history confirm pretty overwhelmingly:

1. Trade intervention is bad for global growth, and the world would be poorer, not richer, if international trade collapsed. Trade liberalization is one of the great economic achievements of the past three or four decades and we should recognize that in the current environment it is very vulnerable to reversal.

2. Diversified economies with high unemployment and large current account deficits generally benefit, at the expense of their trade partners, from trade intervention, while surplus countries have almost no real ability to retaliate. In fact it is very hard to find significant examples in history in which an increase in tariffs or a devaluation of the currency did not cause employment growth for a diversified country with a large trade deficit. It is easy, however, to remember cases in which trade intervention resulted in relative outperformance.

Mish:

Pettis is correct to be pessimistic on trade. Moreover, I wholeheartedly endorse his first point above He should have stopped there because I vehemently disagree with point number two.

There are all kinds of things one can look at in the short term and say "see it worked".

Cash-for-clunkers caused a spike in car sales. Tax credits for housing caused a temporary spike in home prices now taken back and then some. Fannie Mae and Freddie Mac supported growth in housing until things collapsed. Under FDIC there were no bank failures for decades then there were 700.

One needs to be extremely careful in analyzing short-term benefits vs. long-term unseen costs of government interference into free markets.

It is only "easy" to find "cases in which trade intervention resulted in relative outperformance" when one ignores long-term consequences and one ignores what may have happened anyway.

Sometimes government steps in and does something that is credited with a recovery, that would have happened anyway.

Take GM. Obama is bragging about the recovery. I suggest GM would have gone bankrupt (just as it did) and recovered (just as it did) without government help. In fact, government "help" delayed the bankruptcy of GM (at taxpayer expense), and thus delayed the recovery of GM.

Bankruptcy does not mean "out of business". Most major companies restructure and there is no reason to believe GM would not have restructured (or that Ford would not have picked up an equivalent number of jobs).

Pettis:

If protectionists refuse to accept the first claim, and anti-protectionists refuse to accept the second claim, I really don't see how we can possibly arrive at a globally optimal outcome. Trade will continue to contract as deficit countries discover that trade intervention does indeed work, just as Keynes claimed, to shift the unemployment burden of adjustment from deficit countries to surplus countries.

Mish:

Sigh. Pettis ruined an otherwise good paragraph with an ill-advised reference to Keynes.

Keynesian economics has never worked and it never will, except in the short term, and except by ignoring enormous long-term fiscal damage of Keynesian clowns who think they can manipulate markets to desired results.

Proof is in the pudding. We have had economic crisis after economic crisis, with ever-increasing amplitude spawned by a combination of Keynesian and Monetarist policies.

Keynes is to be mocked, not praised.

Pettis:

Trade surpluses must contract.

China's real trade surplus may actually be lower than reported. My friend Victor Shih believes that the trade numbers may be seriously distorted by under- and over-invoicing related to speculative capital inflows.

If he is right, the true surplus may actually be much lower than the reported number, and during times of capital flight it may be higher. We need to try to get a better measure of this before we conclude anything.

China's trade surplus is definitely moving in the right direction, but the collapse in global demand made that inevitable. The question for the rest of the world is whether domestic adjustments in China are leading global rebalancing, or slowing it down.

Mish:

I endorse that analysis.

Pettis:

Copper, copper everywhere

Speaking of commodities, over the course of the past decade copper prices seemed to have quintupled, driven in large part by surging investment, especially Chinese investment, with Chinese demand accounting for an astonishing 40% of global demand. China represents only 10% of global GDP, which means China consumes 6 times as much as the rest of the world per unit of GDP.

Since I expect growth rates to drop sharply, and investment growth rates to drop much more sharply, over the last three years I have been very bearish about medium-term prospects for copper prices. In fact copper has dropped by about 25% from its peak earlier this year. Some bulls attribute this drop mainly to reduced Chinese buying at such elevated prices.

In fact because of the sharp recent drop in copper prices, during my trip last week to the US a lot of people asked me whether I still thought copper prices would decline in the medium term. I generally replied that I expected prices would probably rise a little in the next few weeks and months, partly because I believe that Beijing would relax credit controls soon, and partly because Chinese buyers indeed had a very strong buy-on-the-dip mentality.

Longer term, however, I think the bear market in copper is far from over. We have not yet seen the expected real and sustained drop in Chinese infrastructure and real estate investment, which probably won't happen for another year or two, and against that we have been seeing a lot of commodity stockpiling in China. This will reduce future demand even if investment growth does not slow.

China, it seems, is stockpiling a lot of copper. This, I think, is not a good balance sheet tactic. China's advisors (many of them international copper traders, not coincidently) might tell them that given China's voracious demand, stockpiling copper is a good hedge, but in fact it has to be seen as a purely speculative position.

Why? Because if China's GDP indeed continues growing at very high rates over the next decade (or, more correctly and more implausibly, if investment growth rates remain high over the next decade), this copper stockpiling will have been a great trade. China will have locked in what turns out to have been relatively cheap copper.

But if Chinese investment growth does slow sharply, and copper prices drop just as sharply, this stockpiling will cause China to have locked in relatively expensive copper at exactly the wrong time – when copper-consuming companies are already struggling with lower growth. This is not how a hedge works, of course. A hedge is supposed to pay off when things are going badly, and to lose you money when things are going well.

Mish:

Once again I side with Pettis.

Mish Synopsis

It is not often I disagree with Pettis on much of anything other than the timing or sequence of events. For example: Earlier this year I suggested the Shanghai stock market would be weak this year but Pettis thought the market would be resilient until the regime change.

Perhaps I was lucky.

This time my disagreement with Pettis on trade is far more fundamental.

My friend (mentor and teacher) Pater Tenebrarum talks about social mood in The 'Occupy Wall Street' Protests. He also offers this comment on trade.

We do not have 'free trade', but rather 'managed trade', guided by the long refuted ideas of mercantilism on the part of many nations. Alas, the populist demand for protectionism always has and always will be inviting economic disaster.

It is a demand that refuses to see the other side of the coin. Trade is not 'between nations' – it is between individuals. It is voluntary and it would not take place if not both parties to a trade were gaining from it.

What domestic producers lose in pricing advantage, consumers gain in the form of lower prices and rising living standards. Moreover, the money consumers save on account of being able to buy cheaper goods is then free for investment in other economic activities where a comparative advantage exists. It is not a coincidence that throughout history the richest places on earth were always the centers of free trade.

If protectionism could bring about prosperity, then the most isolated villages in the Hindu Kush would today be utopias of riches envied by all. They obviously are anything but.

Protectionism Cannot Bring Prosperity

I have learned immensely from Michael Pettis. I consider Pettis one of my teachers as well. However, I now disagree with his embrace of what I call "Keynesian silliness".

Instead I side with Tenebrarum. Simply put, "throughout history the richest places on earth were always the centers of free trade". That is all one needs to know.

Protectionism cannot bring prosperity. It never could and it never will . If protectionism seems to work in the short-term it is either by accident (lucky timing in which the market on its own accord may have done a similar thing) or by ignoring long-term consequences.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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miercuri, 19 octombrie 2011