Zero Hedge — Goldman On The Not-So-Good, The Bad, And The Ugly Fiscal Cliff Scenarios That Remain

Even if both the Bush tax cuts and emergency unemployment insurance are extended, the 'sequester' is mostly postponed, and the fresh fiscal drag is confined to the expiration of the payroll tax cut and the new taxes to pay for Obamacare, Goldman estimates suggest that fiscal policy would shave nearly 1.5% from real GDP growth in early 2013. While it seems the 'market' believes that some compromise will be enough to lift the market to new stratospheric heights; we believe, as does Goldman, that the risks are almost exclusively on the downside of this 'not so good' fiscal scenario.

Goldman letter follows.

Zero Hedge
Goldman On The Not-So-Good, The Bad, And The Ugly Fiscal Cliff Scenarios That Remain
Tyler Durden

Nouriel Roubini — American Pie in the Sky

Roubini projects the US economy hitting stall speed in the near term. But..

A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia.

Read it at Project Syndicate
American Pie in the Sky
Nouriel Roubini | Professor, NYU Stern School of Business and Chairman of Roubini Global Economics

FRBSF's John C. Williams — The Slow Recovery: It’s Not Just Housing

Read it at Federal Reserve Bank of San Francisco » FRBSF Economic Letter
The Slow Recovery: It’s Not Just Housing
By John C. Williams

(h/t Mark Thoma)

Goes through the state of the economy as the FRBSF views it. Summary — the economy is improving steadily but is still underperforming and the Fed needs to be on it with policy.

If you just want the meat of it regarding policy, here it is. Read it and weep.

Outlook for unemployment

As I said earlier, the news from the labor market has been heartening. The jobless rate has fallen about three-quarters of a percentage point since August and is now at its lowest level in three years. Unfortunately, the kind of moderate economic growth I expect won’t sustain such rapid progress. The February unemployment rate held steady at 8.3%. I expect unemployment rates to remain around 8% through year-end. And we’re still likely to be around 7% at the end of 2014. We haven’t had such a long period of high unemployment in the United States since the Great Depression. And this phenomenon is widespread. Compared with December 2007, when the recession began, the unemployment rate is up in all 50 states. That’s true even in North Dakota and Alaska, the two states where total employment grew during the recession.

Economists have been debating why unemployment has been so high during this recovery. Broadly speaking, they fall into two camps. One group argues that changes in the structure of the economy are pushing up the unemployment rate. The other group maintains that high unemployment is the result of a severe downturn, which significantly cut demand for goods and services.

Those who favor a structural explanation point out that many job seekers lack the skills employers need. For example, computer industry employers are having a hard time finding qualified workers. But they’re not likely to find such employees in the ranks of jobless construction workers. If such labor market mismatches are widespread, they could be boosting the unemployment rate.

To put this in perspective, I’m going to introduce the concept of the natural rate of unemployment. The natural rate is basically an equilibrium jobless rate that pushes inflation neither up, nor down. Before the recession, most economists thought this rate was around 5%. Today though, economists in the structural camp argue that the natural rate has risen substantially, largely because of the labor market mismatches I described. The idea is that a lot of people are unemployed not because jobs are lacking, but because those jobs require skills unemployed workers don’t have. If this were correct, then our 8.3% unemployment rate might not be that far above the natural unemployment rate. In other words, we might not really be so far from the Fed’s goal of maximum sustainable employment.

I’m not convinced. Research at the San Francisco and New York Feds suggests that job mismatches are limited in scope. The difficulty some Silicon Valley companies find hiring software engineers is not enough to fundamentally transform the labor market. Now, other factors besides skill mismatches may also have helped push up the natural unemployment rate. Over the longer term, mismatches and other labor market inefficiencies may have raised the natural unemployment rate from about 5% to around 6 to 6½% (see, for example, Daly et al. 2012 and Weidner and Williams 2011). So, in my view, the nation remains far from the Fed’s goal of maximum sustainable employment.

Outlook for inflation

The Fed’s other goal is to keep prices stable. I would say that we’ve succeeded pretty well on that score. Inflation overall has been well-contained. Taking a long view, over the past 15 years, the overall inflation rate has averaged almost exactly 2%, which is the Fed’s target rate of inflation. The same is true of the past five years, a tumultuous period of crisis, recession, and recovery.

Now, it’s true that inflation picked up to 2½% last year as the prices of oil and other commodities surged in the face of strong global demand. Oil prices have run up again recently in response to geopolitical concerns. But other commodity prices have not generally followed suit. I expect inflation to be near our 2% target this year and edge down a bit to about 1½% in 2013.

Let me summarize where the Fed stands in terms of achieving its congressionally mandated goals. We are far below maximum employment and are likely to remain there for some time. The housing bust and financial crisis set in motion an extraordinarily harsh recession, which has held down consumer, businesses, and government spending. By contrast, inflation is contained and may even fall next year below our 2% target.

Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish nationwide, not just in states hit hard by the housing bust. High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. And we don’t need to worry that our stimulative monetary policy could fuel regional imbalances.

Monetary policy’s role in the recovery

Monetary policy works by raising and lowering interest rates. The Fed’s policymaking body is the Federal Open Market Committee, or FOMC. In December 2008, when the recession’s full force hit, the FOMC slashed its benchmark interest rate close to zero. It’s been there since. Standard monetary policy guidelines tell us this rate should have gone deep into negative territory. But that’s not possible (see Rudebusch 2009 and Chung et al. 2012 for discussion of the effects of the zero bound on interest rate policy in the recession and Swanson and Williams 2012 for estimates of the effects of constrained monetary policy).

So the Fed has had to find other ways to stimulate the economy. One measure we’ve adopted has been to buy large quantities of longer-term securities issued by the U.S. government and mortgage agencies. Our purchases have raised demand for these securities, lowering their yields. And that has put downward pressure on other longer-term interest rates, making it cheaper for households, businesses, and governments to borrow.

These policy actions have been effective. For example, recent gains in automobile sales have a lot to do with cheap financing. And our securities purchases have helped drive longer-term interest rates near to post-World War II lows. In particular, our purchases of mortgage-related securities appear to have lowered home loan rates significantly. (Hancock and Passmore 2011 and Krishnamurthy and Vissing-Jorgensen 2011 find significant effects of mortgage-backed securities purchases. Stroebel and Taylor 2009, by contrast, do not.) Low mortgage rates have been crucial in stabilizing home sales and construction.

I should emphasize that our unusually stimulative monetary policy won’t last forever. Eventually, as recovery picks up, we will trim our securities holdings and raise our interest rate target. We’ve planned in detail for this, and we’re confident we can do it in a timely and effective fashion (see, for example, the discussion of exit strategy in the minutes for the June 2011 FOMC meeting in Board of Governors 2011). But, that time is still well off in the future.

We’ve passed through extraordinary economic times that have required extraordinary responses from the Fed. We’re not miracle workers. Lower interest rates alone can’t instantly put the economy right. But things would be much worse if we hadn’t acted so forcefully. We were vigilant in 2008 and 2009 when the economy was in dire straits. We remain vigilant now, when the economy is showing real signs of improvement, sharply focused on our goals of maximum sustainable employment and price stability.

Cullen Roche — Koo, the BSR and the coming “fiscal cliff”

Read it at Pragmatic Capitalism
Koo, The Bsr And The Coming “Fiscal Cliff”
by Cullen Roche

Either Zero Hedge or MMT is wrong. They are both on record.

For the record.

ZH thinks it won't be long before we see who is right. Meanwhile, place your bets.

Read it at Zero Hedge
As US Debt To GDP Passes 101%, The Global Debt Ponzi Enters Its Final Stages

posted by Tyler Durden

Ter·ror·ist (Noun): Anyone Who Disagrees with the Government

Read it at Washington's Blog
Ter·ror·ist (Noun): Anyone Who Disagrees with the Government

by Washington's Blog

Some 2012 Predictions

Read it in The Financial Times
Chinese soothsayer sees economic storms ahead
By Jamil Anderlini in Beijing

Yes, you read that right — the The Financial Times. Shows the rising clout of China.

This also gives me the opportunity to sneak in Gerald Celente, who sees some sort of "economic martial law" in his crystal ball for 2012.

Gerald Celente on the Crisis of Western Civilization

Actually, it's a good article on trendcasting and how Gerald got into it.

Ian Welch — The Blindingly Obvious About Obama, 2013, Europe, Iran and so on

You can have widespread prosperity and democracy, or you can have oligarchs. You can’t have both.

The Blindingly Obvious About Obama, 2013, Europe, Iran and so on
by Ian Welch

Roubini's 2012 US Forecast — Anemic

Read it at Project Syndicate
The Straits of America

by Nouriel Roubini

Paradox of thrift:

Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.

Some Bullish Housing Forecasts for 2012 — CalculatedRisk

Finally, some light at the end of the tunnel?

Read it at Calculated Risk
Some Bullish Housing Forecasts for 2012
by CalculatedRisk

Tim Duy — Intractable output gap

But that still is not a story that rapidly returns the economy to potential output. Which brings me back to a familiar place - putting aside the threats to the economy, it is easy to see a positive growth path for the economy, but more difficult to see a rapid closure of the output gap.

Read it at Tim Duy's Fed Watch
A Few Quick Charts on Consumer Spending
by Tim Duy

Calculated Risk on US Growth for 2012

I took the boring middle ground in 2010 and 2011: sluggish and choppy growth, but no new recession. And once again - for 2012 - I'll take sluggish growth with no recession. There are still plenty of scars from the financial crisis (excessive debt, high unemployment, excess capacity, excess supply of housing, a large number of homeowners with negative equity, and high foreclosure activity), but the economy appears to be slowly healing.

Read it at Calculated Risk
Question #4 for 2012: U.S. Economic Growth

Calculated Risk on Employment in 2012

My guess is private employment will increase around 150 to 200 thousand per month on average in 2012; about the same rate as in 2011.

Read it at Calculated Risk
Question #5 for 2012: Employment

Calculated Risk on 2012 Employment

Although I'm still looking at GDP and employment for 2012, I think the unemployment rate will be mostly unchanged in 2012.

A couple of predictions.

• The participation rate will rise slightly in 2012 and probably end the year in the 64.0% to 64.5% range.

• The unemployment rate will still be in the 8% to 9% range in December 2012.

Read it at Calculated Risk
Question #6 for 2012: Unemployment Rate

by Calculated Risk

Bill Gross — Toward the Paranormal

Summary

• The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes.

• A new duality – credit and zero-bound interest rate risk – characterizes the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion.

• Until the outcome becomes clear, investors should consider ways to hedge their bets, including: maximizing durations, U.S. Treasury bonds that may potentially offer capital gains, long-term Treasury Inflation Protected Securities (TIPS), high quality corporates and senior bank debt, and select U.S. municipal bonds.

Read the whole letter at PIMCO

Toward the Paranormal

by Bill Gross

Technological innovation in the works

IBM predicts that over the next five years technology innovations will change the way we work, live and play in the following ways: 

• Energy: People power will come to life  - using local motion
• Security: You will never need a password again - biometrics
• Mind reading: no longer science fiction - electronic control of devices using by sensing brain functioning
• Mobile: The digital divide will cease to exist - mobile devises spread communications technology inexpensively
• Analytics: Junk mail will become priority mail - priority sorting and delivery  of messaging

Read the rest at IMB

The Next 5 in 5
(via The Economist)

Paul Farrell — 2012 will be the year of Occupy

Warning to America’s Super Rich: Think Occupy Wall Street disappeared in winter’s cold? Wrong: The 99% just declared a new aggressive, covert special-ops war strategy to take back our democracy in 2012.

No more peaceful tent encampments in parks. No more Mahatma Gandhi nice-guy stuff. Not enough. Escalation time. Wall Street, the Super Rich and their Washington lobbyists are tone deaf, blinded by greed, trapped in their post-2008 business-as-usual bubble.
Warning, OWS tells us America’s going to be shocked by not one but hundreds of wake-up calls in 2012.

How? In a recent Washington Post op-ed column, OWS leaders are clearly accelerating their battle strategy in 2012. In what amounts to a new declaration of war that promises to electrify the 2012 elections, OWS will be using new asymmetrical warfare strategies, write the two men who’ve been the driving force behind the movement since early this year, Kalle Lasn editor-in-chief of Adbusters magazine and senior editor Micah White.Listen to some of the specific guerilla tactics they warn will be used in their coming 2012 “American Spring” assault: A “marked escalation of surprise, playful, precision disruptions, rush-hour flash mobs, bank occupations, ‘occupy squads’ and edgy theatrics.” And in a New Yorker magazine interview shortly after New York Mayor Bloomberg’s “military-style operation,” Lasn warned: “this means escalation, pushing us one step closer to a revolution.”

So get ready: 2012 promises to be a relentless succession of hit-and-run attacks during what already promises to be a hotly-contested presidential campaign. So forget Zuccotti Park. No long camp-outs and sit-ins. That’s so ‘60s. So last fall. Instead, be prepared for endless surprise attacks, albeit non-violent amateur versions of Seal Team Six, in-and-out fast.

Read the rest at MarketWatch

99% plan new tax war on Super Rich in 2012 — Commentary: Jobless youth enraged, ready with aggressive tactics

by Paul B. Farrell

Want some goals and demands? How's this?

“Robin Hood tax on all financial transactions and currency trades; a ban on high-frequency ‘flash’ trading; the reinstatement of the Glass-Steagall Act to again separate investment banking from commercial banking; a constitutional amendment to revoke corporate personhood and overrule Citizens United; a move toward a true cost market regime in which the price of every product reflects the ecological cost of its production, distribution and use;” and they are in favor of “the birth of a new, left-right hybrid political party that moves America beyond the Coke vs. Pepsi choices of the past.”

Farrell's prediction:

My prediction: Wall Street will never change, never, until they suffer another catastrophic meltdown, with no bank bailouts. We haven’t completed the natural economic cycle Paulson’s team aborted in 2008.

Paul B. Farrell is one of the few financial commentators that integrate geopolitics into their economic analysis. Don't ignore what he has to say as merely peripheral. While one may or may not agree with his analysis, this kind of analysis is essential in this environment. It accounts for a lot of the post that I put up that may otherwise seem random and disconnected. They are indications of patterns unfolding and trends developing.

The pattern and trend that Farrell sees? Eating the young to preserve the status quo. (Life scientist and MMT'er Roger Erickson has been shouting about this for some time from the perspective of evolutionary theory)

Repeat that “bottom line: You cannot attack your young and get away with it” And yet, that’s exactly what Wall Street, America’s Super Rich, their lobbyists, and all their bought politicians are doing: “Attacking our young.” Attacking our next generation. Attacking America’s future.Our leaders are ideologically blind to the need to invest and invest big in jobs before this accelerating rage reaches a critical mass and ignites, triggering another American Revolution and the Second Great Depression.

Mark Zandi on 2012

• U.S. growth is accelerating as the year ends, but the economy's performance in 2011 was disappointing.

• Prospects are better for 2012, but only if policymakers in Europe and Washington address critical issues.

• Europe's current recession is expected to be mild, but the threat of a deeper downturn has financial markets nervous.

• Unless U.S. lawmakers act, federal fiscal policy will shave 1.7 percentage points from real GDP in 2012.

• Businesses will likely remain reluctant to invest and hire more aggressively until after the presidential election.

Read it at Moody's Analytics/Dismal Scientist

U.S. Macro Outlook 2012: Diminished Expectations
By Mark Zandi

(h/t Roger Erickson via email)

PIMCO sees slow global growth in 2012

PIMCO Cyclical Outlook: Deleveraging, Austerity and Europe’s Potential Minsky Moment

The year ahead will likely be very challenging for the global economy. Growth faces several hurdles that we believe collectively will impose a sense of greater uncertainty and increased volatility on financial markets. These hurdles include the need for accelerated balance sheet deleveraging, slowly creeping but surely rising risks of financial and economic de-globalization, and the constant drum beat of re-regulation, particularly in developed country banking systems.

Read the rest of the PIMCO report by Saumil H. Parikh

PIMCO Cyclical Outlook: Deleveraging, Austerity and Europe’s Potential Minsky Moment

Nice to see Minsky and debt deflation being mentioned, even if briefly.

PIMCO sees the EZ as the focal point in 2012.

Gary Shilling bearish on 2012

Gary Shilling Sees `Severe' Recession for Europe (video)
Bloomberg InsideTrack Interview

Shilling thinks that social unrest won't be much of a factor in 2012, and that Occupy Wall Street is essentially over. I think that this results in an overly optimistic albeit bearish assessment. In my view, social unrest is fast becoming the driving political and economic force, and it is gaining steam globally.