CHART: Income Inequality Just Continues To Get Worse

Income inequality increased dramatically between 1979 and 2007, when a global financial crisis rocked not just the U.S. but the entire world. But maybe things have turned around since then? No. Just take a look at what happened in 2011:

The data from the above chart was culled from a September 2012 report by the U.S. Census Bureau, of which the primary findings were:

  • Real [that means inflation-adjusted] median household income declined between 2010 and 2011, a second consecutive annual decline.
  • The poverty rate in 2011 was not statistically different from 2010.
  • Both the percentage and number of people without health insurance decreased between 2010 and 2011.

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Harlan Green: The Lesson From Inflation

Inflation has fallen so low that it threatens this economic recovery, yet some Fed Governors are talking about ending the QE3 securities’ purchases. Why, when there is little evidence of sustained employment or growth?

Fed Chairman Bernanke basically inherited an almost deflationary economic environment in 2006, with the Great Recession that began December 2007 and ended June 2009. That is why the Fed has been keeping interest rates so low, and why the Fed Governors aren’t yet ready to end the QE3 purchase of securities. Without QE3, we could be in deep trouble with real estate still in the doldrums.

2013-08-25-inflation1.jpg

Chart: Financial Times/Carpe Diem

What those Fed Governors and other deficit hawks don’t’ seem to understand is that pushing for higher interest rates in this climate means more deflation and slower growth. That is what both the bond and stock markets are telling us. Such markets don’t drop in tandem if the expectation is for faster growth.

Nor can government budget deficits be the problem when the deficit is dropping faster than at any time since WWII. In fact, we ended World War II with a 120 percent debt-to-GDP ratio, yet it didn’t damage subsequent growth. Instead, continued government spending combined with higher tax rates enabled us to create a lasting post-war prosperity
Whereas, government spending cuts from the 2011 debt ceiling agreement that caused the U.S. debt downgrade and led to the current sequester spending cuts are endangering this recovery.

Such low inflation means producers can’t charge more for their products, therefore can’t increase profits unless they use fewer workers and greater automation to replace them. So there is no incentive to hire more workers, which would increase the demand for their products, and so increase economic growth.

We know the median household income declined some 10 percent from 2000, after inflation in part because of less demand for highly paid workers. And the unemployment rate is still above 7 percent, some 4 years after the end of the Great Recession.

2013-08-25-unemployment.jpg

Chart: Trading Economics

In fact, it is remarkable how closely disinflation (falling inflation) has tracked historical unemployment rates in these charts that begin in 1948, the beginning of the modern consumer economy. For instance, inflation began its steep decline after 1980 when Fed Chairman Volcker pushed interest rates as high as 16 percent, causing the 1981 and 1983 recessions, and a jobless rate of more than 10 percent. The result of the Great Recession has been the same–high joblessness with too low inflation, signaling there is little demand to ramp up production.

The good news is that July existing-home sales rose to the highest level in 4 years, since the end of the Great Recession. The consensus is that most of these homes were put into contract before the recent rise in interest rates, and that the current rise in mortgage rates since then will slow down sales.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.5 percent to a seasonally adjusted annual rate of 5.39 million in July from a downwardly revised 5.06 million in June, and are 17.2 percent above the 4.60 million-unit pace in July 2012, said the National Association of Realtors.

But with just a 5.1-month supply, inventory levels are historically low during this sales season. That means values haven’t increased enough to bring more homes with positive equity on the market that would create a sustained recovery. With such a low inventory level there is the danger of housing values falling again, when and if the Fed begins to reduce its QE3 securities’ purchases prematurely.

If we survived and prospered after World War II with such a record budget deficit, why are we not applying such lessons from history today?

Harlan Green © 2013
Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

The mental health diagnosis and the damage done

We reported a little while ago that a new version of the Diagnostic and Statistical Manual of Mental Disorders (DSM)—the reference bible for diagnosing mental illness and cognitive problems—has been released. In it, some conditions have been removed, others added. And, a few conditions up for inclusion have been rejected, much to the dismay of many.

There are, of course, lots of arguments over what should and should not be in there. But I believe that the DSM has effects outside the world of psychiatry and psychology that mean we should pay less attention to it.

I should start this by saying that I am not a psychologist, psychiatrist, or any other type of psy that may make me qualified to offer a useful opinion on what goes into the DSM. I do, however, have limited insight from the other side: two of my children are on the Autism spectrum. Indeed, I wrote most of this in the waiting room of a clinic while one of my children visits the local psychologist.

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Indonesia’s power cable industry heads for a shakeout

JAKARTA, Aug 26 (Reuters) – Indonesia may lose three-quarters of its power cable makers in the next two to three years as thin margins drive weaker players to accept buyouts, leaving a handful of…

Ohio sees resurgence in meth busts, five years after record low

CLEVELAND (Reuters) – Methamphetamine lab seizures in Ohio have soared more than 400 percent in the past five years, accompanied by a spike in production resulting from new ways of making small quantities of the drug in mobile laboratories, officials said on Sunday.



Even Elon Musk Thinks Tesla Stock Is Overpriced

By David White:

Almost everyone thinks Tesla Motors’ (TSLA) stock is overvalued. It has risen 426.65% in the last year to its $161.84 close on August 23, 2013. It has risen 348.19% in just the last six months. It was not profitable in Q2 2013; and it has no PE. Its FPE is a lofty 94.09. Yet its average analysts’ five year EPS growth rate per annum is only 18.70%. At that rate it will take at least five years for TSLA to begin to grow into its current valuation. How can you not think it is overvalued. HYPE is not value. The "pie in the sky" future is not "real value". Even TSLA’s CEO Elon Musk has hinted/said the stock is overpriced. He seems to be positioning himself (his recent comments) to deflect possible future shareholders lawsuits. These would inevitably follow a significant crash in the TSLA stock price. Such a crash

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Russia Warns U.S. Over Syria, Says Obama Like Bush

Will anyone ever push the reset button on Russia-U.S. relations? With the current imbroglio over Syria, the answer to that question at the moment is decidedly nyet.

Greece expected to need another US$13B in aid, bringing total bailout to more than US$333B, Germany says

Germany’s commissioner to the European Union says he expects a future aid package for Greece to amount to a little more than 10 billion euros (US$13.36 billion) — which is much smaller than the country’s existing two rescue deals.

Guenther Oettinger, the EU’s energy commissioner and a member of Chancellor Angela Merkel’s ruling conservative party, said Saturday the third aid package should cover the years 2014-2016.

In two bailout packages so far, Greece’s European partners and the International Monetary Fund have committed 240 billion euros (US$320 billion) in loans. This week, German Finance Minister Wolfgang Schaeuble said there will have to be another aid program after the current one expires next year.

Oettinger’s comments to weekly Welt am Sonntag came four weeks before Germany’s general elections on Sept. 22.

Rescuing Europe and holding the continent together will cost something – it will cost us Germans too

The blue and red posters of Germany’s Eurosceptic party proclaim that “The German spring will come in autumn.” But Berliners care little about the crisis in the euro. Stop a passer-by and you are more likely to hear worries about rising rents, or the difficulties of getting a well-paid job.

The euro crisis has played little part in a German federal election campaign dominated by domestic discontents. The eurosceptics Alternative fur Deutschland are fizzling at around 2% in the polls. Two-thirds of the public want to keep the single currency rather than return to the Deutschmark and 60% have a favourable view of the EU, according to the Pew Research Center. Germans have been unscathed by the soaring unemployment and sweeping public sector cuts of Spain or Greece.

But just last week, the euro crisis finally broke cover when Schauble, the finance minister, conceded in a speech to party supporters that Greece would need further aid, though he ruled out the need for another debt haircut.

Peer Steinbruck, Angela Merkel’s opposition challenger, seized on the remarks, urging the German chancellor to come clean with voters about the costs of another Greek rescue. In a newspaper interview, he said: “Rescuing Europe and holding the continent together will cost something – it will cost us Germans too.”

Bundesbank president Jens Weidmann warned against the “recklessness” of invoking a break-up of the single currency. His words were a reminder that preserving the euro is a vital national interest for Germany, both because of its exports to the rest of the eurozone and the exposure of its banks to eurozone debt. A euro exit would have “far-reaching consequences for our banks and companies”, Mr Weidmann said.

The Bundesbank chief’s intervention suggested that, while the euro crisis might have a walk-on part in next month’s election, it would never hold centre stage. Almut Moller of the German Council on Foreign Relations, a think tank, said: “Germany has invested so much in saving the euro because Germany benefits so much – it needs the euro for its economic model.”

The euro crisis has had a low profile in the election to date because Mrs Merkel has “no interest whatsoever in triggering it”, Ms Moller added. “She’s sailing on this huge wave of approval. Germans in general are not feeling the pinch of the crisis.”

The opposition’s attacks are blunted by the fact that they have voted in favour of bail-outs. The latest Forsa opinion poll, conducted between August 13 and 19 for Stern magazine and broadcaster RTL, puts Mrs Merkel’s Christian Democrats on 41pc and their current coalition partners, the Free Democrats, on 6% The opposition Social Democrats (SPD) polled at 22% and their allies the Greens were in third place with 13%. Votes drawn by smaller parties mean that Mrs Merkel could lead a governing coalition with as little as 45%, though there has been talk of her striking deals with the Greens or forging a “grand coalition” with the SPD.

The parties’ manifestos reveal differences on Europe. The SPD wants to transform the European Commission into a government that would be elected by and accountable to the European Parliament, alongside a second chamber to represent the governments of member states. Mrs Merkel has sounded more sceptical about rule from Brussels, favouring an approach that involves member states coordinating more closely with each other.

A jobs summit in Berlin this year and a decision by the German government to extend bilateral aid from its state-owned development bank to small businesses in Spain and Portugal may also signal a desire to move away from further federalism.

Germany has set the terms of Europe’s steps towards banking union. Last year, when European leaders agreed a single supervisory mechanism for banks, Berlin secured an exemption for small banks – an important domestic consideration given the central role played by regional state-controlled banks in Germany’s political and business life.

In July, the German government rejected EU proposals for a single authority to wind down failing banks, the second pillar of banking union, concerned that this would lead to shared responsibility for financial risks. By contrast, the SPD favours establishing a European resolution agency.

When it comes to the third pillar of banking union – a eurozone-wide deposit guarantee scheme – the harsh terms imposed on depositors in Cyprus vividly illustrated German politicians’ reluctance to make their countrymen liable for risks taken elsewhere in Europe. The CDU and the Free Democrats both rule out deposit insurance schemes in their manifestos.

Greece, as last week’s spat made clear, will be the first cloud on the horizon after the elections. Henning Klodt, head of the economic policy centre at Germany’s prestigious Kiel Institute, said that, contrary to the government’s assurances: “A debt haircut for Greece will be necessary after the elections. It is necessary not just because austerity measures are failing but because of the lack of a competitive economy in Greece. After the election, the CDU will present [voters with] the bill.”

Professor Klodt added: “The public doesn’t feel these shocks at present – but when there’s a debt haircut, the strain will be felt on the federal budget, when it comes to infrastructure spending [in Germany].”

Last week, German government sources played down the scale of a renewed aid programme for Greece. Aides briefed the Suddeutsche Zeitung that the country’s third aid programme would be significantly smaller than the first two.

Berlin has already softened its demands for fiscal rigour in the eurozone, making plain that it is willing to allow more time to cut deficits in exchange for economic reforms.

The CDU has a euro-sceptic wing, whose existence means that, even if Mrs Merkel’s party leads the next governing coalition, she is likely to need the SPD’s votes to secure Bundestag backing for future European rescues.

Germany’s elections could play an unexpected role in healing European divisions. After years of wage restraint and export success, which piled up a current account surplus of 7pc last year and helped fuel the credit boom of the eurozone’s periphery, these elections bring the prospect of a boost in German domestic demand.

Politicians of all stripes are promising more social spending. The Christian Democrats’ election manifesto promises to raise pensions, increase childcare benefits and improve Germany’s highways, financing the spending not through tax rises but the proceeds of increased growth. The opposition Social Democrats are calling for a statutory minimum wage – Germany does not set one at a national level – and an increase in the top rate of income tax to fund spending on education and infrastructure.

Whoever wins September’s German elections, increased wages and government spending are a likely outcome. The domestic discontents that drive this German election could help restore balance in the eurozone.

The Daily Telegraph, with files from The Associated Press